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Today we’re going to talk about Dollar Cost Averaging. 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.
What is Dollar Cost Averaging?
For a brief refresher or for those too 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.
- Dollar Cost Averaging takes emotion out of your investment decisions, and emotion is your single worst enemy when it comes to investing.
- Dollar Cost Averaging 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 Dollar Cost Averaging 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 will 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 Dollar Cost Average 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 paycheques. 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.
Dollar Cost Averaging 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.
Dollar Cost Averaging 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 Vanguard’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. Vanguard, of course, doesn’t charge any fees for trading Vanguard ETFs, 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.
Peace out.
Or…continue onto the next article!
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.
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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.
What does “maintenance excess’ mean?
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.
Is there an option that says “buy using margin”….how do you ensure you do not buy using margin?
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.
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?
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.”
What account should it be if not ‘margin’? Tfsa?
A margin account allows you to go into margin, which is what most brokerages enable. Do the buy in your margin account, but just make sure you don’t go into margin, meaning don’t buy more than your available cash.
Is ok to use a TFSA account for this? I misunderstood started with a self directed TFSA.
Thanks for the reply.
Yup, just make sure you don’t blow your TFSA limit.
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!
Thanks! Something like this has, to my knowledge, never been done before by a blogger so we’re hoping it’ll help a lot of people.
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).
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.
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.
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.
Thanks again for all you do!
Can you explain why you chose VEU instead of VXUS for American investors? Thanks so much!
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.
Btw, the bonus gets deposited in your account right away.
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.
Yeah that’s what I’d do in your position. Good for you on accumulating that six figures in cash! You are kicking ass at life already.
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.
Excellent. Investing is supposed to be easy, and we will be there with you every step of the way.
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.
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.
Haven’t seen anything like that on the S&P500 (https://en.wikipedia.org/wiki/S%26P_500_Index#Annual_returns)
I think it’s happened for indexes on smaller individual countries like Japan, but to get around that you balance your index holdings globally like the way we’ve done.
And keep in mind that even if the capital values hold flat, you’re still making 2-3% dividend yield.
Say you had invested in the S&P500 in 1937, based on http://www.macrotrends.net/2324/sp-500-historical-chart-data it looks like you would have only recovered around 1954 (almost 20 years). Or buying in 1968 you would have recovered around 1993 (about 25 years). In each example, you would be no further ahead financially after 20 – 25 years (with the exception of the dividend yields)
Am I reading the chart correctly?
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.
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) 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.
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?
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…
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.
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.
Glad you’re following along. Investing is actually pretty simple and we’ll get through it together.
Thank you so much for the great work on your blog. I am a complete beginner in investing, and find your tutorials extremely helpful. I will use the Questrade for my TFSA and my question is do I have to do rebalancing or I can follow your lead and buy ETFs as I can, every month $460, until the limit of $5500? Also, I hold all my other TFSA at the Tangerine Balanced Fund (maximum since the start). Do you recommend I switch everything to Questrade?
Yes. Immediately.
Tangerine is a great company for their savings/checking accounts, but their mutual funds suck. They basically create a passive balanced index portfolio, and then charge you 1% for the service. You can do it yourself for 1/10th of the price. Why anyone uses these is beyond me.
So yes, switch to Questrade, learn how this investing stuff works (starting with our workshop posts) and just do it yourself.
Hi, I’m in the US using TD Ameritrade. I checked that BND, VTI, VEU were indeed listed as “Available commission-free,” but you must ENROLL in TD Ameritrade’s commission-free ETFs program to buy them commission-free. I discovered that after making my very first stock buy and was charge $6.95 for each of the three buys. Please make this very clear to your readers. Thank you for such a great blog!
I called TD Ameritrade after writing this post and asked for a refund of the fees since their website does not make the enrollment requirement clear. They gave me the refund without hesitation. That’s $20.85, almost 1/2 a share of VEU. Every bit counts.
They are in mutual funds
Hi Guys
Love your blog and trying to follow it along in Australia. In Australia we do get charged broker fees as much as 19.95$ per order, or if you go to cheaper broker it is still 11$ something.
What would you suggest in that scenario ? Should one buy in larger quantities to save on broker fees ?
