DCA Today: The Point of Frustration

When starting at $1000 and adding $1000 (plus inflation) each year, these are today’s worst case results: At year 10, the odds are about 20% that the stock market investor's balance will be below $8.8K (with $11K contributed). At year 15, the odds are about 20% that the stock market investor's balance will be below $14K (with $16K contributed).

The point of frustration with dollar cost averaging (DCA) today is 10 or 15 years.

Sequences (1921-1980)

Let us look into the past. Let us look at past historical sequences that were among the lowest performing 20% at years 10 and 20. This is what happened, not taking valuations into account. All amounts are in real dollars (that is, adjusted for inflation). All deficits are relative to the amount of money invested (in real dollars).

Lowest twelve balances at year 10

Year..worst year..deficit
1923..00..$0
1933..09..$70
1964..10..$588
1965..10..$3534
1966..09..$3346
1967..08..$2952
1968..07..$2719
1969..06..$2426
1970..05..$1934
1971..04..$1565
1972..03..$1281
1973..09..$1134

Lowest twelve balances at year 15

Year..worst year..deficit
1927..05..$1332
1928..04..$1551
1959..00..$0
1960..15..$3534
1961..14..$3552
1962..13..$3757
1963..12..$3664
1964..11..$3625
1965..10..$3534
1966..09..$3346
1967..08..$2952
1968..07..$2719

There is overlap. Years 1965 through 1968 hit the same bottom in both sequences. That is, the worst year occurred within the first ten.

Conclusions

It is easy to understand why many investors abandon stocks even when dollar cost averaging. Relative to $1000 annual deposits, most of these deficits are HUGE.

The 20% worst case sequences are clustered together.

Dollar cost averaging reduces the influence of starting valuations considerably. It does not eliminate it altogether. The 1960s and early 1970s were times of high inflation and poor investment returns. Valuations were high in 1959-1973. January P/E10 levels were above 18 from 1959-1969. It was 18.7 in January 1973. The January P/E10 level fell dramatically to 8.9 in 1975.

Have fun.

John Walter Russell
February 4, 2006