Dollar Cost Averaging Into the S&P 500 Over 30-Year Periods (After Inflation)

NOTE: I’m having a terrible time coming up with titles for these posts!

You asked for it (well, one person asked for it), you got it!

Here is a PDF I put together that looked at a hypothetical $100 per month investment into the S&P 500 Index over 30-year periods. The results are pretty interesting (and pretty sad, too). If anything, this information should tell you one thing: YOU NEED TO SAVE MORE MONEY! Granted, $100 per month is not a lot of money. My wife and I are saving a lot more than that. Of course, we’re both in our 40s now so we need to be saving a lot.

Here is the chart from the 5-page PDF report:

Dollar Cost Averaging $100 Per Month Into the S&P 500 Over 30 Years (Minus CPI)

Over all 680 rolling 30-year periods, the average ending account value was $143,638 (a personal rate of return of 8.06%). The highest 30-year period was from January 1970 – December 1999, when the ending value was $271,535 (a personal rate of return of 11.35%).

The lowest 30-year period was from August 1952 – July 1982. The ending account value was $44,808 and the personal rate of return was 1.42%. Ouch!

One other intersting thing to look at is the difference one month makes. The biggest positive change from one month to the next was (March 1970 – February 2000) to (April 1970 – March 2000). Waiting that one month from March 1970 to April 1970 meant a difference $21,338. To the other extreme was (August 1968 – July 1998) to (September 1968 – August 1998). Waiting that one month meant a $32,642 drop in account value. This just shows you how returns affect large portfolios.

S&P Rolling Total Returns (1, 5, 10, 20, 25, and 30-Years)

It’s been awhile since I updated the rolling total returns for the S&P 500 Index*.

I’ll do a follow-up with some different information but right now I wanted to show you the following charts. Here is how I put the following charts together:

• I have montly total return data for the S&P going back to January 1926.

• To calculate the holding period average rate of return, I took the product of the monthly returns and then raised it to 1/n (1 over the number of years).

Example: For the 5-year period from 1926 – 1930, the product of the monthly returns was 1.486667021. I then raised it to 1/5 or .2 to get 1.082536981. Then I subtracted one from that to get an average annual rate of 8.25%. Then I ran the calculation for the following month, which would include February 1926 – January 1931. Make sense?

• Then I took those returns and put them in a chart.

As you look at the charts, notice how as the holding period increases, the returns become less sporadic. Also, notice how the 1, 5, and 10-year holding periods all have period of negative average annual returns. the 10-year holding period was pretty solid until the internet bubble, 911, and the housing bubble/credit crisis.

S&P 500 Rolling 1-Year Holding Period Total Returns

S&P 500 Rolling 5-Year Holding Period Total Returns

S&P 500 Rolling 10-Year Holding Period Total Returns

S&P 500 Rolling 20-Year Holding Period Total Returns

S&P 500 Rolling 25-Year Holding Period Total Returns

S&P 500 Rolling 30-Year Holding Period Total Returns

*The S&P 500 Index consisted of 90 stocks prior to February 1957.

Ten for Tuesday, August 28, 2012

1. The 15 Best Videos on Commerce and Entrepreneurship. I don’t know if they’re the “best” or not, but I watched a couple and found them interesting.

2. The Best-Paid Moonlighting Jobs in America.

3. How to Choose a Dividend-Paying ETF.

4. 5 Rules for More Effective Presentations.

5. The stuff we didn’t have to think about just a few years ago: Who inherits your iTunes library?

6. Interesting: A mindless way to beat the S&P 500 Index

7. Make the best of your college investment.

8. Kay Bell on Romney’s Tax Returns). Where’s President Obama’s college transcripts and records?

9. Henry Blodget on how to fix the economy and a rebuttal (I mentioned these yesterday).

10. Finally, this is an old post but well worth a read: 13 Tips for Dealing with a REally Lousy Day.

Don’t forget to check out this week’s Carnival of Personal Finance.

(Mostly) Excellent Piece on Why Henry Blodget is Wrong

A friend posted a link to this interesting piece by Diana Furchtgott-Roth on Why Henry Blodget is Dead Wrong when it comes to fixing the economy.

Blodget thinks spending is the problem and so his solution is for companies to increase wages and all will be good. From the piece:

Your conclusion is a call for employers to take “a few percentage points of your record profits and use it to hire more employees and pay your existing employees more.” That way, you say, employees will spend more money and corporations will have higher revenues and profits.

Obviously, Blodget has little economics training. Even I know that a company’s goal is not to hire employees UNLESS there is a need to hire them. But, I expect this from Blodget who seems to be taking the populist approach these days. I’m wondering why Blodget didn’t hire a bunch of people back when he was making the big bucks as a securities analyst.

Anyway, this piece takes on Blodget and does it really well. Her work sounds a lot like Thomas Sowell. It’s also what I have been saying here on AFM. For instance:

Some increase in perceived inequality since the 1980s is due to the Tax Reform Act of 1986, which lowered top individual income-tax rates from 50 percent to 28 percent. This led to more income being reported on the individual, rather than corporate, tax schedules.

And this:

In addition, the composition of households has changed over the past 30 years. Women have moved into the workforce in record numbers, and there are more two-earner couples at the top of the income scale and more one-person households at the bottom, including students and retirees.

When two individuals get married, if both have worked and continue to work, they comprise a household with higher earnings—and the measured distribution of income in society widens. There are more such households now than in the 1980s. In 2010, 58 percent of married couples were in the top two quintiles, and only 7 percent of married-couple families were in the lowest quintile.

Finally, I LOVE this point:

If you want to reduce inequality, Mr. Blodget, the simplest way would be to allow only one member of the household to work. It’s two-earner couples who are pumping up the incomes of the top fifth of the distribution. The CEOs and the star athletes are just a tiny fraction, outliers on a massive bell curve. The real culprits are two-earner couples.

Now, I do disagree with Ms. Roth on one point at the beginning of her piece where she talks about the effects of welfare (food stamps, rent supplements, Medicaid-funded health care, subsidized school lunches, and other social programs) on spending. She writes:

…those at the bottom are doing better than they did 25 years ago because they have greater spending power, after adjusting for inflation. This is important for the bottom fifth—economically, socially, psychologically.

Spending is vital because it is the principal determinant of standard of living. It influences confidence in the future.

I disagree that spending derived from welfare is good for people psychologically. Why? Because, in the back of their minds they always have to be worried about the government taking it away from them (a card consistently played by politicians. “So-and-so will CUT YOUR BENEFITS if he’s elected.”).

Spending derived from income that is EARNED is what helps people psychologically.

Other than that, I agree with everything else Ms. Roth said in her piece. I think she effectively schooled Blodget on his economic idea.


Back to School

The kids start back to school today.

This year we will have a Junior, Sophomore, and 3rd grader.

Because of my flexibility, I’m able to walk our 3rd grader to and from school every day. I like it. We have some pretty interesting conversations on those walks. My daughter is full of questions. I’m kind of sad that she only has three more years left in elementary school and then our walks will be over because 1. the middle school is too far away to walk conveniently; and 2) she’ll be “too old” to walk to school with her dad. Such is life.

I’m also a little sad because our oldest only has two years left in high school. Seems like yesterday when he was starting Kindergarten. Time certainly flies. He’ll graduate and then our other son will follow the year after that. Lots of changes coming up in the next few years. Wow. Makes me feel old.

I hope all the kids have a great year.

Now back to our regularly-scheduled blogging.