01-06-2022, 08:59 PM
I saw a presenter make this common mistake again recently so feel that people have to be aware.
Suppose in 2yrs. The stock market go up 100% first year and drop by 50% next year. The average return is 25% but the return after 2years is Zero.
Many people use the average return of stock market to compound and estimate long term returns this is wrong. The correct figure to use is CAGR or compound returns.
The average return of S&P500 is 10% but the compound returns is 6-7% over 30yr period.
If doing DCA over long term say 20yrs, it is better for negative returns to happen early and posive returns to be delayed. If you are dollar cost averaging you should be happy the market drops when you start you DCA....problem is most people stop when they see losses.
Suppose in 2yrs. The stock market go up 100% first year and drop by 50% next year. The average return is 25% but the return after 2years is Zero.
Many people use the average return of stock market to compound and estimate long term returns this is wrong. The correct figure to use is CAGR or compound returns.
The average return of S&P500 is 10% but the compound returns is 6-7% over 30yr period.
If doing DCA over long term say 20yrs, it is better for negative returns to happen early and posive returns to be delayed. If you are dollar cost averaging you should be happy the market drops when you start you DCA....problem is most people stop when they see losses.