Our current example comes from The Wall Street Journal, which likely thinks of itself as the world’s leading financial publication. It may be, but that does not make it immune from gibberish. In fact, the need to publish many articles each business day may make some nonsense inevitable. The August 16, 2002 Fund Track article “Will Slow and Steady Win Out? Dollar Cost Averagers Think So” by a staff reporter is yet another example.
The article compares what would have happened hypothetically had one invested $6,300 in the Vanguard Total Stock Market Index Fund on March 24, 2000 as compared with investing the same amount, $100 at a time, every other week in that fund, so-called dollar cost averaging (DCA). The comparison, which is illustrated with two graphs, reveals that the DCA investor is far better off as of August 9, 2002. There are at least two ways that this is pure gibberish.
The first is the comparison of the two investment approaches. The biweekly investments were chosen because that might be the way someone would buy the mutual fund through a company 401(k) plan or a similar arrangement. Fair enough, but such an investor would not be able to invest over two years of contributions as a single lump sum at the beginning of the period. To me, it is like comparing oranges and limes. They are both citrus fruits, but one usually would not substitute one for the other.
A bigger source of gibberish is the selection of the starting date. It was deliberately chosen as the date of the all-time high of that Vanguard fund! Now let’s see if we can figure this out. If we compare investing everything at the very top with any other method, which is going to be better? I thought you would get that one right. The article could have just as well made a comparison with deciding when to invest according to whether or not the most recent episode of Law and Order did better or worse than the show’s average rating. It would still beat buying at the top. To some extent, the author realizes this. After presenting the loss experienced by the DCA investor, she points out that such an investor is “in far better shape than someone who bought at or near the market peak.” Such insight!
If we wanted to get a reasonable evaluation of whether DCA is a good investment approach, even if we ignore the oranges vs. limes problem, we need to make many more comparisons. How about DCA vs. investing everything at a low point of the fund? Do we have to do any calculations to know which is going to be better?
A reasonable study might assume that an investor has $2,000, the previous IRA contribution limit, to invest each year for some period of years. Then we can do the computations assuming that the entire amount is used to purchase an index fund on the first market day of the year in comparison with buying $500 worth of the fund on the first market day of each quarter and earning interest on the funds awaiting investment. We could start the analysis at the beginning of a year well in the past, say 1960, 1970, or 1980 and each year afterwards. Comparisons of the ending amounts for the twenty to forty starting years would provide some idea about whether dollar cost averaging is a good investment approach.
Did the Wall Street Journal article go beyond making the comparison with investing only at the top of the market? Would I be citing the article as gibberish if it had made some attempt at providing a balanced evaluation? Or to sanitize an old expression: is a bear in the woods likely to defecate in an outhouse? I think you get the idea.
Back to previous page