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What if You Invest on the Wrong Day – Part 2
By JLP | February 20, 2008
The other day I wrote about the impact of investing on the wrong day (meaning, investing right before a big market decline). Today I thought I would follow-up with another graphic that really shows the impact of that crazy week in 1987. For this chart I assumed:
1. $100,000 lump sum investment into the Vanguard S&P 500 Index Fund (except for the DCA of $10,000 per month (invested on the 13th) for 10 months).
2. All dividends are reinvested and no withdrawals are made.
3. This example only represents one piece of what should be a complete asset allocation plan.
4. Taxes are not addressed in this exercise.
In this example, the DCA portfolio came in second-best with an ending value on February 15, 2008 of $782,489. This is due to the fact that only $10,000 was subject to the 20% decline on October 19. I’m not necessarily advocating dollar-cost-averaging over lump sum investing if you have the choice as to which method to use. Most of us (myself included) HAVE to dollar-cost-average through 401(k) plans or IRAs and don’t have lump sum investing as a choice.
Finally, like I said in my previous post on this subject, the chances of investing a lump sum right before a big market drop of fairly slim so I wouldn’t waste a lot of time worrying about it. And, if you do have a lump sum to invest and you’re worried about a market drop, diversify your money into several different asset classes to minimize the impact of a big decline in one asset class.
Topics: Index Funds, Investing | No Comments »