by WWM | Jul 3, 2019 | Buy & Hold versus Active Trading
If you search the internet, there are plenty of articles critical of the buy and hold investment strategy.
So why do I suggest you employ buy and hold?
Some negative articles do not tell the whole story. The data is cherry-picked to “prove” the author’s point. Always raise a red flag when unusual start and/or end dates are chosen for data.
Some disadvantages relate more to investing in individual, non-diversified assets, rather than the low-cost, highly diversified, fund strategy that I espouse for most investors. A valid issue.
We will review the negatives often raised in conjunction with a buy and hold strategy.
Some are legitimate concerns. Some less so.
Today, the more frivolous.
It’s Too Easy a System to Employ
True.
Taken literally, you buy and then hold until you reach your target date. Then liquidate.
Not that there is anything inherently wrong with this approach. In fact, the ease of buy and hold can be seen as an advantage.
The problem with ease, is that like with dollar cost averaging, too many people believe this system should be used in the literal sense.
They buy, then they forget all about the investment until the time comes to liquidate.
The ease of buy and hold makes certain investors lazy. That is the problem. Not the ease of use.
Regardless of the asset or system employed, investments must be monitored and evaluated. Should circumstances change, portfolio modifications must be made. As well, if your personal situations shifts, you will need to adjust your investing plan. This applies to any trading strategy, including buy and hold.
Buy and hold cannot be rigid dogma. While you will adhere to it for the most part, there must be some flexibility allowed.
We have already discussed how to build a portfolio that minimizes the need to review and make adjustments. That is by primarily investing in low-cost, well diversified, index funds. As we saw, components within indices change over time. Even if your index fund is a buy and hold asset, there may be substantial movement within that index over time.
While minimizing the review process, it does not eliminate the need for periodic evaluations. Nor may it entirely avoid making any dispositions. We will consider portfolio reviews in future posts. Both when and how to evaluate your portfolio, as well as portfolio modifications.
Buy and Hold is Not Sophisticated
So it cannot work well. One needs a complex investing system to succeed. Preferably one with lots of technical data and charts.
Or so some people believe.
Sometimes the simple approaches work well.
But they are not sexy. And, for most investors, it is the lack of sexiness that is the bigger negative than a lack of complexity.
You will sound much more sophisticated as an investor discussing butterfly options strategies around the office water cooler, than in recounting how you have owned the same index fund for the last 15 years.
I suggest you worry less about how you are perceived by colleagues and friends. The purpose of investing is to maximize long-term wealth accumulation. It is not to impress your peers.
Find a strategy that works and stick with it. The grass is not always greener, or more profitable, on the other side of the trading fence. And the people that regale you about profits from their latest trading flips, never seem to mention the ones that lost money.
Buy and Hold Can be Emotional
Another two edged sword for the buy and hold approach.
As an advantage, buy and hold is supposed to take the emotion out of investing. You buy and hold through the ups and downs of the asset’s price fluctuations. You ignore the panic generated by the mass media during bear markets or sudden crashes. You are secure in the knowledge that over the long run, your investment will appreciate.
But this approach is also a disadvantage for many investors.
Holding an investment as month and after month its value diminishes is extremely difficult. In some cases, the value never comes back and you lose.
I can definitely empathize.
The difficulty as an investor is that you seldom are certain which investments will fall to nothing and which are just temporarily depressed.
Do you sell and wait for the asset to reach its bottom before buying back in? How do you know when the bottom has been reached?
Do you sell and shift your cash into another investment vehicle? Will that new asset provide better returns?
Again, find well-diversified and well-managed investments. These will help keep you sane during periodic market fluctuations.
Avoid non-diversified assets (e.g., individual stocks or bonds) until you become comfortable understanding the difference between normal short to medium term price volatility and the permanent impairment of the asset’s value.
Programmed Trading Makes Buy and Hold Obsolete
Computer trading programs are quite popular these days.
