Tag: Dollar Cost Averaging

My Lazy Journey to the Double Comma Club.

I took the lazy journey to wealth and it’s worked out well for me. Thanks to Younger Me, I’m financially comfortable and should be for the rest of my life. My parents gave me a good education, but no one would ever mistake me for a trust fund baby. They set a good example of how to live below one’s means, to save for the future, and to invest in the stock market. However, I never followed their path of stock-picking. That was a little too much work for me. So I took the lazy journey and it worked out for me.

When we were both still living at home, I watched my younger sibling read the stock pages in the newspaper each day. That never appealed to me. After all, what good could come from reading all those numbers? At the time, I didn’t have the brains to realize that my sibling was on to something major. Had I simply done what he had done, my financial situation would’ve been so much different. If he could learn it, so could I. Had I simply recognized that my attitude stemmed from an arrogance rooted in my status as the eldest, I would’ve made a different choice.

The fact is that I could’ve simply copied my sibling’s study of the stock pages and I would be in a completely different situation than I am today.

Dividends had me at “Hello”.

Instead, dividend investing turned my head. In the tiniest of nutshells, this is what I understood about dividends: Some companies pay dividends to investors who buy their shares.

All I had to do was buy shares in dividend-paying companies. I found this investing style incredibly attractive, and it didn’t require me to pour over the mouse-sized font that was printed in the newspaper every day. I wouldn’t have to pay attention to the daily stock prices. Instead, all I would have to do was continue to hold the stock and the companies would continue to send me money. The only thing I had to was invest some of my part-time paycheque and a company would send me money? Where do I sign up?

So I started investing for dividends many, many years ago. Every two weeks, my automatic transfer siphoned money from my chequing account and re-directed it to my investing account. Today, I’m comfortably earning a few thousand dollars every month. Thanks to automation, my monthly dividends payments are re-invested to maximize compound growth. My portfolio grows from both my paycheque and my dividends. It’s a beautiful system!

Younger Me made smart decisions.

Looking back now, I’m pleased that Younger Me took the initiative to start. Younger Me consistently invested every two weeks and allowed time to work its magic. This is called dollar-cost averaging. Regardless of the price, Younger Me bought as many units of the chosen security as possible and never sold them. More units meant more monthly dividends. Spending the dividends each month was never an option. Instead, Younger Me wisely relied on the dividend re-investment plan (DRIP) to ensure that every single dividend bought more of the underlying security. Younger Me switched from mutual funds to exchange-traded funds upon realizing that the same basket of stocks could be acquired more cheaply.

Each of these decisions required no more than 15 minutes of work to put in place. I had to fill out a few application forms and I entered some information into my computer. I only had to take each step one time and then I never had to think about it again. My system is well-established and it operates extremely smoothly. It requires very little attention from me. The end result? Today, I am a happy member of the Double Comma Club. I still enjoy seeing the dividends pouring into my portfolio every month. Knowing that I could live off my dividends if I absolutely had to gives me no small amount of comfort. It’s a wonderful feeling!

However, with age comes wisdom. As I reflect back on choices that Younger Me made, I recognize that…

Younger Me could’ve been smarter.

Had I been a little less lazy, I would’ve done a tad more research and invested in growth-oriented securities. After all, the stock market was on a tear from 2009 until March 2020. The returns from the growth in the stock market dwarfed the returns earned on my dividend ETFs. I should’ve invested more in the young and hungry companies by contributing my money into equity-based ETFs. That’s where the engine of portfolio growth really comes from. In other words, had I invested in equity-based ETFs, I would’ve had the natural growth of the stock market in addition to my contributions propelling my portfolio forwards. My returns from equities would’ve been much larger than they were from dividends.

By investing in dividend-paying companies through my dividend ETFs, I was essentially investing in the established, old-school companies that don’t really have room to grow. I had placed my bets on income-based securities rather than equity-based securities. From a certain perspective, this was a mistake.

The second way that my laziness cost me big time was in failing to appreciate that higher returns sooner would mean that I’d reach my current financial situation years earlier. I’ll retire early thanks to my wise choices, but I could’ve retired 5 years ago… and with a lot more money… had I done that little bit of extra research that I’d mentioned. One little tweak in my decision-making could have propelled my portfolio forward by leaps and bounds. Fully participating in the 11-year bull market would’ve done wonders for my portfolio.

Better late than never, right?

Alas, I didn’t start investing in equity-based ETFs until October of 2020. Even in 4 short years, I can see the difference that equity-based ETFs have had on my returns. Trust me. I won’t repeat Younger Me’s mistake. From this point forward, equity-based ETFs will have a prominent place in my portfolio. Accordingly, I anticipate that my portfolio will continue to benefit from my recently-acquired wisdom.

