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What if You Invest on the Wrong Day?
By JLP | February 18, 2008
This post was inspired by TheDigeratiLife’s post on lump sum vs. dollar-cost averaging.
Although the chances of investing a lump sum on the wrong day (meaning you purchase a large amount right before a big drop) are pretty slim, there’s always the possibility that it could happen and the results could really impact a portfolio. To illustrate this point, I took a look at Tuesday, October 13, 1987 through Monday, October 19, 1987, which was a really rough week. Here’s a look at what would have happened had you invested $100,000 in Vanguard’s S&P 500 Index (VFINX) at the closing price on each of following days, reinvested all the dividends, and held it all the way through Friday’s close (February 15, 2008):
That’s quite a difference isn’t it? Here’s a look at how it impacts the annualized rate of return:
.GIF)
Like I said at the beginning of the post, the likelihood of investing during such a horrible week is pretty slim. I looked at the worst one-day drops in the S&P 500 Index since 1980. The 20.47% drop on October 19, 1987 was by far the worst. The second worst drop, which occured on October 26, 1987 was only 8.28%. The third worst drop was 6.87%, which occured on October 27, 1997 (what’s up with the month of October?).
Although it’s easy to look at those numbers and think about what you would have missed out on, I think a better way to look at it is to think about “the worst” you would have done. An annualized 9.7% rate of return over the last 20 years, isn’t too bad considering what the market went through in those 20 years.
NOTE: My analysis ignored taxes and assumed all dividends were reinvested.
Topics: Index Funds, Investing |
February 20th, 2008 at 6:01 pm
Very interesting. The difference between the worst case and the best case is less than 2% per year. Of course, the difference means an increase of 40% in actual dollars. Crazy how powerful an extra couple of percent per year is.
I wonder what the results would have been if the portfolio was better diversified. Maybe I’ll do some research and write a post.