More effort is being spent on technical analysis. That is, these programs look at supply and demand for an investment. What are the pricing trends, momentum, and market bands. This type of information is used to assess future price movements.
While some technical analysts take a longer term view of the trends, many try to take advantage of short-term discrepancies that resolve themselves quickly. This can lead to substantial trading and profits can be made on penny fluctuations in market prices.
An argument against buy and hold is that with all the computer models and short-term trading, buy and hold is no longer relevant. The real money is made in the short term and not in holding assets for 20 years.
I do agree that programmed trading by institutions has, and may continue to, caused problems for investment valuations. I think though that these are short-term blips and that over time, asset pricing reverts to its fair value. This actually bodes well for the buy and hold strategy.
I am not a big believer in individuals using computer trading techniques.
I have known certain investors who have done well identifying price discrepancies and short-term trends to arbitrage. But usually you need significant capital to profit on small price changes. This is something that most investors lack.
These investors are also highly skilled and experienced in investing. They use advanced analytical tools. They also devote substantial time to their trading activities. Most normal investors lack the knowledge, tools, and time required to implement these strategies.
I remain unconvinced that, on average, programmed trading by individuals works. As I said, I do know some success stories. And occasionally, one reads news stories about others. But I also know and read about people that win the lottery. That does not mean everyone does.
Okay, those are a few of the less important, but commonly perceived, disadvantages of the buy and hold strategy.
Not really legitimate worries in my mind.
But there are a few real potential problems with buy and hold.
We will cover those next time.
by WWM | Jun 26, 2019 | Buy & Hold versus Active Trading, Investment Strategies
There are advantages and disadvantages to the buy and hold investment strategy.
I will review the pros and cons. Then you can decide for yourself if buy and hold is right for you.
After, I shall discuss possible tweaks that build on buy and hold’s strengths while addressing legitimate concerns.
Today we will review the benefits of buy and hold.
I Generally Like Buy and Hold for Investors
I may be a tad biased as I advocate essentially a buy and hold strategy for long-term investing.
But remember that I normally recommend passive investing. The objective is to create a well-diversified investment portfolio with the focus on cost minimization and matching market returns. Dollar cost averaging should generally be utilized and the investment horizon is relatively long.
Because of this, I typically recommend investing in low-cost index funds, open ended mutual or exchange traded, for most long-term investors rather than individual stocks and bonds. Especially for investors with relatively small portfolios.
As we will see over the next few posts, buy and hold (with a few tweaks) should usually work well when investing in low-cost diversified funds.
If investing in individual assets that lack built in diversification (e.g., common shares of AT&T, Deutsche Bank, Cathay Pacific, etc.) and are subject to nonsystematic risks, the buy and hold strategy may not work as well. But that is not our focus at this time.
Okay, on to the perceived advantages of the buy and hold approach.
Easy To Understand and Implement
Buy and hold is an easy investment system to employ.
You identify strong assets with long-term growth potential, acquire, then hold them throughout your investment horizon.
No need to constantly monitor and trade as the short-term trends and volatility dictate.
Consistent with Investment Theory
Conventional investment theory supports buy and hold investing.
Over the long run, higher risk assets outperform lower risk assets, on average. Historical data shows this to be true.
Of course, at times one requires a very long time frame to see this out. It took 25 years for the Dow Jones Industrial Average to recover from its highs of 1929 and subsequent crashes. Had you been 30 or 40 years old and invested the bulk of your assets in the late 1920s, a buy and hold strategy would not have brought you success.
While it works in the long run, realize that long may not be 5 or even 10 years. And why you need a diversified portfolio that reduces risk as you approach your target time.
Less Emotion, More Discipline
Two things I like in investing. Keeping the emotions to a minimum and maintaining a disciplined investment approach.
Without worrying about short-term price fluctuations or general market volatility, a buy and hold strategy will help you stay the course.
And combined with dollar cost averaging, you may actually come out ahead by acquiring subsequent assets at sale prices.
Passive Investing Outperforms Active
We covered this issue previously in some detail.