Today, I tell others who are starting their investing journey to invest in equity-based ETFs. I remind them that the potential returns are better because compounding works faster with higher returns. They need not make the same mistake that I did, i.e. failing to appreciate this lesson when I was younger.

Let my story & mistakes be your cautionary tale. When investing for the long-term, well-diversified equity-based ETFs are the securities that will deliver the best bang for your buck. It’s definitely a more volatile path, but it will get you the Double Comma Club faster than my journey took me. Had I invested in equities instead of in dividends, I would have been better off financially.

Let’s face facts. Time still would’ve passed. I still would’ve earned dividends and capital gains. However, my portfolio would be larger thanks to the higher returns of equity-focused securities. Oh well… I can’t win them all!

Experience is a Great Teacher

How are you doing today? I hope that you’re ignoring the gyrations of the stock market and going about your business of self-isolating, washing your hands, and self-distancing. They might not be the most exciting activities, but they will flatten the curve and help to avoid overburdening our hospitals.

As I approach my golden years, I’ve come to accept the maxim that experience is a great teacher. Additionally, I’ve also realized that I can learn from other people’s experience as well as my own. I need not make every single mistake myself. Watching others’ mistakes can be just as instructional.

Today, I’d like to share one of my investing mistakes so that you don’t have to make it yourself.

Back in 2008, the stock market tanked. I remember hearing about the demise of Bear Stearns, and I was shocked. I don’t recall why it was so upsetting since I wasn’t a hedge fund manager at the time, nor was I an economist or any other kind of expert. All I know was that Bear Stearns was a major investing bank and that it’s demise meant that something very bad was happening in the stock market.

So what did I do? I made the second worst mistake available to me. I stopped investing while the stock market plunged.

I’ve made no secret of the fact that I’m a buy-and-hold investor. My investment plan is simple. First, save money from each paycheque. Second, transfer those savings to my investment account. Third, buy units in my chosen exchange-traded funds. Fourth, rely on the dividend re-investment plan to invest the dividends. Fifth, go back to the first step.

I’ve designed the plan to take advantage of dollar-cost averaging. Each month, I invest in my ETFs regardless of the unit price. I completely avoid trying to time the market. “Is this a good time to buy?” is a question that I never ask myself. When I have the money, I buy into my ETF – easy peasy lemon squeasy. This method of investing is know as dollar-cost averaging. I first learned about it in The Wealthy Barber, a great book authored by David Chilton.

Back in 2008, I was not as smart as I am now. Twelve years ago, I freaked out and I STOPPED INVESTING!!!

This was a huge mistake! I should have continued to dollar-cost average into the market during the six months between the demise of Bear Sterns and the recovery which started in March of 2009. I would have been buying during the downturn.

Buying during the downturn is a fancy way of saying that I would have been buying when the stock market was on sale.

It’s good to buy things when they’re on sale. If you want a new pair of shoes, aren’t you happier making the purchase when they’re priced at 35% off? I have a feeling that if you had a choice of buying the identical pair of shoes for $100 or for $65, you’d opt to buy them for $65.

The stock market is no different. On February 22, 2020, the value of the stock market plunged. In other words, it went on sale. The Talking Heads of the media could barely keep from peeing their pants with glee! They had so much to talk about, so much fear to stoke in their viewers and readers. Buy this! Don’t buy that! It’ll be a V-shaped recovery! No recovery for 2 years! Avoid cucumbers!

Okay … maybe they didn’t say anything about cucumbers. But the rest of the statements aren’t too far from the truth.

Once again, experience is a great teacher. I’d already made the mistake of listening to the Talking Heads in 2008-2009. As a result, I did not take advantage of the cheaper prices on the stock market that were available at the time. As the recovery wore on, the stock prices didn’t fall but I did start contributing to my portfolio again. However, I could not overcome the error of not buying stocks when they were super-cheap. My failure to make the right choice 12 years ago means I’ll be working a little bit longer than I’d projected.

I see no sense in making the same mistake this time. So while I’m self-isolating, while I’m washing my hands, while I’m social distancing, I am also continuing to invest in my chosen ETFs. Yes, you read that right. I’m still investing even through this period of excess volatility.

Did the value of my portfolio plunge in February of 2020? You bet your sweet ass it did! And did the value continue to drop throughout March as the stock market roiled due to the COVID19? Again, that’s a big 10-4!

It’s been just 5 weeks since the plunge. My portfolio is recovering, just like the stock market is.

The Talking Heads won’t ever encourage others to follow my simple plan. Despite its effectiveness, my way of doing things is boring and boring isn’t good for ratings.

You see, the stock market is supposed to go up and down. It always has. It always will. Never in its history has the stock market only ever gone up, just like it has never only ever gone down. If you’re going to invest, then do so consistently and automatically. Do your research. Find a broad-based equity exchange-traded fund (or mutual fund if you insist on paying higher management expense ratios). Invest on a regular basis. Ignore the Talking Heads. They can’t tell the future any better than you can.

