Author Topic: Variation averaging?  (Read 524 times)

Kenpachigo

  • 5 O'Clock Shadow
  • *
  • Posts: 1
Variation averaging?
« on: August 11, 2018, 06:02:26 AM »
Hey everybody,

I currently am saving a certain amount of money each month (100 euro for example) that I want to invest into an ETF.
In an ideal world, there is no broker trading fee and I would be able to invest my 100 euro each month.
In this not so ideal world, I have to wait until I have enough money saved so that the brokerage fee is less significant compared to my investment.

example:
  • Saving 100 euro each month
  • I am OK with having the brokerage fee represent 1% of my sum that I want to invest
  • Brokerage fee = 7 euro
  • So that means I have to wait untill I have saved 700 euro (7 euro brokerage fee/700 euro investment = 1%)
  • This means that my first 600 euro's are not doing anything in the first 6 months


What if I take advantage of the variation of stock price?

  • Save 100 euro each month
  • Check what the brokerage fee amounts to percentage wise (compared to my current "stash" of money waiting to be invested)
  • Set a buy order lower then current stock price and by the same percentage

Example
  • After 3 months I have set aside 300 euro for investing.
  • 7 euro brokerage fee / 300 euro investment = 2,33%
  • Current stock price = 100 euro
  • I set a buy order for three shares at 97,67 euro (2,33% less than current stock price)
  • As soon as the price drops 2,33% my buy order will happen
  • 97,67 euro x 3 = 293 euro
  • Add the 7 euro of brokerage fee = 300 euro

In case the buy did not happen (stock price did not drop 2,33%) before the next saving moment ==> I set a new order:

  • After 4 months I have set aside 400 euro for investing.
  • 7 euro brokerage fee / 400 euro investment = 1.75%
  • Current stock price = 100 euro
  • I set a buy order for three shares at 98.25 euro
  • As soon as the price drops 1.75% my buy order will happen
  • 98.25 euro x 4 = 393 euro
  • Add the 7 euro of brokerage fee = 400 euro

The more cash I set aside, the bigger the chance that the variation will cover my brokerage fee (as the brokerage fee percentage drops)
In the worst case, I will have to wait 7 months to invest all my money.

Maybe somebody already has thought of this idea. But I cannot find any information on the internet about it (or I don't know the right search terms).
Can someone share his opinion? Or even do a simulation? I was dabbling with making an simulation in a spreadsheet but I don't have enough knowledge.


Best regards,
Ken
« Last Edit: August 11, 2018, 06:04:54 AM by Kenpachigo »

sokoloff

  • Handlebar Stache
  • *****
  • Posts: 1193
Re: Variation averaging?
« Reply #1 on: August 11, 2018, 07:27:44 AM »
Many mutual funds will allow incremental investments as low as one dollar after you've made the initial purchase, so you could make the investments every month.

Are those not available to you?

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1690
Re: Variation averaging?
« Reply #2 on: August 11, 2018, 09:10:52 AM »
Rather than optimize your situation and go through each example, I think it's more productive to verify that you can't escape brokerage fees.  In the U.S., buying Vanguard mutual funds and Vanguard ETFs cost $0/trade at Vanguard.  Similarly, other companies allow purchasing some ETFs and mutual funds for $0/trade.

If you don't have Vanguard, Schwab or Fidelity in your home country, you might take a look at "Interactive Brokers".  They offer percentage fees that are fairly low, and might help you to invest more regularly.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6724
Re: Variation averaging?
« Reply #3 on: August 11, 2018, 09:50:31 AM »
The more cash I set aside, the bigger the chance that the variation will cover my brokerage fee (as the brokerage fee percentage drops)
In the worst case, I will have to wait 7 months to invest all my money.

The fee doesn't change regardless of the system you try and build around it. You are paying what the market feels is the "right price" for those stocks + 7 Euro.  If it makes you feel better about paying the fee go nuts. I'd spend my energy by 1) finding a lower cost investment option and 2) raising income/lowering spending to increase your monthly savings vs. any fees you have to pay.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3291
  • Location: UK
Re: Variation averaging?
« Reply #4 on: August 11, 2018, 12:02:30 PM »
Find a broker that has a discount for 'regular investments'. Or one that has no fee for certain funds/ETFs.

Or, put more than 100 EUR in a month :P

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2319
Re: Variation averaging?
« Reply #5 on: August 14, 2018, 11:56:39 AM »
If I were in a situation in which the monthly investment was this small relative to fees, I'd try to find some way to finance the amount for the year in January, invest in one lump, and then make my monthly payments be for paying down that debt until the start of the next year. Spending $6.95 for a $100 trade seems a lot worse than financing 12X$100 trades at 4%.