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stock market returns project [Jan. 26th, 2011|10:33 am]
[Current Mood |okayokay]

Riffing off of this New York Times chart I mentioned a few weeks ago, I present: a chart of stock market returns! A few notes:

- Unfortunately, I didn't have any S&P 500 data before 1950, so that's when the chart begins. I'm not sure how the original chart went back to 1920, and I didn't feel comfortable just copying their raw data.

- The calculations for dollar-cost averaging are...a little confusing. Basically I considered it as if you had a lump sum but instead of investing it all at once, you invest it a little bit per month. Except then correcting for inflation gets very tricky. Anyway, there may be some problems but I think the message is the same - especially in the short run it reduces risk and return, but the more strongly the market trends off the better off you would have been investing it all at once.

- It was fun to throw this together but it also adds less information over the original than I had hoped. Oh well!

From: (Anonymous)
2011-01-26 10:18 pm (UTC)
Really interesting and very informative.

One thing to keep in mind about dollar cost averaging (that most people forget) is that the transaction costs will eat you alive. Unless you're investing very large sums of money (where you get very large returns in absolute dollar amounts), the typical transaction fee is a substantial hurdle to overcome.
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From: spchampion
2011-01-26 10:19 pm (UTC)
Forgot to login. That was me, btw.
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[User Picture]From: gregstoll
2011-01-27 01:59 am (UTC)
That's a good point...at this point I'm so used to investing with low-cost brokerages (Vanguard FTW!)
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[User Picture]From: djedi
2011-01-28 05:00 pm (UTC)
True, but also, almost everyone invests using "dollar cost averaging". I don't save my money up for 5 years and then invest in one big lump sum. I invest some money every year. I think your updating of the chart to include how most people actually invest makes it more useful and realistic.
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[User Picture]From: girdsman
2011-01-26 11:57 pm (UTC)
Actually, currently there are a number of ways you can invest in ETF's with no commission, which dramatically reduces the hurdle. (I'm not yet sure, but there may still be a ~$0.25 transaction fee.)

Does this include dividends and reinvestment of dividends?
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[User Picture]From: gregstoll
2011-01-27 02:00 am (UTC)
It does include reinvesting dividends. I actually meant to include a small percentage fee in the model, but forgot. Oh well!
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