The One Ultimate Back Test

Further to yesterday's post, I've kept the Excel spreadsheet where I computed the 10Y returns of the S&P500 for the discussion and it reminded me the precise reason why I started a few years ago to consider to "pound-cost-average" for my long term investments in stocks. This was to me the ONE ultimate back test : the Great Depression decade. If you invested in January 1929 and put all your money on the S&P500, 10 years later you would have suffered a loss of more than 45% of your equity... , but if from January 1929 onwards you invested every year 10% of your fortune, you would have ended up with a +12% return. That's a lousy 1% per annum but still better that a loss of almost half of your capital and of course one have to consider what happened during that decade... If a pound-cost-average strategy would have survived THAT, it should be totally bullet proof, right ? Well, my computations yesterday that showed that from 2000 to 2010 such a strategy would have led to a 5% loss mitigates a bit that point : the time and concentration of the crash years is as well important : in the past decade, the crash came in 2008 at the end of the decade, wiping out years of compounded profit while the Great Depression was a succession of crashes (including German recession in 28, the 1929 crash, bank runs and bank bankruptcies) that were concentrated in the first years of the decade 1929-33.
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