Many Thanks
woks
Hi Guys,
Your work on this blog has done wonders for me in terms of understanding investing. I’m not quite ready to pull the trigger yet, but I will be soon. Have you ever thought of doing a video tutorial of setting up the TD/Vanguard accounts for us to follow. I’m very much a visual learner, as I’m sure many people are. Sometimes it’s easier to follow visually than by simply reading directions. Just a thought!
Glad it’s been helpful, Sunny! Love your idea for the video tutorial. The only hiccup would be having to lug camera equipment around while we travel and the time it would take to edit the videos. But we’ll see if we can figure something out. Thanks for the suggestion!
Just made my first trade! Very exciting. I know I’m far behind in the workshop… and I’ve only done just a small amount to try to understand the processes. I did panic at first about the “DON’T BUY AT MARGIN” warning, and my only account listed as margin. But I calculated out all my buys, ensuring the total cost stayed within my budget. My heart was racing! Haha, I’m such a nerd.
This blog is great! I also second Sunny’s comment re: video tutorials. I know there is something that can be done where you can just record your computer screen and voice over commentary (can’t recall the program name… ). This might help with reduced camera equipment required.
Just starting to look into investing can you recommend which ETFs to invest into the U.K.? And which trading site to use to build a portfolio
As a Canadian, how should I fund the US dollars I need to buy ETFs in US $? Should I do the exchange at my bank, and fund from there into the US funds section of Questrade? Many of the ETFs I’m interested in are on US markets!
Follow the Canadian workshop, which is all denominated in Canadian dollars. You should not need to convert any cash to USD.
You can buy American ETFs directly from any Canadian accounts. I do it with both of my TFSA and regular account. The only thing is that your return shown will include impacts from both the market movement and exchange rate. The one other possibly down side is bank’s exchange rate when we trade US securities with CDN. It had worked out well for me though.
You can also open USD account under TFSA or in regular account as well.
I’m a new reader from Taiwan.It’s really clearly for order the ETFs .I got a question,what is different for BND and BNDX ? I know BND is like for USA bond,and BNDX is the government bonds ? But how can I choice? thanks.
I just discovered your blog and I read your entire book front to back on the weekend. Today, I purchased my first ETF! Absolutely thrilled! Thank you for sharing such wonderful information.
Hello, I do not understand how to come up with the # of units needed to match your asset allocation. In other words, if I am not doing 60/40, as you are, how do I come up with my own #of units? Also what is the minimum amount of money I need to get started?
Dumb Question: Does it matter at what point in the month you buy? Like, should you be waiting for the prices to trend downwards or does it just not matter in the long run?
What does change in buying power, change in maintenance excess and new buying power mean? Thanks!
Not sure if this blog is still active 🙂 Did some more research on my end as I have a lumpsum of savings which are invested in various instruments that are not so efficient that I want to invest in index funds with… out of all of the material I’ve read so far this seems to be the most convincing, especially considering I’m also adopting a “balanced” 60/40 portfolio which by itself should protect me against the risk of a down market considerably, and the numbers seem to back that up – https://ofdollarsanddata.com/dollar-cost-averaging-vs-lump-sum/
I’ve a quick question, the Vanguard pages are a little different. Is buying Vanguard funds the same as trading Vanguard ETFs? Also should my settlement funds be kept as “Vanguard Federal Money Market Funds” or should it go into something different? Thanks
Hi Peter,
I had the same confusion with Vanguard. Apparently buying Vanguard funds is like opening another account with Vanguard & funding it from your bank account. To buy ETF shares you have to select Trade Vanguard ETF’s under the Buy/Sell drop down. My money is initially in a Federal Money Market Fund with Vanguard. I may open another account as a Roth IRA. Hope this helps?!
Diana
I have a question: If I am ready to invest $12000 into RRSP Questrade account now, would you still recommend to spread it out over a year and invest $1000 per monthly or just go ahead and proceed. Would there be any other concerns?
I am looking at a long term investment 15 years
Thinking 70%-80% Maximum Equity Allocation
thanks!
Confused. Very.v on Allocation. I have 3 equity and one bond. So that auto means 75 equity and 25 percent bond correct? If so and I choose $200 to invest each pay period with MERS .02 (146.97price ) .04 ( 52.55price) . .02 (387.89 price) respectively for my equities and the MER for my bond at .03 (85.74 price), How can the money of 200 dollars buy a unit/share equally?