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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