Slow and steady wins the retirement race

Looking for the right time to start investing in the market, or to invest a couple more dollars towards your retirement?  Do you think dollar cost averaging might help protect you from market volatility? If so, read on!

Many people who begin investing are afraid of losing all of the money they invest.  It’s not hard to fault folks for this, after all, the point of investing is to make money.  If you turn on just about any news program you’re likely to hear information about how the market is doing.  Sometimes it’s up, sometimes it’s down, but if you have money in the market, you probably pay more attention when you hear things are down.

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The fear of the market collapsing makes people do bad things with their money.  Perhaps the worst thing people do is pull their money out of the market altogether.  If you’ve invested in low-cost index funds, you have nothing to worry about when the inevitable downturn occurs.  I like to ask what’s the worst that could happen when it comes to doomsday scenarios.  If you have $500,000 invested and the market completely collapses to the point where you lost everything and civilization reverts back to the stone age, you’d be no better off if you had $500,000 in cash under your mattress; due to hyper-inflation, it would be worthless.

Ultimately though, we all just need to get over whatever fears we have that prevent us from saving money for retirement today.  I’m a big fan of data, so here are a couple of scenarios to consider if you have fears about losing money in the market.

The following chart shows how much money you’d have after 30 years if you invested $1,000 a month in the S&P 500, $360,000 in total, depending on the year you started investing.  The data for the following chart and graph was generated from the calculator available here.

Investing Time Period Ending Balance Annualized Return
1950 – 1980 $1,615,344 8.72%
1951 – 1981 $1,761,894 9.17%
1952 – 1982 $1,439,876 8.11%
1953 – 1983 $1,656,948 8.85%
1954 – 1984 $1,744,318 9.12%
1955 – 1985 $1,676,472 8.91%
1956 – 1986 $1,936,468 9.67%
1957 – 1987 $2,340,682 10.64%
1958 – 1988 $2,078,369 10.03%
1959 – 1989 $2,234,319 10.40%
1960 – 1990 $2,537,388 11.05%
1961 – 1991 $2,307,678 10.57%
1962 – 1992 $2,822,574 11.60%
1963 – 1993 $2,786,469 11.53%
1964 – 1994 $2,873,271 11.69%
1965 – 1995 $2,705,891 11.38%
1966 – 1996 $3,416,252 12.56%
1967 – 1997 $4,028,623 13.38%
1968 – 1998 $4,787,855 14.24%
1969 – 1999 $5,858,072 15.24%
1970 – 2000 $6,264,121 15.57%
1971 – 2001 $5,396,723 14.83%
1972 – 2002 $4,294,063 13.70%
1973 – 2003 $3,171,439 12.18%
1974 – 2004 $3,739,160 13.01%
1975 – 2005 $3,499,653 12.68%
1976 – 2006 $3,412,779 12.55%
1977 – 2007 $3,457,949 12.62%
1978 – 2008 $2,994,941 11.90%
1979 – 2009 $1,675,373 8.91%
1980 – 2010 $1,938,767 9.67%
1981 – 2011 $1,974,178 9.77%
1982 – 2012 $1,778,871 9.22%
1983 – 2013 $1,763,246 9.18%
1984 – 2014 $1,945,331 9.69%
1985 – 2015 $1,910,748 9.60%
30 years in the S&P 500
Click to enlarge

This chart shows a couple of things.  The first is if you invested between 1970 and 2000 you did pretty well for yourself.  However, even the people who invested when the market performed its worst, between 1952 and 1982, had an annualized return of 8.11%, ending up with $1,439,876 from a $360,000 investment over 30 years.  8.11% is higher than the number I use in all of my retirement calculations on this site; I use 7%.  This chart doesn’t take into account inflation, both in the economy and within your paycheck, so while things will cost more later, you should also be increasing the amount you invest each year.  I find this information useful to ease fears about starting to invest at the wrong time.  Even if you invested during the worst time possible, you’d have plenty saved for a secure retirement.

The average return for all of the groups was 11.17%, or $2,828,503.

