Armchair Millionaire: Five Steps to Financial Freedom: John Bogle excerpt

By the Numbers

“As far as investing is concerned, dollar-cost averaging suggests that slow-and-steady will likely win the race.”

-John Bogle

5 Steps

In his great book “Bogle on Mutual Funds,” John Bogle (founder and chairman of The Vanguard Group) examines a study of the effects of dollar-cost averaging in the stock market during the stock market’s best 10-year period and its worst. The results are dramatic:

Clearly, the magic of compounding, combined with the normalizing effects of dollar-cost averaging, minimizes the volatility of investment returns. What is more, making regular annual Investment of $1,000 each year rather than an all-at-once commitment would have reduced your effective average annual total return by less than one percentage point during the best decade. But it would have increased your effective average return by nearly eight percentage points during the worst

decade. As far as investing is concerned, dollar-cost averaging suggests that slow-and-steady will likely win the race.

Dollar-Cost Averaging–Annual Rates of Total Return

Initial investment of

$10,000

Annual Investment of $1,000

Best decade (1948-1958)

+20.1%

+19.2%

Worst decade (1928-1938)

-0.9%

+7.0%

Range

21%

12.2%

(source: “Bogle On Mutual Funds”)

This chart shows your dollar-cost averaged investment gaining almost as much as a one-time investment in the very best years of the market while losing much less during the worst years. Dollar-cost averaging is lightning in a bottle!

In his modern-day investing classic “A Random Walk Down Wall Street,” Burton Malkiel demonstrates how using dollar-cost averaging

during a market with a mediocre return will still produce tremendous gains.

Illustration of Dollar-Cost Averaging with T. Rowe Price Growth Stock Fund*

Year Ended December 31

Total Cost of Cumulative Investment

Total Value of Shares Acquired

1974

$1,600

$1,242

1975

2,800

2,942

1976

4,000

4,560

1977

5,200

5,459

1978

6,400

7,359

1979

7,600

9,470

1980

8,800

13,769

1981

10,000

13,177

1982

11,200

16,817

1983

12,400

20,053

1984

13,600

21,040

1985

14,800

29,896

1986

16,000

37,687

1987

17,200

40,162

1988

18,400

43,842

1989

19,600

56,320

* $500 initial investment on January 1, 1974, and $100 monthly investment thereafter. All dividends and capital gains distributions were reinvested.

In good times or bad, dollar-cost averaging is the smartest way to build a portfolio’s value for long-term

investing.

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