Just how much money would you have made if you’d invested $500 a month into Apple (NASDAQ:AAPL) stock over the last 15 years?
What about other major US companies like General Electric (NYSE:GE), JPMorgan (NYSE:JPM) or Visa (NYSE:V)?
Is this even a good investment strategy?
In this article, I find out.
Investing a little each month
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.
According to FortunateInvestor: By investing $500 or $1000 into a low cost tracker fund, such as SPY (NYSE:SPY),VTI Vanguard Total Stock Market (NYSE:VTI) or Vanguard (NYSE: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.
There are many things that don’t work when investing in stocks but DCA is one strategy that we can say is relatively safe, so long as it’s done in the correct way.
By investing a set amount each month, DCA allows you to purchase more shares when the market has dropped and less shares when the market has peaked. Market timing becomes less of an issue which means you don’t need to worry about investing right before a market crash.
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?
Building a $2.5 million position in Apple stock
With the help of a back-testing simulator and some historical stock market 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 (NASDAQ:AAPL) over the last 15 years.
Investment simulation results
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 over the 15 years, 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 enough 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 dollars 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 (NYSE:CVX), Disney (NYSE:DIS), or Goldman Sachs (NYSE:GS)?
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 was Altria Group (NYSE:MO) with a net profit of $447,106, followed by Nike (NYSE:NKE) with a net profit of $344,929.16.
The worst performance came from the Eastman Kodak Company (NYSE:KODK).
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.
And herein lies the biggest problem with the dollar cost averaging approach.
If you are lucky enough to pick out a big winner then you will do very well indeed. But 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 is to spread your risk
Since you cannot easily 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 but you should aim to diversify over at least 10-20 stocks. By investing in this way you won’t be able to capture the huge upside that comes from holding just one super stock – like Apple.
But you will ensure that your investments grow steadily in time and that you don’t lose your money in a sinking ship.