The Best and Worst 30-Year Periods for Dollar-Cost Averaging Into the S&P 500 Index

I have to tell you a couple of things before you look at the graphic. First, the numbers DO NOT include inflation. Second, the numbers are based on the index and therefore DO NOT have fees and expenses deducted from the results. In other words, actual performance wouldn’t have been as good as the results shown. Third, I assumed $100 per month going into the index at the beginning of each month. Here are the rankings:

I highlighted the latest 30-year period in red to give you an idea of where it stood compared to other periods.

Now, here is the same information displayed in chronological order:

Looking at that graphic, it makes one thing clear: one year can make a huge difference! For instance, check out the 1978-2007 period, which would have grown to $330,842 over the 30 years. But, had your 30-year period started the next year, the account would have only grown to $180,713 due to 2008’s pathetic performance.

I think what we can take from this is that investing is a long-term adventure and the key to a successful investment plan is flexibility. If investment plan goes down right before retirement, you might consider working a couple of more years or cut back on your retirement goals. Don’t lose heart. Retirement can easily last 20 or more years, which will give you plenty of time to rebound as long as you are prudent.

9 thoughts on “The Best and Worst 30-Year Periods for Dollar-Cost Averaging Into the S&P 500 Index”

  1. Interesting. What the numbers tell me is that it is not that difficult to build a decent nest egg. After all your numbers are based on saving $1200/year.
    Unfortunately, although for the first time in history people have the luxury of retiring and doing what they want for 25 or so years, they are blowing it because they can’t control their spending. I know because I have to deliver the news to them!

  2. I know you said this, but the numbers don’t make much sense when the simulation is over large periods of time (30-years) — and you don’t factor in inflation.

    Having said that, there are some other interesting things here.

    There was only a single $100k gain (versus prior years), and that was for the simulation that started at the bottom of the Great Depression (1929).

    All four of the $100k losses (versus prior years) all happened within the past decade.

    In the end, the gains are numerous (and common), but the losses are huge when they happen.

    This reminds me of a common scenario that FAs and other industry insiders use to make the claim that you should always remain invested. It goes something like this: The average return for S&P-500 was 8%, if you missed the 10 best days, then your return would be 2%. The problem, though, is that they never tell you the return if you missed the 10 worst days…

  3. This supports the arguement that Social Security should not be privatized. The only people who will benefit will be the brokers who manage the accounts.

  4. JLP) I agree, inflation is tricky. If you have the data, then use short-term CDs or something else that that can actually be invested in for comparison.

    For example, in 2007, you could get over 5% on a 6-month CD. Comparing a 5% risk-free rate (for 2007) against the actual 2007 S&P500 returns changes the story completely.

  5. I love the post: thanks for crunching these numbers and posting. And I wholly agree that inflation is a tricky number to come up with. Personally, I like to use cost of living indexes, which are a better gauge of the value of money than some financial abstractions, especially now that money itself is bought and traded as a commodity. But it’s hard to assess and compare cost of living as well, so I’ll admit that it also is imperfect. Still, I think it’s more concrete than most other indicators.

    On the other hand, JLP, your comment #6 is a trowaway comment.

  6. #7 Nazim) Who produces the numbers for the Cost of Living indexes you mention? The reason I prefer short-term CDs is that the _market_ determines those rates, not some unaccountable (and potentially biased) government agency.

    Using a risk-free rate (from FDIC-insured CDs or something similar that you can actually invest in), would allow you to calculate whether equities return a high enough yield to justify the risk.

    #4 John) I don’t understand your comment. In every 30-year period looked at, they _all_ resulted in higher results than just holding the $36k in cash. The worst 30-year period ended with $156k. I can’t see a connection to this and Social Security…

  7. I think John makes a good point. If you are on track to retire and land on one of the really bad down years, that can be a real hardship.

    Part of the point of Social Security is that it lowers risk. We’re already taking risk in our other investments, and Social Security is an important balance to that because it doesn’t fluctuate.

    It isn’t exactly an argument against privatization because a reasonable investment strategy wouldn’t be 100% S&P 500 at the end of 30 years. However, in practice it is a pretty good argument because studies of actual investing behavior show that people don’t do the “right” thing with their money. They are too optimistic when things go up, and too pessimistic when things go down.

    If we believe that part of the justification for Social Security is the general social stability that it provides, then privatizing it would likely undo much of that.

    There are other arguments to consider of course, but this is what I make of John’s comment.

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