How active management compares to passive investing.
The relatively few scenarios where active investing may be appropriate.
And why active investing tends not to outperform a passive approach over time.
The ability of even professional investors to time markets or consistently pick the best individual investments is doubtful.
Most of you reading this do not have the technical training, investment experience, analytical tools, access to information, nor the time to study investments that the professionals do. If they cannot outperform using an active approach, should you even want to try?
Do not worry about attempting to get in and out of investments to capitalize on price fluctuations. Instead, find quality assets and take a buy and hold approach.
Less Costly Than Active Trading
While transaction fees have fallen substantially over the years, there is usually some price paid when trading. The more you trade, the greater the costs. And the more you pay out in expenses, the less you keep in your own pocket or have to reinvest for compound growth.
A significant cost that many do not fully factor into their calculations is taxation.
Unless your money is sheltered in a tax exempt or tax deferred account, you will be responsible for taxes owing on any realized gains (and in some instances on unrealized profits). The more frequently you trade, the sooner you (hopefully) trigger capital gains, and the sooner you must pay the tax man. Once you have paid your taxes, that is less money that can compound on your behalf over time.
You are usually much better off delaying payment of tax as long as you can.
In general, I agree with these advantages.
At a more detailed level though, there are a few caveats to the buy and hold strategy.
Some of these caveats, and the need to tweak the traditional buy and hold system, is due to potential disadvantages.
Of these negatives, we will review next time.
by WWM | Jun 19, 2019 | Investment Strategies
There are a wide variety of ways for investors to trade investments.
On the one extreme you have the rigid buy and hold investors.
At the other end of the spectrum are the day traders.
And at various points in between are the bulk of investors.
We will quickly review each today.
Buy and Hold
Buy and hold is exactly as it appears. Identify an asset, acquire it, and then hold it throughout your investment horizon.
If you are relatively young, that may mean you hold the investment for decades.
Buy and hold is an extremely passive form of investing.
Day Trading
Active investing, in perhaps its strongest form, can be seen in day (high frequency) trading.
Speculators may buy and sell the same asset multiple times in a single day. May, because even though they are called day traders, these individuals do not normally jump in and out of specific assets the same day. But the idea is that they are very active traders.
I also prefer to refer to day traders as speculators or traders, rather than investors. Neither are derogatory terms in the financial sense and they do better reflect the activities of day traders than those who actually invest for longer periods.
Somewhere in Between
The majority of investors operate somewhere in between these two extremes.
A variety of factors determine where a specific individual will fit into the spectrum. Variables include: investment expertise and experience; time available to research and monitor investments; risk tolerance; investment objectives and constraints; investor personality; investment time horizon; economic conditions; bull and bear markets, investment volatility.
What is Right for You?
There is no one right way to invest. What works for one person may not work for another.
If you look at investing literature, you will see a wide range of advice.
Some recommend buy and hold as a sound strategy. Others write that buy and hold is dead. An antiquated approach that no longer works in today’s markets.
Some recommend day trading strategies. Usually using technical analysis, there are a variety of systems to take advantage of short-term price fluctuations. Others will tell you that day trading is a fool’s game.
Some recommend mostly passive investing, others suggest more active approaches.
What Do I Think?
Avoid Day Trading
I am not a big believer in day trading success.
Yes, some day traders do succeed. And those are the ones you read about. The vast majority, though, do not prosper.
Day trading can require a lot of capital in order to make adequate money on small price changes. You need sufficient financial expertise and experience. Plus a strong technical system and software tools. Day trading can require a lot of effort; many traders do it full-time. Finally, having a strong constitution is useful as day trading can be a stressful activity.
As I want to discuss long-term investing strategies and I do not believe that day trading is appropriate for most investors, I shall not write much about the subject. There are plenty of articles and books to read if you do want to learn more on the topic.
What I recommend must be viewed in the investing context we have discussed to date.
