Fame or Shame

Dollar Cost Averaging

As with all investment methods they have their benefits and their drawbacks as well.  Dollar Cost Averaging (DCA) is no different despite what you’ve heard believers extolling its virtues.  Nonperformance is under achieving a nominal average annual return of 9.24% (or real 6.96%) since 1871.

Three elements come into play.  They are time, dividend yield and price to earnings multiple.  Longer the time you have will lift your rate of return (or lower) closer to the mean return.  Dividend yield is your investment return so important in compounding returns.  Higher the yield closer you’ll be to the mean.  Price to earning multiple (PE) is the speculative element that all depends on the animal spirits either driving returns higher or lower.

Today despite this minor dip the current (4-11-2025) dividend of the S&P 500 is 1.40% significantly below its average (since 1871) of 4.23% along with the Shiller PE at a lofty PE at 33.15!

So…That PE ratio of today is greater than the 1929 top of 27.08. Aggressive animal spirits has the appearance of normalization since this valuation metric has been above the 1929 level since 2017! Thus luring in more and more market participants into believing we have entered a new permanent high plateau.  Nothing is further from the truth as markets will regressive either back down or back up to their respective mean as the economy can only grow so fast supporting dividend growth.

Using 1929 as our comparison even though their dividend (3.67%) and Shiller PE (27.08) is far better than TODAY!  So despite this unfairness we’ll use this time period as our proxy for very possible outcomes for your money 20 years out.

Here we go!

$1,000 invested 1929 and then $2,000 per month for the next 20 years.  Here is our return for our DCA investor a nominal return of 7.68% and after inflation 3.60%.  However our ardent saver doesn’t start with 1k but instead its 10k along with the same $2,000 per month.  Results??  Nominal 7.52% and real at 3.53%.  Let’s continue starting with 100k here is the ending numbers.  Nominal 6.42% and real return 3.03%

Here is a real possibility our hard charger has his 100k at 1929 levels but says to himself. “I can back off my savings to $1,000 per month as I saved so much prior.”  Drum roll please.  Nominal 5.75% and real at 2.73%.  Please note if your 401k funds charge a 2% expense ratio then all returns is lowered by that amount.  In this case a 0.73% a real return that’s retirement on rice and beans along with helpings of ALPO dog food!

The moral of the story is to avoid investing in stocks when price to earnings are elevated way beyond their historical average.  At levels greater than 30 Shiller PE alternative investments such as bonds or even gold/silver is recommended.

Where to find Shiller PE and dividend yield click HERE.  

For past historical data click HERE