No. of Recommendations: 20
"This is a backward-looking figure that is useless for predicting forward year returns
....
People in their wealth-building years should keep dollar cost averaging into an index fund every month. Especially if they have a 401K. People who
are retired should have a majority allocation in an index fund plus an amount in cash or bonds that covers their living expenses for a few years. "
Hmm, there is a potential issue here:
The extremely conventional advice at the end would have worked well in the past, but as the first part of the post notes, success in the rear view mirror is not by itself sufficient to ensure that something is sensible advice for the future.
Imagine a person doing DCA investment of savings of $200 into SPY at the end of each month, the monthly savings amount rising with inflation.
Imagine a second person who is saving the same amount as cash for a while with no real return (just enough interest to cover inflation), and only then puts it into SPY and starts DCA into SPY thereafter.
It has been 28.5 years. Based on the recent peak portfolio value, how did the two investors do?
The second person would have been 28% better off waiting for 14.2 years before investing and starting the DCA process, and they'd still be ahead of the first investor even if they'd waited 15.5 years before putting a penny into the S&P.
Or waiting 8 years before starting, or 14 years before starting.
I'm not suggesting that it's easy to decide when top stop saving and start buying.
But similarly DCA isn't a magical easy route to good returns. The biggest single determinant of forward returns is what price you pay.
If too many of the investments are made at poor valuation levels, there is no guarantee of a good end result, nor even a positive one.
Of course, this is distorted by including the last 1990s. The millennium megacap bubble was off the charts and is never to be repeated, right?
I note that the top 10 stocks made up 20.3% of the Wilshire 5000 market cap at the March 2000 peak, and the top 10 make up 25.9% now.
That's far from being the best metric of market valuation, but it's certainly a warning sign that it might be useful to look more closely at what you're getting for your money.
The S&P 500 will have only so much value 25 years from now.
If you pay twice the price for a share of that endpoint, you'll have half the wealth at the end.
Jim