For Long-Term Success, Follow a Mostly Passive Approach
From my earlier posts, you know that I generally advocate a passive investing strategy.
The emphasis is on matching market returns and minimizing costs in order to maximize compound returns over time. I suggest employing a dollar cost averaging strategy to build a well-diversified portfolio of low cost funds that reflects one’s current investor profile.
With this focus, I think a buy and hold strategy, with a few tweaks, is the best system.
For Non-Diversified Investments, Some Activity is Fine
But if you want to invest in non-diversified investments, such as individual stocks or bonds, I might suggest a more active approach. Not anywhere near the day trading extreme, but slightly more active than under a traditional buy and hold approach.
In fact, for individual stocks, bonds, etc., buy and hold may not be suitable. As we saw with investment quality, what is an excellent investment today, may not be in 10 years. And vice-versa. Purchasing Eastman Kodak in 1950 was a great buy and hold for many years. Purchasing and holding Eastman Kodak in 1980 was not a winning strategy.
And if you get to the point where you want to trade more volatile investments, such as derivatives, then I would suggest an even more active approach.
For now I will focus on helping you build a long-term diversified portfolio that seeks to keep costs down while providing optimal returns. So we will look at the pros and cons of the buy and hold methodology.
I will also touch on some more active considerations. But I will save the bulk of our look at active trading for down the road. At a date when we begin to consider investing in individual, non-diversified, assets.
by WWM | Jun 12, 2019 | Lump Sum versus Dollar Cost Averaging
There are many reasons to invest utilizing a Dollar Cost Averaging (DCA) approach.
However, for DCA to work well, you must invest in quality assets.
I have mentioned this in prior DCA posts, but want to emphasize it separately.
Long-Term Quality, Quality, Quality
Did I say quality?
You need to identify high quality assets with above average long-term growth potential.
Then, during down cycles, you will be buying at sale prices with DCA.
But if you invest in poor quality assets, falling prices may not indicate a sale. Instead, they may be a harbinger of things to come. Things such as permanent price reductions, delistings, bankruptcies, etc. Things investors strive to avoid.
DCA is a good strategy for quality assets.
For inferior investments, it may lead you to throw good money after bad.
Quality – An Elusive Concept
“What am I reading this for?” I hear you ask. “I need to learn how to identify quality!”
Yes, I realize that if you knew how to separate the investment wheat from the chaff, you would already be a millionaire and have no need for wealth management blog posts.
And therein lies maybe the number one problem in investing.
How to find quality assets and avoid the dross.
Not an easy thing to do for a variety of reasons, including: efficiency of financial markets; sheer number of analysts and investment researchers; expertise of the average investor versus a trained professional; differing access to information between amateurs and professionals; time available for the average investor to research.
For DCA, I suggest you stick with ready-made diversified assets that provide some long-term safeguards against asset specific risks. Mutual fund and exchange traded funds (ETFs) are my favourite options for cost-effective diversification.
Yes, each fund will have a few dogs. But they will also have a few superstars and a host of average performers which will nicely offset the losers.
If you already have accumulated a fair bit of wealth, you can create your own diversified portfolio. There are plenty of solid companies or assets out there that can fit nicely into a portfolio. But you will need to do more research and monitoring than with investing in funds.
And if building your own portfolio, remember our conversations on diversification and asset correlations, asset correlations in action, portfolio diversification and inter-asset correlations. Not all assets mesh together in the same way.
Some assets provide much better portfolio risk reduction benefits than others. Building an efficient and effective overall portfolio is more important than the individual investments held within. Be sure to spend time understanding diversification. Proper diversification will help you create a strong portfolio.
Quality – An Ever Changing Concept
About 125 years ago, I could have given you the name of a strong industry in which to invest. No major competition, long history of earnings, no current threats in sight. Sounds to me like a quality industry to invest in. And it was.
Then along came Benz, Daimler, Ford, etal., and the horse and buggy industry went the way of, well, the horse and buggy.
