# Dollar-Cost Averaging Your Way Through the Depression

After some requests from AFM readers regarding my two posts from last week on the 10 & 50 worst months in the S&P’s history, I went back to my trusty spreadsheet an ran some numbers assuming:

A lump sum investment of \$1,840 on the last day of September, 1929 and \$10 per month (\$1,840 over 184 months) invested on the last day of each month from September, 1929 through January, 1945.

Here’s a look at the chart:

According to my numbers, dollar-cost averaging \$10 every month throughout that 15+ year period would have grown to \$3,541, for a personal rate of return of 8.01%—not too shabby considering that this was during a depression! Now, my numbers DO NOT include fees, so the actual account value would be worth less than \$3,541.

The bottom line is that dollar-cost averaging works best during a down or sideways market. Maybe that’s something we should all keep in mind during this market.

## 13 thoughts on “Dollar-Cost Averaging Your Way Through the Depression”

1. Dan says:

While you can find pathological instances in market history–such as your example here–where dollar cost averaging beats lump sum investing, the academic literature is quite clear that, on average, lump sum investing generates larger returns. This is mainly a reflection of greater principle going into the market earlier. The benefit to dollar cost averaging in the face of an uncertain future is psychological, not mathematical.

2. To make an adequate comparison of DCA to lump sum investing you also have to allow for the return on the balance of the \$1,840 that wasn’t yet invested in the stock market. At a minimum you’d get bank interest if it was sitting in cash until it got invested. So, the return for someone who had \$1,840 in Sep 1929 and chose to invest \$10 per month into the stock market over the following 184 months would be a lot higher than \$3,541.

3. Don says:

@Dan: Someone recently pointed out (on this blog or another) that like all methods that limit risk, there is some diminished amount of reward that comes with dollar cost averaging. In that sense, it is no different than diversification into bonds and other asset classes.

If you were a person that diversified a year ago and dollar cost averaged a year ago, then it is reasonable to diversify today and to continue to dollar cost average today. In fact, those behaviors a year ago have helped soften some of the recent loss you’ve suffered.

You are correct that in generally-uptrending markets dollar cost averaging is an underperformer. But JLP is also correct that through downturns dollar cost averaging shines.

4. Andy says:

That’s true, but on the other hand I believe banks didn’t pay interest on deposits in the 30s.

5. I’ve been thinking about this as topic as well. It seems to me like a it would be better to wait until after the fall was over before beginning to pump cash into the market. From what I can see from the graph that you generated, the market fell for well over a year! If a hypothetical investor had shown some patience and held off on a dollar cost averaging strategy for 6 months, 12 months, or even 18 months it seems as though they could have improved returns dramatically. I think that that is food for thought in our current economic conditions.

6. lordskip says:

@steward:

what you’re suggesting is market-timing. There’s quite a lot of material written about why that could be a bad idea.

7. @ lordskip – Hindsight is 20/20. I think I understand the whole “market-timing is risky” argument, but I’m not sure if waiting to see how things pan out is really trying to “time the market” in the traditional sense. It might just be being prudent?

8. some1 says:

“but Iâ€™m not sure if waiting to see how things pan out is really trying to â€œtime the marketâ€ in the traditional sense.”

it is.

9. Bill says:

What if you were dollar cost averaging with WaMu? I guess if you’re talking S&P, that’s one thing, but with specific stocks, some might not survive.

10. The argument against dollar cost averaging is being made by the same people that priced the market as if there was no risk. And they will never learn the lesson they should have just learned. Markets have risk – you can lose money as well as make it.

11. Niilo says:

Certainly for a rising stock market, dollar cost averaging (DCA) fails against the lump-sum investment. This is inevitable, as simply all the money is exposed to all the growth. However, my consistent criticism is simply that we do not have our life savings at the beginning of our life. Theoretically we can borrow it and use the gains to make interest payments, but what bank would give a 20-year-old what he claims he’ll have in 40 years? This leaves most people in the situation that they have some savings now, but an employment income stream (with an investment portion) into the future. For a long-term buy-and-hold strategy, it would then be advisable to use an index fund with the lowest possible cost structure (internal management fees and commissions to buy more), put your existing retirement (or long term, 10 year+) money into it, then contribute your investment steam monthly/quarterly/etc, hoping to reap the benefits of the lump-sum investment and the DCA benefits of the monthly payments. Then you really *buy* continuously and *hold* continuously. In my mind, it is really buying into the ultimate representation of a nation’s industry.

12. rajesh chhabria says:

well if you invest lump sum and then see your investment go down / most panic and sell off

so on paper comparing returns over 20-30 years lump sum may be attractive / but who holds on in downturns / most lose / dca removes fear and keeps investing/ so what if you earn a few points less / man — ur making profits not loss as most do

cheers

13. frank says:

visiting this site long after it – and comments – was posted I wanted to point out that investing is all about managing risks and is always a trade off. DCA works to mitigate investment risk in a down market, but does not address opportunity cost in a rising market. However, studies and my experience has found that investors feel the pain of losses much more than gains, so unless we are guaranteed an upside market, DCA makes sense. Finally, most investors are using DCA through 401k contributions, and we all know that there is a huge shortfall in retirement savings, so let’s encourage DCA even if it lacks perfection.