Investment Workshop 4: To Buy or Not to Buy?

Wanderer
Follow Me

Wanderer

The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
Wanderer
Follow Me

Hello again and welcome back to the Millennial Revolution Investment Workshop! New readers, please click here to start from the beginning.

mrinvestmentbanner

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:

  1. The market is crashing. You’d be nuts to invest now.
  2. 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.

  1. DCA takes emotion out of your investment decisions, and emotion is your single worst enemy when it comes to investing.
  2. 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.”

Standard Disclaimers

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.

Buy Schedule

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.

workshop_4_1

Then we enter our order volume…

workshop_4_2

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.

workshop_4_3

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!

workshop_4_4

Rinse and repeat until all your orders are in.

workshop_4_5

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.

Peace out.

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!

31 thoughts on “Investment Workshop 4: To Buy or Not to Buy?”

    1. If you buy using margin (DO NOT USE MARGIN), if your balance falls below maintenance excess your margin will get called and your stocks sold without your consent.
      DO NOT USE MARGIN and you can ignore this number.

        1. Make sure you know exactly how much cash you have in that account and don’t buy more than that. Questrade (and most brokers) make it really easy for you to accidentally buy using margin because they make money in fees/interest when you do that.

      1. I made my purchases, but the only account I have is a MARGIN account, hence it’s the only account I can use to make the buy. Can you explain in a bit more detail why not to buy from my MARGIN account?

        1. I think I’m just getting confused over the word “Margin” in my Self-directed account. I also opened a TFSA with Questrade but have not transferred or funded it yet. I’ll wait until the market opens and my first trades go through… hoping to see my cash balance cut in half, based on your instructions above (about 490$ out of 1000$).

          I found a pretty good (if not simple) description of Margins and how they work below…

          “Until you run out of money, you are buying directly with the $1000 you deposited. Once your cash balance is zero, anything else you buy is on margin (money borrowed from Questrade, using your holdings as collateral).

          Margin isn’t a free loan, and your broker can demand you deposit more cash at any time (the dreaded margin call) to satisfy margin requirements. If you can’t, your broker will sell off assets until you have enough cash.

          Margin Power is what Questrade calls using assets in your TFSA as collateral for a margin loan. If you don’t have a TFSA with them, that’s why your margin power is zero.”

  1. Thank you so much for doing this!

    I just made my first trade ever, at the ripe-old-age of 31, and I am so excited for the future! I never would have done this if you guys hadn’t pretty much talked me into it. Your articles are so easy to read and I feel like I’ve learned a lot over the past few months. Even though we’ve obviously never met, I (and I know a lot of other people) take what you guys have to say to heart – not just because you’ve done it yourselves, but because you are obviously smart people. Getting a walk-through, step by step, was just what I needed to finally start my investing journey.

    I’m looking forward to a (hopefully) financially independent future, thanks to you guys!

  2. Your investing tutorials are fantastic. I could have used these many years ago when I first started investing. I will say this though (ahem…with my many years of experience..) NO BODY knows what the markets are going to do. NO. BODY. There will always be pundits who say the sky is falling. Be careful of your own natural inclination to listen to either positive or negative MSM reports. You DO have a bias. Figure out what it is and then look for information that COUNTERS that inclination. My own was doom and gloom. Too much reading of Zerohedge. I was frozen with fear and unable to make a move. That was a long time ago but the only way to free myself was to actively search out and read the opposite point of view – greaterfool.ca is one by the way (if you can get around all the real estate talk…Garth actually is very insightful about the direction of the economy and markets).

    1. Yeah, absolutely agree. I’ve found the most successful investors create a framework where they trust the math while eliminating the impact of their own emotions. That’s what we’re trying to do here.

  3. For new accounts, TD Ameritrade has the promotion “$600 + 60 days of commission-free trading with deposit of $250,000.”

    I wonder if anyone here has used this or a similar promotion. What are the caveats exactly?

    How long does the $250,000 have to be in the account to get the bonus?

    For obvious reasons, TD Ameritrade has put scant information on its web site on this.

    1. Shh, don’t tell them I told you this, but with code 277, Ameritrade will give you $1000 for $250000 in new money. You need to hold it for a year. If the market takes your balance down, it’s okay, but you need to refrain from withdrawing from the original 250k.

      Also, you need to type “commission-free ETFs” in the search box when you set up the account, follow the links and opt-in for the commission-free ETFs. No other caveats. I just set one up.

    1. Simple. VEU was on TD Ameritrade’s commission-free ETF list while VXUS is not. They track similar indexes and their performance over the past 5 years has been nearly identical.

  4. Good advice in general, but I am in a unique position. I do my regular DCA each month, but I have a six figure lump sum sitting in cash that I got recently. With median stock prices at their all-time high, I am not about top invest it all right now. I will be putting it in equal parts over 12 months, maybe all at once if there is a 30% correction. The bond market has been correcting over the past couple of week,s so bonds aren’t looking terrible anymore.

    http://www.efficientfrontier.com/ef/997/dca.htm

    12-18 months seems to be the optimal window for investing new money.

  5. Thanks for the workshop. I have completed my very first trade. I never thought this was easy. I went with the 60/40 and exactly what you have described in the workshop.