I remember the Beta versus VHS video tape battles. Beta was deemed superior in quality, but VHS won the war. Then came along dvds and VHS video tapes joined the 8-Track on the scrap heap. Or what about the revolutionary Sony Walkman? A great money maker for Sony. Then came the iPod, which changed the game.
The world is not static. It is constantly in flux.
What was a quality product today, may not be tomorrow.
So many examples in recent history. Look at the timeline of Eastman Kodak. Began in 1888. Joined the Dow Jones 30 in 1930. Remained there for 74 years. A dominant and innovative company. “By 1976, 85% of all film cameras and 90% of all film sold in the US was Kodak.” However, by 2004, falling fortunes saw it removed from the Dow 30. In 2012, Kodak filed for bankruptcy.
What was an inferior company today may catch fire tomorrow.
For example, in 19xx, ABC developed a new product. Not a success. The first quarter of the next year ABC posted its first quarterly loss and laid off 20% of their employees. In April, the co-founder of ABC was removed from all operational involvement with ABC. In the year after the co-founder’s departure, ABC traded in the USD 15-20 range. That compared quite unfavourably to the USD 25-30 range it had traded at since it opened in September 19xx.
Not a good company to invest in. Corporate losses, large layoffs, founder ousted, share price down 33-50%.
A dog to avoid.
But what if I add four additional bits of information?
The years were late 1984, early 1985. The company, Apple. The product, the Macintosh. The co-founder, Steve Jobs.
In June 2019, Apple is trading in the USD 195 range. Nice growth from USD 15-20 in mid-1985.
But wait, like a late night infomercial, there is more.
Since 1985, there have been 4 stock splits.
Say you invested USD 1600 on June 3, 1985 at USD 16.00 per share, you acquired 100 shares. An actual price that date.
As at June 10, 2019, adjusted for stock splits (but ignoring cash dividends paid or reinvested in additional shares), your USD 1600 investment grew to 5600 shares worth approximately USD 1,100,000 today.
Not a bad return on an inferior company when you invested in 1985. Not a bad return at all.
And yes, sadly for the majority of investors out there who missed the boat, that is a true story.
Unless you have the special skills to find the next Apple, hedge your bets. Invest in a variety of assets with funds. You may not get all the superstars, but you will avoid the dogs.
Equally important? Always bear in mind that quality can change over time. Eastman Kodak, less than 50 years ago, was seen as a dominant, innovative, leading company. Much like Apple is viewed today.
I have mentioned this a few times in different posts. Index funds see changes in their portfolios over time. As previously strong companies fade, emerging companies replace them in the index.
In 2004, the Dow 30 removed Eastman Kodak, AT&T Corporation, and International Paper from the index. Kodak joined the Dow in 1930. AT&T in 1916. International Paper in 1956. Long time participants in an index of only 30 top companies. They were replaced by American International Group (AIG), Pfizer, and Verizon. AIG was then replaced by Kraft Foods in 2008, which in turn was replaced by UnitedHealth Group in 2012.
Even in an index of 30 companies, there can be significant shifts over time. Buying an index fund is not like owning the same company forever.
Quality Must Be Continually Monitored
As quality of an asset can change over time, you must review your portfolio on a periodic and consistent basis.
As an aside, the perceived quality can also change over time. Look at the major fluctuations in value of gold, residential real estate, oil over the last 10-20 years. Has the quality of the asset risen or fallen at various points of time? Or has the perception of value changed during those periods based on other factors?
Often perception becomes reality in the short-term, whether it makes sense or not. But over the longer run, the facts usually shine through.
We will consider portfolio monitoring later in detail.
Both for actual quality shifts as well as perceived changes.
For now, know that you must monitor your holdings to ensure that you do own superior products with long-term upside potential.
Under-performing assets must be assessed as to whether the poor results are temporary or permanent. If permanent, changes must must be made. If temporary or due to incorrect perceptions, perhaps there is the opportunity to increase your position at a discounted price.
Again, a little easier said than done.
Hopefully though, I can pass on some tips to improve your assessments.
