Latest posts by Wanderer (see all)
- Investment Workshop 5: Setting Up Personal Capital - November 30, 2016
- Investment Workshop 4: To Buy or Not to Buy? - November 23, 2016
- Investment Workshop 3: Picking Your ETFs - November 16, 2016
Hello again and welcome back to the Millennial Revolution Investment Workshop! New readers, please click here to start from the beginning.
So here we are. After weeks of preparation, we’ve chosen our asset allocation, we’ve picked our ETFs, we’ve decided on our asset weightings, and today we sit here on the precipice, ready to make our first investment and put our money where our mouth is.
But…is now the right time to do it? Trump just got elected! An ISIS attack was just discovered in France! Experts are saying the stock market is overbought and a recession is coming any day now!
OK here’s the thing: We’ve been investing for close to a decade now and whenever it comes time to commit any amount of money to any investment, the markets are in either one of two states:
- The market is crashing. You’d be nuts to invest now.
- The market is flying way too high and a crash is around the corner. You’d be nuts to invest now.
That’s it. Those are the only two situations that exist when it comes time to invest. The stock markets have NEVER, and will NEVER be in a state of “Everything looks fine, so now’s a good time to buy.” It’s always in a state of disaster, or with a disaster right around the corner. Hell, just in the span of 2 weeks, we’ve swung from Situation #1 when Trump won the election to Situation #2 now that stock markets are making new all-time highs.
And those predictions, by the way, have always always ALWAYS proven to be wrong in the long term.
So how to invest in such treacherous times?
Simple. Dollar Cost Averaging.
For a brief refresher or for those to lazy to click on that link, Dollar Cost Averaging (or DCA, as the cool kids call it) is simply the process of spacing out your purchases to happen periodically over time. So for example, instead of investing $100k all at once, maybe you do it in 12 equal instalments once a month. This does two things.
- DCA takes emotion out of your investment decisions, and emotion is your single worst enemy when it comes to investing.
- DCA allows you to slowly ease into the process of investing gradually rather than be forced to take one giant scary step.
The debate of DCA vs Lump Sum Investing is one of the few points of disagreement I have with FI Godfather Jim Collins, who described DCA in our last conversation as “changing your investing to match your psychology rather than changing your psychology to match your investing.”
However, I think that DCA is the way to go for most people because it addresses the biggest problem people have when it comes with investing: Fear of the Unknown. That’s what this entire Workshop is about. Addressing people’s Fear of the Unknown. It doesn’t matter how many articles someone reads about how statistically safe skydiving is, they’re still going to be scared shitless when they stand at the edge of that airplane door for their first jump. What we are doing with this Workshop is holding out our hand, and saying “It’s gonna be OK. We will jump with you.”
Just to be clear, we are investing in an exceptionally volatile and unpredictable time, and as we’ve written before if Trump ends up implementing all the trade policies he campaigned on it will result in a stock market crash and quite likely a recession.
So in the short term we can expect that our portfolio may go negative. And as we discussed in Workshop #2, how negative it can go is determined by our initial equity allocation decision. For a 60% equity 40% fixed income portfolio, we can expect a worst-case decline of around 20%. If you aren’t OK with that, lighten up your equity weighting.
However, that is exactly why we are investing using DCA. In a stock market crash, DCA will allow us to pick up more units at a cheaper price and ride the inevitable recovery even stronger. It’s what allowed us to escape 2008 without losing any money and it work again here if that happens.
So to be clear, when investing in the stock market using Index ETFs, you can expect:
- Your portfolio will be down at some point
- Your portfolio will not go to zero
- If you are down, your portfolio will eventually recover
- Over the long term (10 – 15 years), you will likely make around 6-8% annually. More if you have a higher equity allocation.
To many, though, whether to DCA is kind of a moot point since most people reading this are still working, so they naturally get their money every two weeks in their paychecques. So we will pick a buy schedule to match this. Which means instead of investing $10k per portfolio, we’re going to increase that amount to $12k each so we can have nice even numbers to work with every month.
That means we will be investing $1000 per month, split off into 2 $500 buys. Feel free to substitute whatever amount makes sense to you, but I just picked nice round numbers so it will be easy for us to track performance.
The Canadian Portfolio
Let’s start with the Canadian portfolio. because we will be investing $500, here is how that translates into how many units of each ETF to buy, rounded out to whole numbers since you can’t buy fractional ETF units.
|Name||Ticker||Allocation||MER||Current Price||# Units|
|Vanguard Canadian Aggregate Bond Index ETF||VAB||40%||0.13%||$25.80||8|
|Vanguard FTSE Canada All Cap Index ETF||VCN||20%||0.06%||$30.63||3|
|Vanguard U S Total Market Index ETF||VUN||20%||0.16%||$41.67||2|
|iShares Core MSCI EAFE IMI Index ETF||XEF||16%||0.22%||$26.82||3|
|iShares Core MSCI Emerging Markets IMI Index ETF||XEC||4%||0.26%||$24.10||1|
Prices are current as of market open Nov 23, 2016.
The American Portfolio
Now let’s do the American one. Here is how our first $500 buy translates into individual ETF units.
|Name||Ticker||Allocation||MER||Current Price||# Units|
|Vanguard Total Bond Market ETF||BND||40%||0.06%||$83.00||2|
|Vanguard Total Stock ETF||VTI||30%||0.05%||$113.95||1|
|Vanguard FTSE All-World ex-US ETF||VEU||30%||0.13%||$43.71||3|
Prices are current as of Nov 23, 2016.
*Reader have asked us why we’re picking VTI instead of VTSAX, and the answer is that VTSAX requires a minimum purchase of $10,000 while VTI does not. Other than that, they are identical in performance and MERs.
Note that because VTI has such a high per-unit price, we are running into a problem here where rounding to whole units is going to cause our initial allocation to be off simply because of rounding error. This will become less of a problem as we go forward as our total balance increases, and it will give us a chance to demonstrate how to rebalance going forward with our buy orders.
Pulling the Trigger
Actually pulling the trigger is a simple matter of taking these orders we’ve calculated and entering it into our brokerage’s trading platform. The following screenshots are from Questrade, but TD Ameritrade’s interface should be similar.
We start by searching for our ETF.
IMPORTANT: Make sure the fund’s name matches what you’re expecting. Some ticker symbols overlap across exchanges.
IMPORTANT 2: For our Canadian participants, make sure each ETF has the suffix .TO at the end of it to signify that you want to trade on the TSX. For example, XEC.TO, not just XEC. XEC is an unrelated energy company based in the USA.
Then we enter our order volume…
There are lots of different options for what type of order to enter (Limit, Stop Loss, etc.), and how exactly the order is filled may matter to you if you’re a day trader, but we’re long-term buy-and-hold investors, so entering a Market Order that’s good for the day is fine.
And also, remember to double-check before you confirm you order that you are NOT being charged a $4.95 commission or whatever to make this trade. There may be a small fee levied by the exchange (in this case, 2.8 cents), but make sure you’re not getting hit with trading fees. I double checked the ETFs we’re using are on TD Ameritrade’s free-trade list, but make sure before you hit Buy!
Rinse and repeat until all your orders are in.
And we’re done! Congratulations we have just put in our first order. See? That wasn’t so scary was it?
When the market opens these orders will get filled, and that’s it. We are done for the week. Next Wednesday, we will see how our positions look like in the Personal Capital view and we will go over how to track our day-to-day performance.
Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.Liked this article? Join the Millennial Revolution and help us spread by Sharing or Liking!