Post New

Meet Joe Investor. Ten years ago, he was 48 years old, and had way more hair than he does today. But he'd also been living below his means, and his retirement account had $600K worth of VOO (the Vanguard S&P 500 Index ETF). He was also able to keep saving $800/mo from his paycheck, and have that invested entirely in that same index ETF in his 401K every month. Yes, that's every month. Rain or shine. Pandemic or no pandemic. No market timing.

Let's say that Joe decided that his financial freedom/early retirement number was $2 million. How much would he have in his 401K today?

To answer that question, we just need to go to this excellent S&P 500 DCA calculator, plug in the start and end dates, the initial amount, and the monthly adds.

https://ofdollarsanddata.com/sp500-dca-calculator/

Using August 2014 as the start month, we find that Joe's 401K has grown to $2,193,422. He can now cash out, go to a 60/40 allocation and retire early and happily at age 58.

Did Joe need the IQ of a genius to do this? Nope. He was just an average student in college. In fact, just by implementing this no-brainer strategy, Joe beat out the majority of money managers at mutual funds who DO have graduate degrees in finance from Harvard, Wharton, etc., and who spend their careers studying reports from Wall Street analysts who ALSO have MBAs from the top Ivy Leagues.

Mechinv
For success in investing, your emotional fortitude counts for way more than your intellect.

Did Joe need the IQ of a genius to do this? Nope. He was just an average student in college. In fact, just by implementing this no-brainer strategy, Joe beat out the majority of money managers at mutual funds who DO have graduate degrees in finance from Harvard, Wharton, etc., and who spend their careers studying reports from Wall Street analysts who ALSO have MBAs from the top Ivy Leagues.

Though he didn't have to be a genius, what he did have is one of the greatest rallies in all time as a tail wind. Depending on your favourite metric, generally it's fair to say that the broad cap-weighted US market valuation levels are higher now than at any time since the 1929 peak. On some metrics it's only close to the tech bubble peak--much more comforting!

I'm not saying current valuation levels are "wrong", they are what they are. But it's fair to say that they could not have been foreseen. Joe's result was a whole lot more luck than smarts.

The ending date is a big determinant of what looks smart with hindsight. Lots of people who retired in 1999 (as I did) and switched their equities to an all-bond portfolio (as I didn't) would also look extremely smart. So, the general rule is: be highly concentrated in whatever is going to be most richly valued at your retirement date.

Jim


Average S&P 500 price-to-sales ratio 2000-2014 inclusive: 1.39
Current level: about 3.0
Is a dollar of sales for the average company really worth over twice what used to be normal even in the post-20th-century era of high valuations? The market seems to think so, for the moment.

Meet Joe Investor. Ten years ago, he was 48 years old, and had way more hair than he does today. But he'd also been living below his means, and his retirement account had $600K worth of VOO (the Vanguard S&P 500 Index ETF). He was also able to keep saving $800/mo from his paycheck, and have that invested entirely in that same index ETF in his 401K every month. Yes, that's every month. Rain or shine. Pandemic or no pandemic. No market timing.

Let's say that Joe decided that his financial freedom/early retirement number was $2 million. How much would he have in his 401K today?

To answer that question, we just need to go to this excellent S&P 500 DCA calculator, plug in the start and end dates, the initial amount, and the monthly adds.

https://ofdollarsanddata.com/sp500-dca-calculator/

Using August 2014 as the start month, we find that Joe's 401K has grown to $2,193,422. He can now cash out, go to a 60/40 allocation and retire early and happily at age 58.

Just so we're clear, the S&P total return over the last ten years was 325% (I checked out of curiosity). So the initial $600K did practically all the work. The additional $800 per month is just a thin layer of icing on the cake.

Elan

Average S&P 500 price-to-sales ratio 2000-2014 inclusive: 1.39

That period includes two ugly bear markets which skew the average downward. I'd want to know the ratio in a "normal" market.

But to second Mungo's observation about the current exceptional bull market; If Joe Investor had invested his $600K in August 2000 he'd have been left with $350K ten years later. (Yes, I cherry picked the dates :).

Elan

So the initial $600K did practically all the work. The additional $800 per month is just a thin layer of icing on the cake.

