How much money would you have made if you’d invested $500 a month into Apple stock over the last 15 years? What about other major US companies like General Electric, JP Morgan or Visa? Is this even a good investment strategy? In this article, I find out.
Investing a little each month
As I’ve written before on this blog, a good way to build up a healthy, passive investment portfolio is to invest a little each month into a cheap tracker fund or basket of stocks.
By investing $500 or $1000 into a low cost tracker fund (such as $SPY, $VTI or $VOO for example) it’s possible to lower your average entry price and capture market returns without having to lay down a large lump sum investment.
This is a process known as dollar cost averaging (DCA) and it’s a technique employed by many retirement and pension schemes. By investing a set amount each month, you will purchase more shares when the market has dropped and less shares when the market has peaked, thus market timing becomes less of an issue.
But what if you didn’t put your money into a diversified basket of stocks? What if you went all-in on just one company? And what if that company was Apple?
How To Build A $2.5 Million Position In Apple Stock
With the help of the Amibroker back-testing simulator and historical data from Norgate Premium Data, it’s very easy to test different investment strategies and see the results within just a couple of minutes.
Thus, I thought it would be fun to see how much money you would have made if you’d invested $500 a month into Apple shares over the last 15 years.
Doing so in Amibroker is relatively straightforward using the following code: Just remember to set your starting capital to the total cumulative amount – in this case $90,000 ($500 x 12 x 15).
FixedDollarAmount = 500;
MonthBegin = Month() != Ref( Month(), –1 );
FirstPurchase = Cum( MonthBegin ) == 1;
Buy = IIf( MonthBegin, sigScaleIn, 0 ); // each month increase position
Sell = 0; // we do not sell
PositionSize = FixedDollarAmount;
Investment simulation results
As you can see from the equity chart below, investing $500 a month into Apple produced some outstanding results.
The test results from investing $500 a month into Apple show a total net profit of $2,588,284.17, which equates to a compounded annualised return of 25.36% and a total percentage gain of 2,934%. This resulted in a total end portfolio size of $2,678,284 (when including the $90,000 total investment amount).
In other words, if you had had the foresight to invest $500 a month into Apple, you would have invested $90,000 in that time and made well over $2.5 million in just 15 years. The best thing about this strategy is that you would have purchased huge amounts of stock whenever the stock experienced a correction, such as in 2009 and 2013.
The one fatal flaw
Of course there is one fatal flaw with this strategy – hindsight bias.
In hindsight, many people might believe that they could have predicted the meteoric rise in Apple shares but in reality very few will have been able to.
In 2000, Apple had not yet introduced the first iPhone, the Macbook or the iPad. In fact, they had not even released the first iPod yet (that came a little later in 2001).
So to think that you could have predicted such a rally, and have been confident to sink $500 a month into the stock without flinching is perhaps unlikely.
How did other stocks fare?
If you put $500 a month into Apple over the last 15 years you would have been very fortunate and come off extremely well with over two million in profits.
But what would have happened if you had picked a different stock instead? What if you had sunk $500 a month into Chevron, Disney, or Goldman Sachs?
Individual back-test simulation
Using Amibroker, it is extremely easy to run the same strategy but test lots of different stocks individually.
All you must do is pick a watch-list and then hit ‘individual back-test’ instead of ‘portfolio back-test’. Doing so in Amibroker will run the strategy on each stock separately and then report the results for each one.
For the following simulation therefore, I will run the code separately for every company in the Dow Jones Industrial Average between 2000 and 2015. Normally, this Dow Jones Average will have a total of 30 stocks in the universe, but since I will be including historical constituents, the total number of stocks is in fact close to 80.
As you can see from the following table, Apple was indeed the best stock to have stuck with over the last 15 years and it was so by a long way. The next best performer from the Dow Jones Index was Altria Group ($MO) with a net profit of $447,106, followed by Nike ($NKE) with a net profit of $344,929.16.
The worst performance came from Eastman Kodak Company. If you had stuck $500 a month into what used to be one of the dominant forces in photographic products, you would have lost around $70,000 when the company filed for bankruptcy in 2012. (Although these numbers are slightly exaggerated since you probably would not be entering money in a company when it has already plummeted under $1 a share which is what the simulation did. Incidentally, the company did re-emerge from bankruptcy in mid-2013).
Likewise, you would have lost really significant amounts of money in Motors Liquidation Co., Bethlehem Steel and the financials, such as Citigroup ($C) and Bank of America ($BAC), which plunged in the credit crisis and are yet to recover.
And herein lies the biggest problem with the dollar cost averaging approach. If you keep putting your money into a sinking ship you run the risk of losing your entire investment.
Stocks that fall and do not recover are the enemy of this strategy. As are stocks that go absolutely nowhere.
A better approach – spread your risk
Since you cannot predict what the next booming stock will be and you cannot predict which companies will sink like a stone, the only sensible approach when using the dollar cost averaging approach is to spread your risk.
That’s why it’s always better to invest your cash in a low-cost tracker fund or other diversified set of investments. Tracker funds themselves can track hundreds or even thousands of different stocks.
Another approach, and one I wrote about in this article on random stock-picking with DCA, is to choose a different stock each month and build up a portfolio of lots of different names. As you will find if you read the above mentioned article, doing so can also produce some nice long-term returns.
You may also like:
– Improving DCA with stock picking strategies
– 6 steps for safe investing in stocks and bonds
– 12 charts every investor needs to see
– Value investing rules: how to pick cheap stocks
Simulations run using Amibroker and survivorship-bias free data from Norgate Premium Data.
With US rate rise and yes its only 0.25% would you agree that we are in a world of divergence – interest rates are no longer in sync with each other.
Hedging strategies and the quants style are now coming into vogue???
When you say no longer in sync with each other are you referring to other economic powers, i.e Europe, or something else?