Ecoinometrics - How long does it take?
How long does it really takes to make a million with dollar cost averaging.
Reading about the long history of investment successes and failures as well as drawing on my own experience I've come to believe two things:
The only thing that will end your investment career is running out of money. Be always positioned to avoid being wiped out.
There isn't a single way of winning at this game. Find what works for you.
Different investment styles can make you wealthy over decades as long as you be careful to not crash and burn.
One investment strategy that has a relatively low risk of getting you to lose all your money is dollar cost averaging. As a matter of fact dollar cost averaging (DCA) is more akin to a savings strategy with upside than anything else.
But if there is a low risk you'll lose all your money with DCA what are the chances that it will make you rich?
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Done? Thanks! That’s great! Now let’s dive in.
How long does it take?
Here is the setup. You are starting with nothing. You now have cash coming in every week.
You have decided to get rich slowly by running a dollar cost averaging strategy. For you getting rich means going from $0 to $1m.
How long do you think it will take?
Let's unpack that.
Running a dollar cost averaging strategy involves three choices on your part:
What asset are you going to buy?
How often are you going to buy it?
How much dollars are you going to spend on it every time you buy?
For the sake of being able to do a long time horizon analysis lets say you are choosing to DCA the SP500. We have 100 years of data on the index, so we can say something interesting about it.
As we have explored here over a long enough time horizon the frequency at which you DCA does not matter for performance. You could do it daily, weekly or monthly, after a few years you can't tell the difference.
So let's keep it simple and assume you are dollar cost averaging weekly, every Monday as long as the stock market is open.
The last choice you have to make is how much you are going to spend on DCA every week.
These days the median weekly salary in the US is around $1k. Let's say you are going to commit 15% of that, $150 to dollar cost averaging.
Ok, our setup for this analysis is:
DCA the SP500.
Do that every week.
Invest $150 every time.
If you were to do that, how long would it take for your position to get to a $1m value.
Well obviously that depends on the growth of the SP500.
If you had run this exact strategy between 2002 and 2022 you would now have $450k. That means you are less than halfway from your goal after sticking to it for 20 years. For sure compounding will likely make sure it doesn’t take another 20 years to get you to $1m. But still that’s not a get rich quick scheme.
See the evolution of the value of this position over time.
But that's specific to the past 20 years. For the stock market we have 100 years of data. So we can ask a more general question.
In the past, how long does it typically takes to reach $1m by dollar cost averaging the SP500 to the tune of $150 per week?
We looked at the entire history of the stock market and came up with this distribution chart.
On the horizontal axis you can see how many years it took to reach $1m via DCA. The taller the area in a region the more common the number of time it took that long to reach $1m. The regions are coloured based on how close they are to the average duration. Red is average, the more you go towards the blue the further you are from the average.
Take a look.
Over the past 100 years dollar cost averaging the stock market weekly to the tune of $150 it takes you on average 32 years to reach $1m.
Best case scenario it took you 20 years. Worst case scenario it took you closer to 40 years.
That's a long time of saving before you get to enjoy your money... If you didn't start very early you’ll only benefit from that at an advanced age…
Actually you can look at this from a different angle. If you want to know about how long it will take you to dollar cost average any asset to a million dollar you need to make an assumption on the future returns of the asset.
A standard way of doing that is to think in terms of annualized rate of return. What are your assumption for the future annualized rate of return of whichever asset you DCA?
On the chart below you can see the distribution of the annualized rate of return for the SP500 over the past 100 years. The median is at 7%.
So you can gauge your expectation against the historical distribution.
If we take three scenarios:
3% annualized is the conservative expectation
7% is the median expectation
15% is the aggressive expectation
and project how long it will take you to DCA to a million at $150 a week we get the following.
At 3% annualized it will take you 50 years to reach $1m. At 7%, the median value for the stock market, it will take you about 30 years to get there. At 15%, which is high for the SP500, you will reach your goal after 20 years.
Said differently if you play it safe, you’ll get to accumulate a million but it will most likely be a long road.
That means if you are in a rush you might decide to take your chances with something else than the SP500.
You'll trade off the greater chances of getting to $1m for the higher likelihood of getting there faster.
The low range of annualized returns for Bitcoin (calculated on a rolling 5 years basis) is 50%. Let’s be conservative and say that Bitcoin will deliver only half of that in the future. That is 25% annualized returns.
That’s the orange line on the previous chart. As you can see, with some conservative estimate for Bitcoin’s growth you can get to $1m in a little over 10 years.
Of course none of the paths I’ve plotted above are realistic. Your DCA journey is not going to be smooth. But to get a general idea of what’s possible this is a good approximation to see what you can expect.
At the end of the day there is no free lunch.
For my personal taste on risk I've chosen to try to get there faster. I have no idea where I will be in 30 years and in what physical condition so I'd rather compress my investment period to 10-15 years instead of 25-35 years. That’s one of the reasons my portfolio is skewed towards digital assets with high growth potential over the long run.
But this really depends on your personal appetite for risk. Now you have the framework, up to you to determine what suits your needs.
Bitcoin derivatives
The November contracts on the CME will expire this week. The institutional investors are back net short BTC in force since the drop price dropped last week. Some will see opportunism while the consequences of the FTX collapse are still playing out. Other will see some price manipulation going on. As usual reality is likely to be a bit of both.
As of Tuesday last week the asset managers have been reducing their exposure to Bitcoin. This goes with the general sentiment. No surprise there.
On the options side a third of the contracts about about to expire with the following breakdown of positions.
In November, 3 puts for every 2 calls with:
100% of the calls above the $15k strike
42% of the calls above the $20k strike
12% of the calls above the $25k strike
100% of the puts below the $25k strike
90% of the puts below the $20k strike
30% of the puts below the $15k strike
In December, 4 puts for every call with:
99% of the calls above the $15k strike
90% of the calls above the $20k strike
45% of the calls above the $25k strike
96% of the puts below the $25k strike
94% of the puts below the $20k strike
46% of the puts below the $15k strike
The situation is heavily skewed towards the puts. The CME just broke a new all time record in the amount of puts on the Bitcoin futures.
The conclusion is that the institutional investors on the CME are positioned for blood with Bitcoin having the potential to slide towards the $10k level.
Let's see how that plays out.
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Cheers,
Nick
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