[Date Prev][Date Next][Thread Prev][Thread Next][Date Index][Thread Index]

[RT] Dollar Cost Averaging



PureBytes Links

Trading Reference Links

Preface - I'm not talking my book here. I don't own any stocks. I'm a
short-term index futures trader. Long-term to me is a week and I never
average down.

All this talk about scale trading and averaging down, along with this
week's crash, got me thinking about the way many people invest in the
stock market - dollar cost averaging. Lots of people with 401K plans
just contribute an equal amount every week or every month to a mutual
fund.

We all know what happened in the 1929 crash. The Dow hit its high in
August 1929, crashed 90%, and didn't return to the 1929 high until 25
years later in 1954. So I wondered what would have happened to our 401K
investor if he had been unfortunate enough to open his account at the
August 1929 peak and had the balls to stick with his equal weekly
contributions over the years.

The gif shows the results. I calculated the profit/loss by comparing the
average cost paid for a Dow share to the weekly Dow close. Not a pretty
picture but not as grim as the 25 year scenario might lead us to
believe. I think it shows the value to a _very_ long-term investor of
buying more shares when they are cheap and buying fewer when they are
expensive.

-- 
  Dennis
Attachment Converted: "f:\eudora\attach\Dol-cost.gif"