2020 was a very interesting year for much of the stock market with a quick significant drop and quick recovery. Because of this volatility, I have wondered how Dollar Cost Averaging would have fared vs. doing a lump sum investment. This past week I took the time to calculate it. Dollar Cost Averaging (DCA) is effectively purchasing an investment systematically over a period of time. I compared this to purchasing an investment with a lump sum at the beginning of the year. In my calculation, I assumed at the start of 2020 you had $26,000 and were choosing between the following two options:
Purchase $500 of VT - Vanguard Total World Stock Index Fund ETF for 52 weeks (DCA).
Purchase $26,000 of VT at the start of the year (Lump Sum).
Not including dividends, at the end of the year you would have about $31,000 if you did DCA and about $29,500 if you purchased the investment as a lump sum at the beginning of the year. I used historical data from Yahoo Finance for my calculations. What I find fascinating with DCA is that there are situations where even if an investment is having a negative return on the year, your account balance could have gone up if the volatility was favorable in the interim. This was a unique year and I am not suggesting that DCA is always or even better on average than purchasing an investment as a lump sum. This is just for the money nerds who were wondering.
Interesting Article(s) or Video(s)
Jeff Levine's analysis of the recent stimulus bill.
Thank you for reading!