Cost Averaging: A Practical Case Study

Reading Time: ~7–8 minutes

Financial markets can feel disorienting at times, with rapid headlines and fast-moving price fluctuations. Yet, a calm, long-term approach that focuses on consistent contributions can, in some cases, offer a clearer path toward potential growth. This post examines the concept of cost averaging, often called “dollar-cost averaging”, and applies it to a realistic scenario in which an individual invests 100 US dollars every month in the S&P 500.

Disclaimer: While historical data informs the example, none of these figures guarantee future results. No one can promise positive returns, and this discussion is intended solely for educational purposes, not as personalised financial advice.

Note: To implement cost averaging in practice, investors typically need a brokerage account offering access to index funds or ETFs. If interested in exploring brokerage platforms, see the BrokerSuperMarket broker pages for a starting point in comparing various options.

What Is Cost Averaging, and Why Consider It?

Cost averaging involves investing a fixed amount of money at regular intervals (monthly, quarterly, etc.) regardless of whether the market is up or down. The principle operates on a few key ideas:

• Buying at Different Price Levels
  If the market price of an index fund drops, the same contribution buys more shares. Conversely, if the price increases, the same contribution buys fewer shares. Over time, this can potentially smooth out the average purchase cost.
• Reduced Need for Market Timing
  Trying to pinpoint perfect entry or exit points can be stressful and often proves challenging, even for seasoned professionals. Cost averaging establishes a steady investment routine, mitigating the emotional urge to time the market.
• Long-Term Mindset
  By systematically investing over an extended horizon, some individuals find they focus less on daily market swings and more on broader economic trends.

None of these points guarantee that an investor will achieve positive returns. Severe market downturns or prolonged recessions can undercut gains, and every investor’s situation is unique.

The Example: 5, 10, 15, and 20 Years of Monthly Contributions

Below is a scenario illustrating how someone who began investing 100 US dollars per month in an S&P 500 index fund in January 2000 might have fared over four intervals (ending in 2005, 2010, 2015, and 2020). This structure allows for a direct look at 5-year, 10-year, 15-year, and 20-year timelines. Each interval’s nominal ending value is then adjusted to approximate January 2025 purchasing power, giving readers a more contemporary sense of the real-world wealth generated.

Key Assumptions & Disclaimers

1. Monthly Contribution: $100, starting January 2000.
2. Historical Data: Based on approximate S&P 500 returns with dividends reinvested.
3. No Fees or Taxes: Real-world returns would likely be lower if accounting for fund expenses, brokerage costs, and taxes on dividends or capital gains.
4. Inflation Calculations:
   • Figures from each end date (2005, 2010, 2015, 2020) are converted to approximate January 2025 dollars, reflecting estimated cumulative inflation from those end dates to January 2025.
   • Inflation rates are estimates, not exact official measurements.
5. Past Performance ≠ Future Guarantees:
   • The example does not predict any future outcome. Markets are volatile and can diverge from historical norms.

Table Overview: Nominal vs. January 2025 Dollars

Notes:

• Nominal Value: The raw amount as of the period’s end, unadjusted for subsequent inflation.
• Approx. Value in Jan 2025 Dollars: Adjusts the end-date nominal amount to estimated January 2025 purchasing power. For example, $6,600 in 2005 might equate to $8,500 in today’s dollars, depending on inflation estimates.
• Gross Gain: The difference between total contributions and the nominal (or adjusted) value.
• All figures are approximate and rounded for simplicity.

Breaking Down Each Timeframe

A) Five Years: January 2000 – January 2005

Context:
This period was notably affected by the dot-com crash (2000–2002), which kept the S&P 500 below its earlier highs. By continuing to invest monthly, the individual bought more shares when prices dipped. While the nominal gain looks modest ($600), inflation-adjusted calculations suggest higher purchasing power in today’s terms due to the growth since 2005. Still, results remain relatively subdued compared to the longer intervals that capture more of the market’s recovery.

B) Ten Years: January 2000 – January 2010

Context:
This decade encapsulates two major bear markets—the dot-com crash and the 2008 financial crisis. By the beginning of 2010, the market had started to recover from the turmoil of 2008–2009, but had not yet regained all lost ground. Cost averaging through both downturns helped lower the overall purchase cost. The final amount appears significantly larger when converted into January 2025 dollars, illustrating how nominal gains from 2010 still expand in today’s economy.

C) Fifteen Years: January 2000 – January 2015

Context:
From 2010 to 2015, the market saw a notable bull run, partly influenced by recovery policies after the 2008–2009 recession. This tailwind boosted portfolios that had been accumulated steadily, even through tough years. Although the nominal balance at 2015 is $38,000, converting to 2025 dollars underscores the real purchasing power in a contemporary context. The gap between $38,000 nominal and ~$47,000 in 2025 dollars offers a glimpse of how inflation over that subsequent decade would likely affect spending capability.

D) Twenty Years: January 2000 – January 2020

Context:
Spanning two full decades, this timeframe includes the dot-com bubble burst, the 2008 financial crisis, and the lengthy bull market of the 2010s. The S&P 500’s notable climb after 2009 significantly improved long-term returns for those who maintained regular contributions—even at points when market sentiment was negative. Adjusting $70,000 from 2020 to estimated January 2025 dollars yields roughly $81,000, illustrating potential real purchasing power. That said, these results neither predict future outcomes nor eliminate the possibility of prolonged market downturns.

Key Takeaways

1. Steady Contributions Help Smooth Volatility
   By investing a fixed $100 monthly, the investor avoided attempting to “time the market.” Purchases continued through downturns when prices were lower. Though no guarantee of profit, such discipline can sometimes mitigate the emotional highs and lows.
2. Bear Markets Can Offer Buying Opportunities
   When markets drop, cost averaging automatically buys more shares at reduced prices. If and when recovery occurs, those additional shares can amplify future gains.
3. Present-Day Adjustments Clarify Real Wealth
   Converting the nominal figures to January 2025 dollars helps illuminate purchasing power. Inflation can erode the nominal gains, so readers may appreciate understanding what the final amount equates to in a more current economic context.
4. No One-Size-Fits-All Approach
   BrokerSuperMarket cannot guarantee positive financial outcomes, and personal circumstances vary widely. Many factors—like exact timing, fees, and taxes—affect real-world returns. It is wise to consider professional advice for tailored guidance.
5. Long-Term Perspective May Capture Multiple Cycles
   Fifteen or twenty years often see several bull and bear markets. Persisting through such periods has, at times, yielded stronger returns than intermittent attempts at timing. Yet, each cycle has unique triggers and durations, so past results do not promise similar future paths.

Final Thoughts

Cost averaging, exemplified by regularly investing $100 per month in an S&P 500 fund, showcases how disciplined contributions might accumulate significant sums over extended periods. Observing these timelines (5, 10, 15, and 20 years) highlights how major downturns can initially hinder performance—but may ultimately bolster the impact of low-cost share purchases if markets rebound. Converting nominal amounts to January 2025 dollars further underscores the real value of these investments in a contemporary setting.

Disclaimer: this example should not be interpreted as a forecast. Every investment strategy carries risk, and the possibility of sustained losses exists. Moreover, no platform can promise favourable outcomes. Nonetheless, the principles illustrated, steady contribution schedules, long-term focus, and understanding inflation’s effects, often guide those who seek measured growth rather than quick gains. Individuals unsure of their approach may benefit from researching different asset classes, evaluating personal risk tolerance, or consulting licensed professionals.

(All values in this article are provided for educational purposes only. BrokerSuperMarket does not offer personalised investment advice or guarantee financial returns.)