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At the time of this writing, Vanguard’s S&P 500 Index Fund (VFINX) is down 14.04% year-to-date (not including dividends). Where would you be had you dollar-cost averaged into VFINX during the year? To arrive at that answer I assumed a few things:

1. Invested $500 on the 1st and 15th of each month.

2. If the 1st and the 15th fell on a weekend or holiday, I used the price for the trading day preceding the 1st or the 15th.

3. I assumed this was a 401(k) account.

So, here’s where you would stand right now had you invested $500 into VFINX on the 1st and 15th of every month during 2008:

So, you would have invested $7000 during the year and it’s worth $6,509. You’re down 7.01%, right? Not exactly.

Why?

Because you weren’t fully invested the entire year. In order to figure out your personal rate of return, you need to add in the purchase dates. The easiest way to do this is with Excel’s XIRR function. I ran the function myself. Here are the results:

So, according to those numbers, you’re personal rate of return is -22.68%, which is an annualized number. Sounds scary but keep in mind that it wouldn’t take much of a rise in the price of VFINX for that number to become positive. I was playing around with the numbers and figured out that if VFINX went up to $125, you would actually have a positive personal ROR even though the fund would still be down over 7.51% for year.

So, even though it stinks to watch your periodic investments drop in value, in the long run, it’s a good thing if you’re dollar-cost averaging.