In my last video, I already decided which ETFs I will be investing in. But how do I go about actually purchasing them? Well, you need to choose a broker. I use an online, commission-free broker called SelfWealth who only have a flat $9.50 fee per trade. That’s a pretty good deal.
I’ve already decided that I am investing in these four ETFs – 25% in each of VAS, VGS, VGAD, and VAE. Just say I have $100,000 in total to invest. There’s a couple of schools of thought here. I could buy them all on the same day in a lump-sum, $25000 in each. That would have the benefit of saving on brokerage – four trades for a total of $38.
If the market were to go up, which on average it does, then it would be best for me to invest in this manner.
However, what if unbeknownst to me, the market is actually at a peak now? (A real possibility based on recent events). Then I would be investing all my money into a falling market. So probably the better option in this case would be to put my money in over time, say $5000 every month – a process known as dollar-cost averaging. This assumes that the average investor, like myself, can’t time the market, so there’s no use trying.
For me, I started with an initial investment in January of $5000 in each of my ETFs. The reason I picked $5000 is that that’s a fairly good trade-off with regard to brokerage. $9.50 of $5000 is only 0.19% – a fairly reasonable one-off fee. I wouldn’t recommend lower than $5000, but that’s up to you.
Then, every month thereafter, I put in a one-off $5000 investment into my lowest value ETF. So in February, just say the ETFs have the following values, then I would put $5000 into VGAD. In March, I would put $5000 into VAS as it has the lowest value.
I choose the ETF with the lowest overall value for two reasons. First, it keeps my portfolio reasonably well-balanced. If I keep putting money into say the highest performing ETF, then very quickly my 25% target allocation would go out the window. Secondly, buying the lowest price ETF will give the most bang for my buck, that is, I’ll be able to buy more units on average.
So each month, I’m planning to invest $5000 into the lowest value fund until I’ve fully invested my $100,000. From that point onwards, I will invest $5000 whenever it becomes available. So maybe once every three or four months depending on how much I can save.
Although mathematically speaking, a lump-sum investment may be the better option, Vanguard’s Robin Bowerman said it well in defence of dollar-cost averaging.
“Dollar-cost averaging provides a means to resist any temptation to try to time the market. Attempts at market timing often result in following the investment herd by buying when prices are high while selling when prices are low. As humans we are not wired that way and behavioral economics research tells us that as investors we often 'misbehave' ... that is why dollar-cost averaging makes sense in tough/volatile markets. It keeps people in the game."
Moneychimp.com also said it well, “If the market dips, people will be happy because dollar-cost averaging will be saving them money, and if the market goes up, people will be happy regardless.” So from a psychological perspective, dollar-cost-averaging makes sense.
Now for today’s take-home message:
1. Choose a low-cost broker such as SelfWealth.
2. Invest regularly. Invest your money over time to make the most of dollar-cost averaging. That doesn’t mean you have to invest every week or month. Once a quarter is also a good option.
3. Don’t try to time the market. The majority of people get it wrong.
And that leads to my final point:
4. Only buy, never sell! ETFs are for investment. If you want to trade frequently, become a day trader. We’re here to make money over the long-term. Sure, there will be some days where the markets go down and you’ll feel like you want to sell everything. But don’t! Keep hold of your ETFs and ultimately, you’ll reap the rewards.
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Dollar-cost averaging: a suspect plan?