To read this, I suggest reading my proposal for funding Social Security
which precedes this in the BLOG. (egb)
This is a followup to the original posting. I have heard many times
that if someone had invested in the stockmarket he would have done much
better than the Social Security interest rate of 1.23%. I heard
something to the effect that "no 10 year period ever did worse than
1.23%. It's hard to propose an alternative to the current scheme based
on hearsay so I searched around and found daily Dow Jones records for
all trading days between Oct 1, 1928 and Oct 1, 2008.
I wrote a program that created three accounts: a cash account that
simply accumulated what was deposited without interest; a Social
Security (SS) account that accumuates deposits and grows at the SS
rate of 1.23%; and a dollar cost averaging account that grows
and shrinks at the rate of the Dow Jones averages.
The program is nothing more than you could do with pencil and paper,
but it is a lot faster. Assuming 'A' is the amount deposited in
each account per month:
DJ CASH INTR DCA
DATE CLOSE ACCT ACCT ACCT
(x) (y) (z)
month 1 w1 x = A y = A z = A
month 2 w2 x = x+A y = 1.0123 * y + A z = (w2/w1) * z + A
month 3 w3 x = x+A y = 1.0123 * y + A z = (w3/w2) * z + A
...
The program shows that there is no 30 year period where dollar cost
averaging did not do better than SS. Here are the results of analyzing
all dates using periods of from 1 to 60 years:
YEARS INTR DCA
1 341 609
2 296 641
3 262 663
4 228 686
5 199 703
6 167 723
7 159 719
8 144 721
9 135 719
10 121 721
11 118 712
12 117 701
13 105 700
14 94 699
15 88 694
16 79 691
17 76 682
18 69 677
19 63 670
20 60 661
21 52 658
22 50 648
23 42 644
24 33 641
25 23 638
26 13 637
27 9 629
28 6 620
29 3 611
30 0 601
31 0 589
32 0 578
33 0 566
34 0 554
35 0 542
36 0 529
37 0 518
38 0 506
39 0 494
40 0 482
41 0 469
42 0 457
43 0 446
44 0 434
45 0 422
46 0 410
47 0 397
48 0 385
49 0 374
50 0 362
51 0 350
52 0 338
53 0 325
54 0 314
55 0 302
56 0 290
57 0 278
58 0 265
59 0 253
60 0 242
To read this table, the first column represents the total length
of time for the investment. The second column ("INTR") is the SS
Interest account accruing at 1.23% per year. The third column
is the Dollar Cost averaging account that follows the Dow Jones average.
Any line can be read as follows (choose 22, for example):
Of all of the 22 year spans within Oct 1, 1928 and Oct 1,2008,
50 of them would have shown a greater gain for a SS account
than Dollar Cost Averaging, and 648 would have shown a greater
gain for Dollar Cost Averaging than SS. There are a total of
50 + 648 = 698 22-year spans each starting at the beginning
of a month.
The results suggest that the risk of this plan is very low over a
30 year investment plan.
Using the example in the Heritage paper of a person starting out at age
21 and collecting at 67 (46 years) my program shows that the
worst 4 periods that person could have started investing in the time
from 1928 to 1962 [1962 + 46 = 2008 <- the present] are: CASH = cash account, no interest INT = interest account DCA = dollar cost average of DJ close value. START PERIOD DJ
YEAR (yrs) CLOSE CASH INT DCA Difference
(END) (0.0%) (1.23%)
------------------------------------------------------------------
1936/07/01 46 803.27 55300.00 74356.11 142633.01 68276.90
1936/06/01 46 814.97 55300.00 74356.11 145142.28 70786.18
1936/08/03 46 822.11 55300.00 74356.11 145559.27 71203.16
1936/03/02 46 828.39 55300.00 74356.11 148855.72 74499.61
and the best 4 periods are:
1953/06/01 46 10596.26 55300.00 74356.11 635346.00 560989.89
1953/12/01 46 10998.39 55300.00 74356.11 635604.09 561247.98
1953/09/01 46 10937.88 55300.00 74356.11 644034.34 569678.23
1954/01/04 46 11357.51 55300.00 74356.11 652417.48 578061.38
1953/07/01 46 11066.42 55300.00 74356.11 659513.43 585157.32
The program also showed that if an interest rate of 3.64% were
yielded in Social Security, then an Interest account would have equaled
the worst starting period (1936/07/01). That indicates that the worst
the DJ has done in ANY 46 year period since October 1928 was 3.64%
annally. All of these calculations are done without adjusting for
inflation. The results are what an investor would see, not what
he could buy.
Ed
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