What To Do About Poor Quality
If investing in individual, non-diversified assets, you will likely acquire your share of under-performing investments. No one gets them all right.
You also run a risk with funds, especially if they are actively managed or in specialized sectors. But if you are trying to match a specific market using low cost index funds that adequately track the market, your risk of under-performing the benchmark is small.
Yet another reason to like passive investing in low-cost index funds.
There are tactics to deal with your losers. We will look at these down the road. Stop-loss orders, setting downside limits for reviews are two popular approaches.
I think that is all I want to say about DCA for the time being.
Next we will start to look at useful acquisition tactics for long-term success.
by WWM | Jun 5, 2019 | Lump Sum versus Dollar Cost Averaging
We have already covered how Dollar Cost Averaging (DCA) promotes investing consistency and discipline.
A third reason to use DCA is that it is great for building a diversified portfolio over time.
That is not to say that investors cannot build a diversified portfolio through lump sum investing. However, DCA can make the process easier and more consistent, especially smaller investors with limited resources.
Proportionate Ownership
There are many ready made investments that allow investors to periodically invest relatively small amounts. In return, these assets provide excellent low-cost diversification.
No load open-end mutual funds and exchange traded funds (ETFs) are two popular types of such investments.
With each small investment, individuals actually buy a piece of many different individual investments. Companies, bonds, currencies, real estate, etc.
Perhaps you have USD 1000 to invest. Instead of buying 100 shares of one company at $10 per share, you can get a proportionately smaller piece of 100 different companies. A great way for small investors to diversify within an asset class.
You can also buy funds that invest in a wide variety of asset classes and investment styles. Different levels of market capitalization, wide geographic distribution, growth versus value investing, alternative asset classes, and much more.
In today’s marketplace, there are a myriad of fund investment options.
And this promotes easy portfolio diversification.
Often Difficult to Buy One Unit
When buying individual assets, it is difficult to buy less than one unit.
If you want to invest directly in real estate, USD 1000 will not buy you much, if anything.
However, as at June 1, 2019, your USD 1000 will get you about 38 shares of the iShares Global REIT ETF (REET).
REET owns 296 different holdings around the world, in both developed and emerging markets. As well, investments cover a wide variety of sub-sectors, including: retail; industrial and office; residential; health care; hotels and lodging.
For a relatively small cost (current annual total expense ratio of 0.14%) you get substantial diversification across geographic regions, real estate sectors, and individual holdings. Not bad for your $1000.
The same difficulty in buying one unit can also arise with individual stocks.
While many public companies try to keep the price of their shares within reach of most investors (e.g., stock splits, initial public offering share price), there are still companies whose stocks have very high valuations.
For an investor with little money to invest periodically, that can pose a problem.
For example, perhaps you want to invest your USD 1000 in stocks. Your golf buddy told you that both Amazon and Google were great investments. However, on June 3, 2019, Amazon (AMZN) trades at USD 1705 while Alphabet (GOOG) has a share price of USD 1037. You may need to save for a few months before even buying one share of each company.
But if you invest that $1000 in the Vanguard Growth ETF (VUG), you acquire about 6 shares. Each share contains 6.2% of its proportionate portfolio holdings in Amazon and 5.5% in Alphabet. Plus relatively significant exposure to Microsoft (7.7%), Apple (6.5%), and Facebook (3.5%). And smaller weightings, but ownership, of another 295 growth companies.
Not bad exposure and diversification for your $1000. Not to mention, if you DCA at $200-300 monthly (or similar), you can add shares of a fund periodically and consistently over time.
Search for Specifics
Note that you can search mutual funds and ETFs by exposure. That way, you can find funds with significant holdings in companies, industries, sectors, markets, etc., that you specifically desire.
