Does Index Fund Investing Still Work in 2023?

Dollar Cost Averaging vs Lump Sum Investing!

If you had started investing anywhere between 1928-1997, and your retirement plan was either Dollar Cost Averaging or Lump Sum Investing in the S&P500 index over a 25 year period, which strategy would have been "better", and what are the differences?

The S&P500 Index has been around since 04 Mar 1957, but has been valued since 03 Jan 1928. Since the inception of the first market tracking ETF by State Street Global Advisors in 1993, S&P500 index funds have been extremely popularly investment vehicles for passive investors.

In this video we critically analyse the claims such as 'index investing always makes money' or 'if you dollar cost average into the S&P500 you can achieve 7% average market return'. By comparing investors with a 25 year holding period who start dollar cost averaging or lump sum investing at different months from Jan 1928 until today, we investigate whether these strategies have always worked out for the investor.

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[vladk]

Amazing study. I'd love to compare it with more complex index investing strategies, like buying on key levels (median drawdown percentages) or changing how much you put in each sector or make your purchase dependent on the month. these are just a few examples, i'm sure there are more interesting parameters to change while keeping it a "DCA" strategy

[merk]

Thankyou for going through the numbers and giving us your expert opinion.

[DavidDji_]

thanks for the amazing content. this is far superior to anything else in the youtube financial game.

[Novometix]

Great fan of your channel. Keep up the good work and looking forward for your courses on the website.

[vaagnavakian]

1) I’m afraid one would object to the premise of dividend exclusion from calculation. Historically dividend yield of broad US equities market accounted for approx 3-4% out of realised CAGR total return of 8% (pls refer to Jeremy Siegel’s Stocks for the Long Run and Ibbotson equities database for the source). Automatically reinvesting dividend into the market would certainly yield higher returns vs considering capital gains only, this could be easily seen by comparing S&P500 index with S&P500TR index, the later assuming dividend reinvestment into index. 2) DCA despite having indeed lower absolute return, would incur less volatility as measured by standard deviation, so on risk-adjusted basis DCA should be more attractive as compared to lump-sum. 3) I’m not sure if I missed it, but did you measure DCA returns as CAGR assuming the lump sum is in possession from the start but the investor decides to deploy capital gradually? If yes, then remaining balance should be accounted for commitment to short term money market to capture opportunity cost, which I assume is not in your calculation. If however DCA is performed out of necessity (investor regularly commits to the market from salary of other income source) then IRR is the correct way to calculate, not CAGR.

[adanjsuarez]

Nice job! I did something similar years ago and then I modified a bit my DCA adding a MA to exclude the down sides, on the accumulate sum, but not in the individual periodic investment.

[michael]

You gotta add inflation into account though. 1k in 1997 is like 2k in 2020

[Aripb]

Really great videos! I wonder if you could adjust this analysis a bit to consider “lump sum” as more of an extreme case of DCA. For example, I would be very interested to know what interval works best for DCA. In this case you compare a 25 year interval (lump sum) to a monthly interval. How would DCA weekly/monthly/yearly compare?

[jacquesfournier]

Very interesting. What about adding covered call strategy (let say on 30%) on the SPY and also add some leverage (let say 25%). Very curious about what both DCA and Lump sum would do?😁

[valueray]

how would the numbers look if you only buy the dip? lets say you accumulate yopur 1000 monthly until sp500 drops at least 5%, and only then you buy the money you saved until then. would it look better?

[seekerofawareness]

All this does is remind me why buy/hold and DCA are both poor strategies for wealth creation compared to what is possible if you apply some simple quant strategies to create an edge.

[Hurudrim]

Awesome video. There are multiple aspects to consider though. Is the average investor capable of picking the right stocks? Historically speaking, its hard for humans to predict what the next market will be that's fueling the stock market(tech for example recent years). Now in hindsight its obvious, but was it in '91 or 2012? What will be the next big sector? Who knows...
Thats the strength of investing in SP500, the individual doesn't have to predict which sector will yield the best return since the SP500 is a weighted index. The wisdom of the crowd literally does it for you.

No one knows if the US stock market is going to stagnate now for 15-20 years like in the 1880-1898, 1901-1924, 1965-1982, 1998-2012.
But as Buffet says "I know....that over time, the US economy will continue to grow".
So, does the passive investor have the economical/psychological capacity to wait for a 10-20 year period of zero/minimal returns?

[lorenzobaggi]

Loving it!!
I really need the code, wow !

[chillydickie]

what is the benefit of considering fund value return for the investor? in absolute terms, ends up with less. seems like a term made up by funds to say they achieved the same result, you just didnt front load enough (aka didnt give us all your money earlier)
love the analysis though

[WiseOwl_]

I don't like the graph. Hurts my feelings

[Cheenweekiang]

Do you have this analysis in python code in your patreon?

[roofernando]

Hello I've watched your videos which are really great! Thank you for making this content. I've noticed that you have in the background "Option Volatility & Pricing" book. I am currently working through this and its exercise book and find myself getting stuck on some problems. Do you have any recommendations of forums to join which allow me to ask questions and have discussions?

[ЕвгенийБагрянов-нэ]

9:47 a person will win in the 80s simply because there was the biggest inflation

[Sierra-suxf]

Bro, this analysis is cool and all, but I think there is a more important consideration for DCA going forward.

There really isn't the precedent to assume that the s&p will return anything, ever. The stock market just hasn't been around long enough in it's current paradigm, and even in general, less than 100 years is not a lot. Like what are we expecting that its gonna go up till 2060-70 when people our age retire?

Why would it. Most of the growth is artificial. P/e ratios are a joke across the board. Blue-chip stocks have more in common with a crypto game of musical chairs than it does with markets before the 1950s.