Some people think it’s better to invest money using dollar cost averaging.  It’s an easy concept to explain:  if you have $12,000 to invest, instead of investing it all on the first of January, you invest $1,000 each month of the year, or some other interval.  The thought is the market might be up some months, and down others, and by not investing it all at once you average out the extremes.  Most of us who invest in work sponsored plans like a 401(k) already invest this way because we invest a percentage of each paycheck.

What people forget is that, in general, the market goes up, so by sitting on their money they miss the growth from the overall upward trend.  Don’t Quit Your Day Job has a great overview of the downsides to dollar cost averaging, ultimately calculating that you lose out on a potential 0.3116% biweekly return on an example investment by trying to invest using dollar cost averaging.

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Since we’re retirement rocket scientists, we want to see some data!  So here are a few more scenarios.  We already determined the best years to invest were between 1970 and 2000, and the worst were between 1952 and 1982.  The years that came closest to the average were 1960 to 1990.  From the entire time period from 1950-2015, the worst return was -36.55% in 2008, the best was 52.56% in 1954, while the average return was 12.74%.  It’s interesting that the worst performing 30 year period not only included the best performing year, but also excluded the worst performing year!

Let’s imagine you have $100,000 to invest on January 1st, and then let that money grow for 30 years.  You intended to retire January 1st, 2015, so we’ll go back into the past to 1985.  You have a couple of ways you could have invested this money.  From the chart above, we know the annualized return from 1985 to 2015 was 9.6%, which is below average for the S&P 500.  However, that occurred with regular, monthly investments (dollar cost averaging) over 30 years, meaning you would have invested $277.78 a month for 360 months. If instead you invested the entire $100,000 on 1/1/1985, you’d have an ending balance of $2,363,725.35 on 1/1/2015, an 11.11% annualized return.

If you invested the $100,000 over the course of the entire year (1985), or $8,333.33 a month, you would have $2,094,382.06 come 1/1/2015 (or 11.4% less).  If you did it over 2 years ($4,166.67 a month for 24 months), you’d end up with $1,841,623.66.  The best resource investors have on their side is time, and you can see that each month this hypothetical investor waits to get money into the market, the less their investment grows.

Here’s a chart demonstrating the perils of using dollar cost averaging.  It shows what your ending account balance would be if you took anywhere from 1 month to 360 months to invest your $100,000.  As you can see, over the 30 year period, every year you delay investing your money, your final account balance decreases.  Out of 30 years, only one year, 1989, is an exception.  You would have had more money if you spread payments out over 6 years instead of 5, but don’t look too much into this, since you’d have been better off every other time investing the money today instead of tomorrow.

Dollar cost averaging
Click to expand

Here is the data in chart format, so that you can see the actual values.

Year Months to Invest $100,000 Monthly Investment Account balance in 2015
1985 1 $100,000 $2,363,725
1985 12 $8,333 $2,094,298
1986 24 $4,167 $1,841,771
1987 36 $2,778 $1,664,055
1988 48 $2,083 $1,581,496
1989 60 $1,667 $1,285,712
1990 72 $1,389 $1,490,714
1991 84 $1,190 $1,319,998
1992 96 $1,042 $1,250,056
1993 108 $926 $1,185,616
1994 120 $833 $1,171,987
1995 132 $758 $1,077,157
1996 144 $694 $1,020,812
1997 156 $641 $967,031
1998 168 $595 $915,307
1999 180 $556 $868,753
2000 192 $521 $825,818
2001 204 $490 $789,891
2002 216 $463 $761,296
2003 228 $439 $735,602
2004 240 $417 $709,803
2005 252 $397 $685,429
2006 264 $379 $662,693
2007 276 $362 $639,988
2008 288 $347 $621,980
2009 300 $333 $606,388
2010 312 $321 $591,968
2011 324 $309 $576,199
2012 336 $298 $561,157
2013 348 $287 $544,760
2014 360 $278 $531,188

Don’t squander time, the biggest ally you have in saving enough money for retirement.  If you haven’t started investing today, there’s no time like the present to get started.

If you have any questions or comments, you can reach out below or continue the discussion in the forum.  If you are interested in receiving a notification of new posts, you can subscribe here.

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