If you started investing at the stock market top, you are only down 3% with dollar cost averaging

People ask me investing advice all the time. What stocks should you buy? Is it a good time to buy? My answer is always the same: how the f**k am I meant to know? And ironically, therein lies the answer. 

Coming from a maths background, I am well aware of the power of numbers. And the numbers show two things: most stock investors are bad. And by bad, I mean that they underperform the benchmark: the stock market at large, which for this piece I will use the S&P 500 as a proxy. 

And that very fact forms the thesis of my entire investing portfolio – that I know nothing. If it’s so hard for everyone else, what is different about me? Moreover, the numbers say it should rule your thesis, too. But let me explain. 

Passive management beats active management

 I explained the three most important statistics in investing in this piece last September, but to recount them slowly: 

1. Most active investors fail to beat the market
2. The S&P 500 has an inflation-adjusted historical return of 8.5% on average
3. The market is extremely volatile

That piece goes into the details more, but the bottom line is that for most investors (not all – I am talking retail investors here) anything beyond just whacking a set amount into index funds each month will cost you money in the long run. 

In a funny way, 2022 proves that more than any other. The year was a torrid one for the market, the worst since 2008 as Russia invaded Ukraine, an inflation crisis sprung up around the globe and central banks hiked interest rates quicker than at any point in history. 

This combined to crush stock prices, with the S&P 500 falling nearly 20%. And so, the short-term volatility of the stock market was shown again, as the chart below demonstrates, displaying 2022’s return against returns from the last 100 years. 

The power of long-term investing

But the power of long-term investing is that this short-term volatility can be weathered. And point number two above – that the stock market yields 8.5% on average – means that in the long run, investors should benefit. 

To demonstrate this, let’s examine the hypothetical case of the worst possibile stock market investor.  That is, the poor soul who decided to start investing right at the stock market peak, down to the very minute. That would be December 29th 2021 when the S&P 500 trade at 4793. 

Even with this comical level of bad timing, the investor would only be down minimal amounts, assuming they continued to hold course and invest on a monthly basis ever since. To be exact, a $100 monthly investment, starting right at the stock market peak and continuing all the way through the last 15 months of investing pain, would mean an investor would currently be sitting on a $48 loss. 

Before the last few weeks, they would even have been up money, their portfolio netting a juicy $22 gain, or 1.57%, before the banking sector wobble caused a pullback. 

So even if investors had made the worst possible decision in timing the stock market peak to the absolute day, they would still only be down minimal amounts as long as they kept faith in the numbers and the long-term mantra. 

Of course, this is not to say that the stock market plunges 40% from here. It could. But it also could rise – again, I don’t know and neither do you. But numbers don’t lie, and with a positive average return, the simple reality is that it is +EV to just buy and stick it out. That is kind of all there is to say.

Looking further into the example, the below shows the current value of all purchases, assuming monthly investments of $100 since the stock market peak. 

Slow and steady wins the race

Dollar-cost averaging may not be the sexiest hobby in the world, but it certainly gets results in the long-term. The power of the efficient market hypothesis, which is the fancy term for “ the stock market is random and nobody knows anything”, is hard to argue with. Like, really hard. 

Sometimes, it requires parking your ego at the door. I explained how I was trying to do this last October, when I wrote how pessimistic I was about the economy, and yet despite this, I was betting against my own judgement by making my biggest stock market purchase of the year. Always doubt yourself, as the famous motivational saying goes.  

Since then, the stock market has risen before giving back gains (I am currently up a delicious 0.5% on that investment). So I was wrong! But in trusting the numbers over my own bias and poor judgment, and continuing to invest since, my portfolio has come up a little. 

But that is irrelevant, as it was only five months ago, and the time horizon on this investment is decades. 

Now, of course there are other mitigating factors. You may not have a long-term time horizon – you may want to buy a house next year, or retire in six months, or have a kid to send to college. Perfectly valid reasons, and every investor has their own financial circumstances and risk tolerance. 

Investing in stocks is not for everyone, as you need to be able to stomach large losses which come along periodically. 

But if you are willing to invest, have a long-term time horizon and are just reluctant to do so because of some fears that the timing isn’t right, the maths quite objectively says that is poor logic. Human emotion is a terrible thing, which is why, if we are lucky, ChatGPT robots will take over the world and we will all be redundant soon. That will be nice. 

So just whack your money in, close your eyes and hope for the best. I’m an idiot, but so is everyone else. 

If you are interested in reading more about this, I would suggest Nick Maggiulli’s excellent book “Just Keep Buying”