Dollar Cost Averaging the NASDAQ's Wild Ride Since '99

March 5th, 2014 by 

We've had a lot of recent fun with our two part (and... growing?) series on reinvested dividends.  First we told you that timing month to month purchases was a waste of time.  Then, when the goalposts were moved, we redid our analysis for yearly purchases (while addressing the criticisms and giving you a wonderful story about a shower tiling job).

Since we have some amazing data leftover from our Monday publication on the NASDAQ's dividend reinvested performance since 1999, we figured we would move our own goalposts this time.  So, let's ask a crazy question... in that I can't think of a more relevant recent contrived example:

What sort of dollar cost averaging performance would an investor who started in March 2000 and (here's the kicker) only bought NASDAQ have seen?

Okay, make your estimate now (don't look!).

How Would Our Horrible Luck Investor Have Performed?

This investor, seriously, had enough luck to make him worthy of a new version of Alanis Morissette's Ironic (I owed Canada one).

He picked a sector (as we showed on Monday) that is still down from its March 2000 peak and started his career at a promising time (November 1999), which quickly turned sour.

Basically, he couldn't even get dollar cost averaging right.  However, our worker did do some things right - he invested month in and month out, and he didn't sell ever.  Here's how he did:

Value 2/28/2014Total InvestedXIRR
Bad Luck Tech Guy$163,322.75$86,000.008.55%

If that isn't good enough for you, here's a visual:

Bad Luck Tech Investor's DCA Adventure

Bad Luck Tech Investor's DCA Adventure

What Just Happened?

Goalposts were moved and the football was spiked (it's not a perfect analogy, sure).  Anyway, our bad luck investor still managed to eke out 8.55% annual returns over the last 14 and change years - despite an economy which, I'm sure you won't argue, hasn't been as powerful as historic American economies.

All this with the NASDAQ - diversified, sure, but still heavily dependent on the fortunes of technology.

Look, I get it - these article are weird, and long time readers know that I don't passively invest all of my money.  So even though I've churned out more than a few epic pieces on dollar cost averaging, I don't even employ it for all my portfolio (maybe I'll do one on lump sum investing soon to balance it out).  For me, holding about a quarter of my wealth in stocks in individual firms is just something I do - and I'll continue.

But the point remains:  Your 401(k)?  Your monthly IRA contribution?  Your HSA's attached investment account?  Your stock purchase plan?  Your DRIPs?  Anything that's automated... why bother messing with the automation?  Even with perfect timing, you'll only pick up a few hundredths of a percent in alpha... and even with some of the worst timing in recent history you'll still end up like the subject of this article.

Not bad, right?




PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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