  6. Ya, I do my balancing using a DCA, over a 2 year period, seems to work. Also let the dogs run. Don’t touch your balance until 6 years into a market cycle, this saved me a crap load when things went south in 2012. didn’t touch it. Bottom of the cycle you should have a shit load of cash and bonds to put back in, then move to a 70/30 split. I am a little more aggressive than some. Again roll in in about 6 months, the downturn is always steeper than the recovery.

    Balanced over the last 2 years, Can Eq first, now have about 70% of Eq in US, and US cash in my trading account. Need to Balance again soon as I am probably about 60/40.

  7. How do you guy say tackle doomsday scenarios, for example, where the market stays flat for 20 – 30 years? Apparently it’s done this before several times.

    Maybe this is a rhetorical question? If the concept is to buy and hold, you’d just have to hold and wait for the market to move up again. I suppose flat isn’t too bad since the investment would just act as a savings account.

        1. If you extend out the historic analysis all the way back to 1871 and reinvest dividends (which is a form of DCA) you get the following results for 25 year periods:
          Average annual return: 9.4%
          Max Return: 17.1%
          Min Return: 3.8%

          Try playing around with the inputs here.

          https://dqydj.com/sp-500-historical-return-calculator/

          And remember, S&P500 technically didn’t hit break even from the cratering of the GFC for 6 years (2007 – 2013). We recovered in 2 because of DCA, so if we happen to hit one of these worst-case historical windows DCA will pull us out of the hole much faster.

  8. I found this article especially relevant because I just started investing with Questrade in September and the markets have been so high that I have been nervous to put all our savings into this bull market all in one lump sum. For peace of mind I think I will have to try DCA for these larger lump sums. I mostly was buying and selling individual stocks and so far have been lucky to make good trades (but pretty much everyone makes good trades in a bull run I’ve also read 🙂 ).

    I’ve decided I would like to try a more passive approach – hence index funds….but I find the index funds a little confusing…or maybe I’m making them more confusing then they actually are.
    Can you confirm that I understand correctly how index funds like VCN.TO work? My understanding is:
    1- that every quarter a dividend (last one was $0.189) will be paid for every share that I own.
    2- why are we always ‘holding’ the index fund? Do we never sell it when it seems like it’s at it’s peak (I know you can’t always tell when the peak is)..but do we somehow “DCA sell” it too? this is the part that confuses me the most…if we are always holding it then it seems we are a dividend investor (and I thought dividend investors were supposed to be different than index investors – maybe I’m reading too many blogs/books and am overthinking things or confusing myself!)… it seems like vcn.to oscillates between lows of $24CAD and highs of $31CAD over years. If we aren’t selling it…are we mostly keeping it for the dividends and the hope that in 10-30 years when I plan to retire (more like 10-15 for me as I’m a gen x-er) the stock price peak will start hitting higher than $31.00 so therefore I am keeping it for more than the dividends? looking forward to clarification…thanks and continue the great posts.

    1. 1) Check with your fund prospectus but yes VCN currently has a 2.36% trailing 12-month yield paid quarterly, so your understanding is correct for this one.

      2) Index funds up over the long term (15-20 years) because they track the performance of every company in aggregate. The S&P500, for example, has never lost money over any 15 year window and has had a median annual gain of 12.2%. During your accumulation phase (i.e. when you’re working) you won’t be doing a lot of selling except to rebalance to your target asset allocation. We’ve written extensively about index investing so you might want to go through the articles in this blog where we talk about this. Don’t invest anything until you understand what you’re doing.

  9. Hi there,
    Quick question – in the first article in the series you mentioned that we would be talking about TFSAs and RRSPs in a later article but I haven’t seen that yet so I am assuming that these buys are in an unregistered account. Will you be showing us shortly how to set these up (or should we just do it at the same time we open the margin account (and I am still confused about what a margin account is – is it just an unregistered account)). Will you be talking about tax efficiency?

  10. Hey Guys,

    I’m still a little confused about the margin aspect of the account. By default we had to a choose a margin self directed account…. Right? I loaded $1000 as that was the minimum required to trade with the account.

    I plan of doing it like you guys $500 every two weeks/month, so does that mean the remaining $500 in my account that won’t be invested is open to being used as margin collateral by questtrade… is there anything we can do to opt out of this?

    Wanderer you said in your first comment post “If you buy using margin (DO NOT USE MARGIN), if your balance falls below maintenance excess your margin will get called and your stocks sold without your consent.
    DO NOT USE MARGIN and you can ignore this number.”

    How can we choose not to use margin?

    Thanking you in advance for you thoughts…

    1. Margin acts like overdraft on your checking account. If your account balance falls negative because you bought more assets than you had cash for, it will buy them on margin. The danger of margin is that if the ETFs fall in value below a certain threshold, the brokerage will automatically sell to cover the amount you owe, which is what gets people into trouble because they end up being forced to sell when they should have held and waited.

      To make sure you don’t use margin, just make sure you never put in a buy order for more cash than you have.

  11. This is great. Thank you for doing this. Like many others following your blog. I was so confused and fearful of investing because it’s a jungle out there. I would have never pulled the trigger to invest even though, in theory, I know that investing is the key to FI and assets growth. I have deposited my cash and will be able to buy once the market open. I’m so excited.

Leave a Reply

Your email address will not be published. Required fields are marked *

Social Media Auto Publish Powered By : XYZScripts.com