Hello fellow investors,
over the past few weeks I have read a lot of posts and comments that suggested some investment model along the lines of “just DCA into the S&P 500 and you'll be rich in a few years!”. I find statements like this extremely unsettling as they suggest to me a lackluster understanding of the concept behind passive/index investing and the long-term focussed mindset it requires.
It is true, 2021 was an exceptional year for the S&P500. According to this wonderful tool for calculating DCA returns (https://dqydj.com/sp-500-periodic-reinvestment-calculator-dividends/), DCA'ing into the S&P500 last year with a monthly investment of $1,000 would have netted you a juicy 23.37% after tax and fees according to the site. That's pretty damn impressive and actually an amount I'd be very happy with even in indivual stock picking, no less for just a passive approach. Awesome!
However, things cannot be this easy about indexing, can they? Just buy an index and make an easy 10+% year by year? Of course they are not. If they were, everyone would be doing it and everyone would be rich. So what's the catch? Let me attempt to illustrate:
Imagine we are in a similar market it was January 1998. The S&P500 has ran quite amazingly for the last few years (returning 19% YoY since 1990!) and we happily decide that we are going to DCA from now on for a fixed $1,000 every single month. Please make an educated guess what your yearly returns would have been over the next ten years.
The answer:
Four percent. 4,147% CAGR, to be precise. Not exactly retirement money, is it? And it gets worse. Until 2012, your yearly returns would have dropped even below 3%. A measly 3% CAGR over 15 years and that after a decade of almost 20% yearly returns. Ouch.
However, there is also reason for hope: If you held strong even after those years of mediocre to bad returns and kept on DCA'ing even to this date, now you would be sitting at a juicy 10% return over 30 years – a much more comforting number and actually life-changing kinds of money thanks to the power of compounding.
So what is my message here?
1) Indexing is a proven method and may be the easiest and safest way to make a person rich.
2) It takes an insane amount of patience, guts and savvy.
3) If you decide to index, please do not do it with the expectation of getting rich quick. You may end up getting burnt, and getting burnt badly. Patience is key, and confidence even in dark times is mandatory.
I wish you all the best of luck and hope this will come in handy when markets inevitably cool down one day. Have a great day!
PS: I chose the time window above for illustrative purposes without wanting things to look too grim. 1998-2003 was -10% YoY for example, and this will inevitably happen along the indexing journey. If you want to go through more examples, just try the calculating tool on this site, it's lit: https://dqydj.com/sp-500-periodic-reinvestment-calculator-dividends/
Thanks for your attention!
edited for clarity: we're talking yearly returns of 4% for 1998-2008 of course, not 4% total.
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