And in case you were wondering, the biggest mistake you can make right now is to sell your stock market portfolio. For the love all that you deem holy, do not sell! Right now, the prices are low and that’s why you should be buying them.

Like I’ve said, experience is a great teacher. You can learn from mine instead of making the mistakes yourself. Don’t stop investing right now. Stick to your investing schedule and build your portfolio while the stock market is on sale. The second biggest mistake you can make is to halt your investment contributions.

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Weekly Tip: Pay cash for your next car by making a monthly car payment to yourself for as long as possible before you head to the dealership. The payments to yourself will be the down payment, if you’re forced to finance your vehicle. Ideally, you’ll stay out of debt completely because your accumulated savings will be sufficient just pay for your next vehicle with cash.

Dollar Cost Averaging is a Great Tool

As the warm days of spring roll in and push harsh memories of winter to the recesses of your memories, you may find yourself enjoying the sunshine and asking yourself: What is exactly is dollar-cost averaging?

I’m here to tell you that DCA can be a powerful tool for investors.

In a nutshell, dollar-cost averaging is a method for systematically investing your money. Investors who use DCS invest the same amount of money into an investment on a regular schedule. That schedule can be whatever the investor choose – weekly, monthly, quarterly, annually, or any other increment. The purchase of the underlying asset occurs regardless of the asset’s price.

There are a few of good reasons to use this investment methodology.

Dollar Cost Averaging or Lump-Sum Investing?

Firstly, the DCA strategy facilitates quicker investment in the stock market. Investors can align their investments with their paycheques. Since one my guiding financial mantras is spend-some-save-some, I make sure that a part of my paycheque is promptly & automatically re-directed to my investment portfolio.

There’s a school of thought which says that lump-sum investing is better than DCA because the entire value of the lump-sum amount is put to work in the stock market all at once. If your plan is to invest a large amount in the market, the proponents of lump-sum investing recommend that you invest the entire amount at once. Check out this article from the wise fellow at www.fourpillarfreedom.com for a good discussion of the benefits and drawbacks of the two investment methods.

Theoretically, I have no quarrel with the lump-sum investment style. However, the practical reality of my life is that I don’t have large lump-sums of money lying around. I invest when I get paid because that’s when I have the money available. The money is deposited into my chequing account, then it’s shunted to my investment account, where it sits until it’s invested. For most people without large chunks of money at their disposal, DCA is a better option – in my opinion – because they can invest when they’re paid.

No Need to Time the Market

Secondly, DCA eliminates that temptation to try and “time the market.” Investors who time the market are trying to buy an investment at its very lowest price. Perhaps you’ve heard recent chatter in the system from economists about the impending recession?

What you will never hear from any of those experts is the exact date on which the recession will start. And absolutely none of them will tell you date on which the stock market will be at its very lowest point. People lucky enough to buy at the lowest point will have the best investment returns when the market recovers. Market-timers are always trying to pick the very best time to invest.

Like all investors, market-timers are trying to maximize the profits from their stock market investments. Unlike market-timers, investors following the DCA-method simply invest their money on a consistent basis. They do not bother themselves with trying to buy at the very lowest price. They’re not concerned with the very best returns. They understand that time in the market is more important that timing the market.

Automation Pairs Beautifully with Dollar Cost Averaging Investing Method

Thirdly, the power of automation complements the DCA investment strategy very nicely. If you intend to invest in the stock market, then automatically transferring money from your chequing account to your brokerage account is an excellent strategy.

Let’s say you decided to invest on the 15th of each month. Your automatic transfer will ensure that a chunk of money is in your brokerage account for the purchase. On the 15th of the month, you’ll buy as much of the asset as your funds will allow regardless of the asset’s price. Then you won’t think about investing again until the 15th of the following month. Maybe you want to invest quarterly? That’s fine too. Put the power of automation to work! Gather money in your investment account until it’s time to buy some assets. Never forget the DCA can’t work for you unless you’ve set aside some savings.

This is how I invest. Every month, I invest money into my dividend-paying investments. I don’t follow the price of my exchange-traded funds from one day to the next. Instead, I buy as many units as I can when it’s time to buy. Then I don’t think about my investments again until the dividends roll in.

Easy-peasy, lemon-squeezy – rinse & repeat!

I’ve been using the DCA method to invest my money since 2011. I wasn’t interested in learning to be a wizard at picking stocks. The DCA method was easy to implement and even easier to understand. Much like every other investment method, it’s not perfect and it’s not suitable to for everyone. However, it works for me. I’m confident in this method and I’ll continue to use it until something better comes along.