The Dow Jones rose only slightly from 1929 to 1954, closing at 381 in 1929 and 383 in 1954. An investor who dollar-cost averaged monthly and reinvested dividends earned an average annualized return of 11.7% over the same period. The index appeared flat, but the investor accumulated a much larger share count by buying during declines and continuing through recoveries and renewed drops. Reinvested dividends purchased more shares at lower prices, and those additional shares generated more dividends over time. This mechanism can help investors avoid missing recoveries after market spikes when scheduled contributions continue.
"The Dow Jones closed at 381 on September 3, 1929. It closed at 383 on November 23, 1954. A $2 gain over 25 years. As Hanson framed it, "That's not even a lost decade. That's like a lost working career.""
"An investor who dollar-cost averaged through that same window, systematically buying every month and reinvesting dividends, earned an average annualized rate of return of 11.7%. The index went nowhere. The disciplined buyer compounded wealth anyway."
""Your behavior was the all-terrain vehicle. It was buying while things were going down. You were still buying while things started to recover and had a sputter start, but then went back down. You were still buying.""
"The math works because dividends reinvested at depressed prices buy more shares, and those shares then produce more dividends. A flat index masks the engine running underneath. By 1954, the dollar-cost averager owned a much larger share count than the price chart would suggest, all accumulated at average prices well below the 1929 peak."
Read at 24/7 Wall St.
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