Dollar-Cost-Averaging Revisited

My old friend, dollar-cost-averaging, came to mind recently as I looked at the performance of the markets during the first six months of 2020. 

Oftentimes I’m asked “Is this a good time to invest?” and before I can answer, I hear “This market is terrible.  I think I’ll wait awhile.”  ( A prominent attorney asked me this question around 2009—in May, near the bottom of the market—after he had inherited a large sum of money, and concluded, “too many problems.”  It was a very costly decision.)  

Generally my answer to the question of when is “If you’re concerned about the timing of your purchase, why not dollar-cost-average?”  

To review, dollar-cost-averaging is the process of investing the same amount of money on a fixed schedule into a mutual fund or stock over a specified period of time.  Perhaps six months, a year, ten years, etc.   Doing so results in the investor averaging his/her cost so that they are assured that their average cost will always be less than the average price.  Note that I did not say it would always result in a profit. 

This year may be a good example of dollar-cost-averaging.   The U. S. market started the year with the S&P 500 Index at 3226 on January 3, it moved sideways for a month and a half, and then as the coronavirus became real in mid-February, it began a terrible decline to 2237 on March 23.  Year-to-date, a decline of 31%!  But then it turned around such that on June 30, it was at 3100 reflecting a six month decline of only 4%.  A real roller coaster.   

Let’s see what would have happened by dollar-cost-averaging into an stock index fund reflecting the S&P 500 Index.  I’ll use the Vanguard S&P 500 ETF.  Assume the total investment amount is $1 million and my dollar-cost-averaging will be the same amount each month—in this case $166,666 for six months—into the fund on the first trading day of each month.

DateInvestment AmountShare PriceShares AcquiredTotal SharesValue of Account

Value of Account as of June 30, 2020 is $1,042,118.

The results are a $42,118 gain (4.2%) on the $1 million investment during a period when the fund’s net asset value declined around 6%.   The key was the investments in March, April and May when the fund had declined in value, which allowed the investor to buy more shares at the more attractive prices.  Of course, if the investor had sold at that time, it would have resulted in a loss. 

This approach may work for the investor who wants to make a large investment in the market but is unsure about the timing.   So instead of investing a large lump sum today, the investment may be spread out over six months or a year.   

I have had very good experience when the dollar-cost-averaging is over a very long time period, say ten years or so, when one is saving for an education account or a retirement fund. 

Full Disclosure:  I’ve been dollar-cost-averaging on a monthly basis into three common stock mutual funds for over fifteen years.     

Tim Medley

Tim Medley

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Sissy Moreland

Client Services Trading

A graduate of Mississippi State University, Sissy joined Medley & Brown in 2017, but her career goes all the way back to 1990 when she was the merchandise director for four years at Phi Theta Kappa. She was also Customer Service Manager and Marketing Development Manager at Crystal Springs Apparel from 1994 to 2005. From 2005 to 2017, she was Manager of Sales Administration at Skyhawke Technologies. Thanks to her considerable operations and administrative experience, Sissy oversees trading and assists with most back-office operations for the firm. Staying so busy at work requires Sissy to recharge her batteries outside the office from time to time which she does by running, reading, enjoying a leisurely brunch, and watching the Saints play football.

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Beth spent four years in the investment world before joining Medley & Brown in 2004 as our operations coordinator. She and her husband Robbie are busy parents to identical triplet daughters, so not surprisingly, some of Beth’s favorite things to do are napping and relaxing on the beach when she actually finds the time. Beth also enjoys taking short walks to the pool, attending concerts, and going out of town for long weekends. Beth loves her Mississippi State bulldogs and currently has four dogs, three cats, and three grandcats because having three children simply isn’t enough. No wonder her operational skills are so exceptional.

Doug Muenzenmay, CFA, CFP®

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When he’s not enjoying the outdoors or attending his children’s school and sporting events, you can find Doug studiously researching investments for his clients. His career began in 1991 after graduating from the University of Iowa with a bachelor’s degree in economics. He spent 17 years in trust investments at three different banks before joining Medley & Brown in 2010. Doug also got his MBA from Mississippi College and served as an adjunct professor in finance there from 2007 to 2013. Married to his wife Sharon since 2001, Doug is a Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), and a board member of the CFA Society of Mississippi.

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Eddie’s extensive education includes a B.S.B.A. in accounting, with special distinction, from Mississippi College in 1994, along with a J.D. from Vanderbilt University and LL.M. (Master of Laws) in taxation from the University of Florida. But it’s what he’s learned outside of school and work that really stands out. He’s an Eagle Scout, which taught him a great deal about honesty and hard work from an early age. He learned even more earning black belts in Taekwondo, Hapkido, and Hanmudo. Oh, and he studies the Korean language in his spare time as well. Additionally, Eddie serves as an adult leader for Scout Troop 164 in Madison. He is a past board member of Hope Hollow Ministries, the Central Mississippi Down Syndrome Society, and the Mississippi Corporate Counsel Association. Eddie is currently a board member of the Woodward Hines Education Foundation. He enjoys spending time with his wife, Sarah, and their three children—Andrew, Caroline, and Emma. 

Julius Ridgway

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Judging from his background, you’d think investments and other financial matters were all Julius cares about. After all, he has two decades of direct investment experience and spent the previous ten years involved in banking and real estate. Julius also received a masters degree from the London School of Economics in 1998, an MBA from Millsaps College in 1993, and a history degree from the University of Mississippi in 1990. But his true passions include driving sports cars on racetracks or twisty mountain roads, running ultramarathons, and taking road trips with his wife and son. He’s worked here since 2002 as a Chartered Financial Analyst (CFA) and member of the CFA Institute while also serving as an adjunct instructor at Millsaps College and board member of New Stage Theatre. It takes major dedication to tackle all these responsibilities—sort of like training for all those long distant runs—but Julius enjoys every minute of the grind. And when it’s time to slow down, Julius finds the best way to clear his head is taking long hikes in the mountains on all those road trips.