Most investors don’t just make one lump sum investment and then never invest again. Investing should be a lifelong process of investing as much as we can at many points in time. Unfortunately, when considering investment options, many of us just look at things in terms of a lump sum investment i.e how much money would I have if I invested $10,000 in XYZZ Fund 10 years ago? This distorts reality and has us stuck on one small flash in time as opposed to the big picture. Considering the value of periodic deposits and the internal rate of return provides a much more practical view of things, hence we are going to look at what would happen to the value of your investments if you deposited $1,000 per month for that last 10 years, and not $120,000 10 years ago.
What Should We Compare?
For US investors the S&P 500 Index is a the investing standard, so we’ll look at that through Vanguard’s S&P 500 index fund (portfolio 1). We’ll also use Vanguard’s Aggressive Growth Live Strategy Fund (portfolio 2) which is passive, has low fee’s and has an 80/20 allocation with global exposure. Finally we’ll use the First Eagle Global Fund (portfolio 3), because well its one of my favorite mutual funds!
- $1,000 invested monthly for 10 years, $120,000 total, would now be worth over $170,000 in aggregate in any of these investments!
- Despite the major drawdown of the 08/09 financial crisis, you got an internal rate of return of at least 7% on a diversified portfolio. Yes the good ole 7% market return, through one of the worst periods in history.
- The S&P 500 had a drawdown of 50%+ and still had an Internal Rate Of Return above 11!
- The lowest cost (and actively managed fund did the best, and the highest cost fund did the worst. The Vanguard 500 index fund at a mere 14 bps outperformed the other comparison fund. The First Eagle Global Fund, which has fee’s over 8x that of VFINX at 116 bps, did the worst in terms of total return. It did however have the highest sharpe ratio!