The Nasdaq Composite Index hit an all-time high Thursday morning, and we wanted to take a look at how a certain type of long-run investor would have done buying that index.
We previously looked at the implications of dollar-cost averaging by seeing how an investor would have done following this strategy by putting $US50 per month into a S&P 500 index fund every month since that index’s pre-crisis high in October 2007. Even though they started buying right at the top of the market, our hypothetical investor still turned a tidy profit by holding their course.
In celebration of the Nasdaq’s new record, we now consider a similar strategy for someone investing in the technology-heavy index. Here’s how the Nasdaq has performed at the end of each month since its dot-com bubble peak in March 2000:
There’s the big crash running for the first couple years of the 21st century, followed by a very slow rise until the financial crisis, which saw another crash, before the more recent post-crisis upward tear.
As we did with the S&P 500, we consider a hypothetical investor who puts $US50 at the end of every month into a Nasdaq index fund starting in March 2000 and continuing to the present.
So, she puts this $US50 in every month, no matter what happens to the index.
Here’s our investor’s price return, less her $US50 per month cost:
Our investor starts out having a couple rough years while the dot-com bubble was bursting.
She then saw some gains that were taken out during the financial crisis.
Despite that, in the last few years things have been looking very good for her.
The value of our investor’s portfolio is about $US19,330 at the end of March, 2015, and she has invested a total of $US9,050 since 2000. This gives her a huge 114% return on that investment, which works out to a healthy 5.2% annual return.
This is remarkable considering that our investor started buying the Nasdaq at the height of the tech bubble, probably one of the worst asset/timing combinations in the history of capitalism.
We recently admonished young people to start saving early for their retirements, but one of the most effective ways for a long-term investor to go about making their investments is dollar-cost averaging.
The concept behind dollar-cost averaging is simple: Invest a fixed amount of money once every fixed time period, like each month or each year, no matter whether the market is going up, going down, or staying flat. By doing this, you wind up buying fewer shares of your chosen asset when it’s expensive, and more shares when it’s cheaper.
Keeping a steady hand at the wheel is such a boon to a long-term investor that dollar-cost averaging, even when starting at the absolute top of a bubble, led our investor to healthy returns in the long run.
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