For example, you want to own Amazon but only have USD 1000. Not even enough for a single share. But how about something like The Consumer Discretionary Select Sector SPDR® Fund (XLY)? It trades around USD 111 per share and has a very reasonable expense ratio of 0.13%. XLY’s portfolio holds 64 different companies, but 25% of the ETF represents Amazon. Home Depot, McDonald’s, NIKE, and Starbucks, are other significant holdings.
XLY provides heavy exposure to Amazon (and discretionary spending sector). It meets your goal of owning Amazon. The issue may be that it owns (possibly) too much Amazon, so you lose diversification. Also, if consumer spending takes a hit, that may have similar impact on all these companies. As the saying goes, “a falling tide lowers all boats.” Perhaps a fund like XLY is better suited as a tactical play or to augment one’s overall portfolio. Less so a core portfolio holding.
Cost of Fund Acquisition
Funds can also be purchased in lump sum, so why are they an advantage for DCA?
Mainly in the method one can acquire funds.
Traditionally, an advantage of lump sum investing was the reduced transaction costs involved. Instead of paying multiple fees for each DCA purchase, investors could save money by only making a single large purchase. However, that advantage is disappearing over time.
Buy Free Directly From the Mutual Fund Company
Many mutual fund companies allow investors to buy extremely low amounts on a periodic basis through direct debits from the investors’ bank accounts. If purchasing directly from the mutual fund company, there are normally no transaction costs involved on no load funds.
For example, you may be required to invest a minimum of $5000 on an initial purchase. Subsequent purchases may then be made at a minimum of $50. If it is a no-load fund, then there will be no sales commissions.
Buy Mutual Funds With Waived Commissions from On-line Brokers
Or if investing through a brokerage account, there are many mutual funds and ETFs for which the on-line broker’s commission is also waived. The number of brokers offering these waivers and the number of commission-exempt funds available is growing.
While growing in number, factor that in as only one variable. Saving $9.99 (or less) in a transaction cost may not be worth it if there are better funds out there that do require the fee.
Shop Around for Best Rates on Mutual Fund Commissions and Transaction Costs
And for those funds that do require a commission to the broker, price competition has reduced fees substantially. The same holds true for brokerage fees on buying or selling ETFs or equities. While still a concern – every dollar paid out of your account is a dollar that will never compound on your behalf- transaction costs are impacting investors to a lesser extent these days.
But it does pay to shop around. Make sure you get best value for your investing requirements.
Dividend Reinvestment Plans
Another excellent way to grow an investment, while reducing cost, is through a Dividend Reinvestment Plan (DRIP).
Funds periodically pay out any gains or income to investors. Under a DRIP, instead of a cash distribution, the payment is reinvested in additional units of the fund. There are no transaction fess on the reinvestment.
Usually a great way to painlessly increase your investment. Not to mention the compound return impact as your reinvested income will also earn income over time and grow too.
That said, two caveats. If you are relying on income to live, no sense in reinvesting it. Also, most tax jurisdictions consider the income as taxable. Even if you do not physically receive it. Unless held in a tax-free or tax-deferred account, you will need to pay tax on income earned. Either hold DRIP assets in tax-effective accounts. Or be aware that come tax season, you are liable for income you did not receive in cash.
Summary
Small investors can easily build a diversified portfolio using DCA.
Mutual funds and ETFs allow small investors to invest in assets that they may not have the ability to do on their own.
No load mutual funds are a cost-effective way of accumulating wealth under DCA. This is especially true when investing directly through a mutual fund company. When investing via a brokerage house, be wary of any broker’s commission. Consider funds with waived fees.
ETFs are also effective, but one must consider transaction costs. Transaction fees on ETFs are generally lower than for mutual funds with loads, but they should still be monitored. There are also waived commission, or no-transaction fee, ETFs offered by brokers, so look for those.
But do not select inferior funds just to save a dollar or two on commissions. While you want to minimize investment expenses, you always want to acquire quality assets. Stronger returns will offset slightly higher commissions. So invest wisely both in costs and quality.
Finally, DRIPs can be an effective tool to grow your wealth. Unless you require the cash income, consider DRIPs for all eligible investments.