It’s Worse than you think. Under Water after 18 years of investing?

Written on March 16, 2009 by OptionsRopeaDope

My apologies for the long periods of silence on this blog - I’ve been all cash since October 5th and intend to stay that way for awhile longer. Not that I don’t look at the market, in fact, I look at it constantly with the luxury of having no emotional investment at stake. And so after watching the meltdown and things get worse each day, (and when I noticed that the market has to rise around 70% just to get to where it was 10 years ago! (it was 90% last week)) I decided to do a little research to answer the following questions -

• What are the lump sum returns in the market each year going back to 1970 or so? (easy)
• What are the returns with Dollar Cost Averaging for each year, and how do they compare to lump sums? (harder)
• How do each of those strategies compare to Treasuries over similar time periods?

Now dshort.com has lots of graphs about the performance of the market, but I haven’t seen a DCA chart (which I think is probably much more relevant to 401ks and retirement savings than anything else. So I went to Google Spreadsheets (pretty awesome if you don’t use them) and looked up some GoogleFinance functions, and graphed them out. I shared the results with a few friends, but after hearing the President’s Press Secretary Robert Gibbs saying how the stock market has always been a great return over time, and after seeing more than a couple of CNBC guests smugly saying treasuries are a terrible investment, and anyone would obviously do better in stocks, I decided to share my results with the world. Here is the graph I came up with. The most spectacular point -

• At current market levels, dollar cost averaging (DCA) into the S&P or DJIA has NEVER outperformed treasuries for any currently living person’s working life (assuming 60-70 years of investing max).
• If you started dollar cost averaging into the market 18 years ago (1991), you’d be under water today. Not just worse than treasuries, or factoring in inflation - worse than rolls of cash in a mason jar in the backyard. That’s pretty much everybody 42 years old and and younger.

(Sorry for the resolution, I suck manipulating images. Original image in the Spreadsheet link below.) 

Some other notes -

• The later you started DCA, (that is, the younger you are), the worse you’ve done.
• If like most people, you’ve increased your investments over time, you’ve done even worse.

And think about this - the market would need to rise to around 1400 TODAY in order for the DCA return curve to be beat the level of treasuries over the past 30+ years (and even then, its spotty.)

Now the graph doesn’t take into account inflation (that would be a little too complicated for me) but I have a funny feeling that if inflation was added in, you’re under water no matter how long ago you started investing with DCA. It’s shocking. This has the feel of the entire financial planning industry basing their professions on complete lies (fact - for any currently living person’s working life, the stock market has never returned 10%/year, lump sum or otherwise.) I don’t have the answers, but for my money, I’d say real estate, and businesses I’m personally involved in are where my money is best invested (Warren Buffet style - that is, seat on the Board, special stock with dividends the public doesn’t get, etc.) The public markets have made suckers out of everyone. Just to throw a wrench in the mix, I’d love to see this stat brought up to all the pundits!

For your own reference here are some links -

• The raw Google Spreadsheet (uses GFinance to auto update index levels every day.) I didn’t include dividends, etc. For naysayers, note that if I had, it would have made the compounded returnseven worse if I said they were reinvested (which they usually are). Index levels only go back to 1970, but the trend farther back is very similar.
• Here’s the equation I used for dollar cost averaging returns.
• I used 1 year TBill constant maturity, and just assumed reinvesting at the new rate each year. I got the rates from here a couple of weeks ago. In most cases, longer term bills would have had even better returns, since rates have been steadily dropping for much of the last 30 years.

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