December 15, 2008

Dollar Cost Averaging example from Suze Orman

Previously I had an Example of Dollar Cost Averaging where I discussed how DCA can help you even out market ups and downs to avoid some risk in the market. A little while ago I caught an episode of the Suze Orman show where she gave an example of Dollar Cost Averaging (DCA). In her example she had $1000 invested every 3 months into Vanguards S&P 500 index fund from August 2000 until August 2008. On August 2000 the fund was trading at about $140 and on August 2008 it was at $120. If you had invested that $1000 every quarter you would have a total of $36,102 as of August 2008. So even though the market started at $140 and was down to $120 eight years later your investment with DCA would still be 9.4% more than the $32,000 total that you had invested. If you had plopped $32,000 into the market on August 2000 then you'd have about $27,428 or about 14% decrease. I verified the numbers myself looking at the S&P 500 index value.

This is just an illustrative example meant to capture how DCA is meant to work. You might notice that the example ends in August 2008 and we all know the market has suffered since then.

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