Most net buyers of equities do not invest a lump sum in the market. Rather, they invest their savings gradually over time. After reading a passage in The Intelligent Investor on how such a dollar cost averaging strategy performed during the Great Depression, I was curious to see how it would have performed in recent years.
To model the strategy, I made some assumptions: $1,000 in inflation-adjusted dollars is invested in the TSX Composite Index at the start of a calendar year. I used the annual real returns of the TSX Composite available on the Libra Investments website. Also, assume there are no transaction costs, taxes etc.
Here’s the surprising news: such a regular investing program would have produced a positive return for every rolling 10-year period starting in 1970. It is true that the 10-year period ending in 2008 produced the smallest profit in the sample but it was a profit nonetheless. What about 20-year rolling periods? The profits ranged from 50% to 150%. Investors would have at least doubled their money in real terms in investing over 30 years.
I would caution against reading too much into these results. In fact, as I’ll show in a future post, Canadian investors in the S&P 500 and MSCI EAFE fared a lot worse following a dollar-cost averaging strategy and not just in the recent past. The point is that, despite the daily dose of depressing news, Canadian investors could have easily obtained decent results even over 10-year periods. Unfortunately, I’m one of the investors who didn’t — chasing tech stocks in the initial years made sure my returns look worse. But whose fault is that? The market’s or the investor’s?