Yes, without the additional monthly contributions, the $600K would have become about $1.99M anyway, falling just a bit short of the desired $2M. The additional $96K of monthly DCA'ing resulted in adding another $200K to Joe's nest egg. So the end amount of $2.2M put him comfortably over the top of his goal.

BTW, the monthly DCAs had a much bigger effect when Joe was younger. You might ask - how did Joe end up with $600K at age 48 in the first place?

Again, you can work backwards and figure out what Joe needed to have started with at age 38 by using the DCA calculator. It turns out that in 2004, at age 38, Joe only needed to have had $200K in his index ETF. By contributing the $800/mo from his paycheck the next 10 years towards purchases of VOO, his 401K would have grown to $600K by 2014. If he had NOT made those contributions, he would only have had $434K in 2014, and would NOT have been able to retire early this year. The monthly contributions added almost 50% more to his nest egg.

S&P 500 DCA Calculator: https://ofdollarsanddata.com/sp500-dca-calculator/

Remember that during 2004-2014, there was a nasty, vicious Great Recession of a bear market during 2008-09, and another nasty near bear market in 2011. Joe still wound up tripling his next egg with the DCA method during that period. And then, during the second 10-year period, from 2014-2024, Joe lived through two more nasty bear markets - the Covid one in 2020, and the more recent bear in 2022 - and still wound up tripling his best egg again and retired early.

Mechinv
For success in investing, your emotional fortitude counts for way more than your intellect. Your objective is not to "look smart" and impress other people that way. Your objective is to be financially independent, so that your time is totally your own.

(Yes, I cherry picked the dates :).

But the folks who made their decisions in August 2000 and then 10 years later couldn't cherry pick.

Eric Hines

If Joe Investor had invested his $600K in August 2000 he'd have been left with $350K ten years later. (Yes, I cherry picked the dates :).

The above is not correct. If Joe had the worst timing and started with $600K in Aug. 2000, and kept adding $800/mo from his paycheck into his index ETF, he would have $634,678 in his 401K ten years later in August 2010 - that's despite the Dot Com crash and the Great Recession.

And then if he kept adding the $800/mo he could retire 9 years later in Aug. 2019 when his 401K hit $2,172,237.

You can verify the above by using the DCA calculator - https://ofdollarsanddata.com/sp500-dca-calculator/

You can verify the above by using the DCA calculator - https://ofdollarsanddata.com/sp500-dca-calculator/

Also by testfol.io
8/1/2000 to 8/1/2010 $667,200.46
https://testfol.io/?d=eJxFj0FPwzAMhf%2BLz5mU7jBNOS...

to 8/1/2019 $2,229,890.07


The only time the value hit near $350K was 10/7/2002.

This is why you ALWAYS check figures.

If Joe Investor had invested his $600K in August 2000 he'd have been left with $350K ten years later. (Yes, I cherry picked the dates :).

The above is not correct. If Joe had the worst timing and started with $600K in Aug. 2000, and kept adding $800/mo from his paycheck into his index ETF, he would have $634,678 in his 401K ten years later in August 2010 - that's despite the Dot Com crash and the Great Recession.

I was correct. You changed the rules to arrive at a different result. You can of course keep throwing money at your portfolio to make it look like you made a profit. My point was that, in contrast to the latest magical ten years, the ten years starting August 2000 produced a painful loss for S&P investors.

Elan

You changed the rules to arrive at a different result.

I think you misunderstood the rules. The topic of this thread is using a DCA strategy to buy shares in an index fund every month. DCA means adding a fixed amount from your paycheck. I clearly stated in my rules that the DCA amount was $800/mo.

You claimed that starting with $600K in August of 2000 plus applying DCA would result in an ending value of $350K ten years later. That is incorrect.

Both Ray and I showed that the ending value is actually $634,678. We used two different DCA calculator tools to arrive at the same figure. And both Ray and I showed that even with that bad start, you could continue to DCA and retire 9 years later with about $2.2 million (in 2019).

You claimed that starting with $600K in August of 2000 plus applying DCA would result in an ending value of $350K ten years later. That is incorrect.

It's not what I claimed. But this isn't worth arguing further.

Elan

Post New

Berkshire Hathaway FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.