



Dollar-costing is of questionable value for individual stocks, because you don't know where individual stocks are going. Are you buying Exxon or Enron?

But with a market index fund it is not unreasonable to suppose that you know where the shares are headed over a long period: up. Let's look at what dollar-costing would have done to someone buying the S&P 500 at a constant rate, starting 40 years ago.

We don't want the results to be warped by either inflation or the declining popularity of dividends. So let's create an imaginary index fund that owns the 500, reinvests all dividends and incurs no overhead. In real terms this fund's share price would have tracked the jagged line plotted above in blue.

The rise in the blue line has averaged 6.3% a year over the past three-quarters of a century. That's not bad, and it's way better than what you could have earned then or could earn now on safer investments. But there has been terrifying volatility getting from there to here, including four crashes in which prices more or less halved in a short space of time.

Despite the volatility, an imaginary investor we'll call Mr. Blue sticks it out. Every year, beginning in mid-1972, he puts the equivalent of $10,000 of today's money into that index fund. His cumulative investment, restated in today's money, is $400,000. His fund shares would now be worth $1.7 million.



Are stocks fairly priced now? To get a red-line value you need to plug in earnings out to June 2015. You don't know what they will be, but you can guess by picking up Standard & Poor's analyst forecasts and extrapolating. By this measure it appears that stocks are currently a little overpriced.
