Dollar Cost Averaging: Gold versus Dow Jones

I performed some analysis to determine the performance of gold versus the Dow Jones Industrial Average (DJIA) when an investor utilized dollar cost averaging. Dollar cost averaging is where the investor invests the same dollar amount at given time intervals into a particular investment. This way the investor purchases more of the investment when the price is low and less when the price is high.

The analysis involved the following assumptions:
  1. The investor uses $1,000 at the end of each year to purchase either the DJIA or gold at the market price
  2. Dividends from investing in the DJIA are reinvested in the DJIA
  3. The investor does this for 40 years. I used 40 years with the belief that an investor will start investing when they are 25 years old, invest for 40 years, and then retire at which point he/she will start to drawn down their retirement savings.
  4. At the end of 40 years the investor cashes in all of his/her investment at the market price for the investment he/she was dollar cost averaging (i.e. either DJIA or gold).
The chart below shows the accumulated balance of the investor after the 40 years of dollar cost averaging. The year labeled 1967 on the chart shows the accumulated balance of the investor after dollar cost averaging over the past 40 years (i.e. the investor started investing in 1927).

The chart illustrates that gold performed better or as well as the DJIA for about half of the investment periods. More recently gold's performance is close to that of the DJIA for 40 year investment periods.



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