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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Wadiman on September 28, 2014, 03:59:01 AM

Title: ETF investment method over a year
Post by: Wadiman on September 28, 2014, 03:59:01 AM

I will be investing $3200 per month via direct EFT purchase (12 purchases per annum = $132 in brokerage costs) and my question is how to make the specific transactions? 

My current thoughts are to think about investing on a proportional basis annually - that is:
40% roughly equals 5 months (4.8 months)
20% roughly equals 2 months (2.4 months)
10% roughly equals 1 month (0.83 months)

Please note that I have other investments by way of superannuation (Australia's equivalent to IRA I think) and an investment property so I have some diversification.  My Superannuation fund currently has 30% cash/fixed interest.

So - I would buy the 40% allocation 5 months each year, two of the 20% allocations = 2*2 months = 4 months per year, and two of the 10% allocations = 2 months per year.  That adds up to 11 months which would mean maybe one of the 20% allocations one year and the other the following year.

As to what to decide to purchase in any one month - I would look at what offers the best value for that month and buy that.

How does this sound?

How have you more experienced MMErs done this?
Title: Re: ETF investment method over a year
Post by: RichMoose on September 28, 2014, 04:14:29 PM
How about just setting up a rotation that you always follow. For example in the following order: vas, vts, iem, vas, veu, vas, vts, vas, veu, vas, vap then rinse and repeat. Once you have say 100k, you can start focusing more on maintaing your exact allocation. If developed market stocks are doing very well, you may have a few months in a row of just purchasing iem and vap to maintain your AA.

To start with I would probably refrain from making your purchasing decisions based on your view for best value because it will throw off your desired AA in a hurry. This problem corrects itself over time anyways because as your portfolio grows you will always purchase larger amounts of the currently underperforming sector to maintain your AA, like I pointed out in the example in the last line of the previous paragraph.

Personally my asset allocation is determined by account because in Canada there are very good reasons to invest based on account-type from a tax perspective.
Title: Re: ETF investment method over a year
Post by: travelbug on September 28, 2014, 04:31:05 PM
Good question. I am interested too! Just been looking at index funds myself in Australia.

Title: Re: ETF investment method over a year
Post by: nothingbo on September 29, 2014, 04:24:44 AM
One possibility.... Nabtrade is currently offering 20 free trades (in 30 days), you could kick start your portfolio in the first two months using the free trades, then rotate as TuxedoEagle suggested.

There might be some better free trade signup deals at other brokers ?

UPDATE: commsec offering $600 worth of free trades in 3 months.
Title: Re: ETF investment method over a year
Post by: Wadiman on September 29, 2014, 06:26:50 AM
Thanks for the feedback folks - much appreciated!

Tuxedoeagle:  With the purchasing decision in a particular month I wasn't anticipating continually choosing one ETF if it was the best value in that month.  So - for example with the 40% allocation ETF (VAS) it would only be selected 5 times in the year - even if it was the best value in any month after the five purchases it wouldn't be chosen.  Does that address your comment about AA targets?  I know that over time a rebalance would be needed to ensure appropriate weightings but I was hoping to get reasonably close to potentially avoid some brokerage costs.  If I followed the set pattern (ETF1, ETF2, ETF3, ETF4) it would be an equal weighting of 25% until rebalance at say, the end of the first year. 

Nothingbo: Thanks for the free trade deals - I previously set up with CMC for $11 trades and hope to only do three trades a month.
Title: Re: ETF investment method over a year
Post by: RichMoose on September 29, 2014, 09:38:30 AM

I really like your setup of purchasing in monthly lumps and purchasing only 1 ETF per month so that you only incur one commission fee, I am following a very similar arrangement myself. At the start, your desired AA is obviously going to be impossible to achieve. If you follow a set pattern (any one you are comfortable with, mine was only a suggestion) that covers all of your ETF's in the approximate desired AA you will be pretty close to where you want to be. No matter how you go about it, I suggest you take about 2-3 years of building your portfolio following the pattern before worrying to much about rebalancing.

I'm not sure which sites you read, but I know the Canadian sites recommend rebalancing once per year. Problem I see with this is that you would be incurring selling commissions that you could easily avoid by wiser purchasing.

Following best value probably won't benefit you much because portfolio returns have a limited effect on your portfolio value for the first few years of saving. Besides, they are difficult to judge because current value doesn't have anything to do with short-term returns. To help you picture it, lets say in Canada I'm choosing VCN.TO (Canada Index), VUN.TO (US Index), VDU.TO (Developed ex North America Index), and VEE.TO (Emerging Market Index) all at 25% each. I will invest a total of $40,000 purchased in $10,000 lumps. If I was following the value approach for the past year I would first have invested all my allocation for VEE.TO in October 2013, then VDU.TO in January 2014, then VCN.TO in April, and finally VUN.TO in July. Here are the results:

VEE.TO = $11,134
VDU.TO = $10,160
VCN.TO = $10,484
VUN.TO = $10,448
= $42,226

Let's say I didn't care about value, I just followed the pattern that first came to my head, VCN > VUN > VDU > VEE. Here are the results:

VCN.TO = $11,737
VUN.TO = $11,158
VDU.TO = $9,776 (ouch, bad timing)
VEE.TO = $10,105
= $42,776

As you can see, value means very little over the short-term. I would actually have come short ~$500 to thank me for the effort I put in researching fundamentals on each index. It doesn't matter so much what the value is when you purchase the index because as your portfolio grows you will automatically be purchasing more of the undervalued indices just to maintain your AA. And you can accomplish this with probably no selling commissions at all for the first 5 years minimum because you let purchasing drive your AA.

I don't want you to feel like I'm shoving my ideas down your throat so I'll leave it at this, but hopefully my simple illustration will make your life easier when it comes to purchasing your ETF's and building your portfolio.