"My first time" (Buying an ETF that is)

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torius71
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"My first time" (Buying an ETF that is)

Post by torius71 » Wed Jun 29, 2011 8:20 pm

I have decided to open up and share a learning experience for myself and hopefully others.

After a couple of weeks of research (and anticipation), I bought my first ETF the other day. I didn’t take my "first" lightly. I wanted an international small cap fund. All my other MF's are with Vanguard and I already had a brokerage account with them, so I decided to stay put. After using Vanguard’s ETF:MF cost comparison tool, I decided that the cost advantage of the FTSE All-World ex-US Small-Cap ETF was too much for me to pass up.

Not being in much of a hurry, I decided to take a patient approach. I waited until about 2 pm, following the advice of others to avoid the first and last ½ hour of the day. Shares were up about 1.5% for the day, which others have also mentioned is not ideal, but my free weekdays are scarce, so I decided to give the buy a shot. The bid was at 101.91. Ask was 102.13. I put my buy limit order at 101.90. Almost immediately she turned around and walked away from me. Bid/ask began to creep upward. Playing hard to get (and hungry), I went to the kitchen to toast a bagel.

When I came back to the computer, my buy price was still way under the current ask. I began to lose hope and didn’t know what to do. Just as I began thinking about canceling my order (3 pm), the bid/ask starting coming back to me. Ultimately, the bid/ask dropped about 0.5% in the last hour of trading and with my heart pounding out of my chest, my full order went through! :P

Similar to my other “first time”, I left the experience feeling not only “lucky”, but completely convinced that I was a pro. I have only lately started questioning my performance.

So, how did I actually do? Should I have changed my order at any point? Was it a bad day to buy? Etc.

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Post by livesoft » Wed Jun 29, 2011 8:33 pm

It appears you probably bought on June 14th. Since VSS dropped by a few percent after you bought it, you did not do well. It was also a low-volume up day, so that was a clue not to trade. You currently have a loss in your position.

You could've bought around $97.40 a couple days later. You'd be up almost 4% already instead of down about 1%. :twisted:

And June 15th was bona fide "Really Bad Day" for VSS and mentioned on the forum well before closing, so you could've taken action then:
http://www.bogleheads.org/forum/viewtop ... 77#1083977

So being patient is waiting for another day.
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Post by nisiprius » Wed Jun 29, 2011 8:58 pm

ETFs, I tell ya, are the first big step on th' road t' degraydaytion. They turn honest investors into adrenaline-crazed, hopped-up speculators who don't eat, don't drink, don't sleep! They stay glued to their screens I say glued twenty-four-seven staring, staring, staring! Getting burned out eyeballs! Carpal tunnel. Callus on their mouse hand! Staring at their screen, not at wholesome porn my friends, no sir, but quotes, quotes, quotes. When they should do their tasks, they're looking bid-asked! You ask 'em to weed the flowers, and they're trading after hours! They forget to update their Facebook status and their friends unfriend them! Let me be perfectly frank, let me tell you it goes. First it's Vanguard. Then it's Spiders. Then it's ProShares! And th' next thing you know they're buying inverse 3X leveraged molydenum futures. And that means trouble, my friends, right here in River City and--

--oh, excuse me, I got carried away.
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Post by daytona084 » Wed Jun 29, 2011 9:00 pm

livesoft wrote:It appears you probably bought on June 14th. Since VSS dropped by a few percent after you bought it, you did not do well. It was also a low-volume up day, so that was a clue not to trade. You currently have a loss in your position.

You could've bought around $97.40 a couple days later. You'd be up almost 4% already instead of down about 1%. :twisted:

And June 15th was bona fide "Really Bad Day" for VSS and mentioned on the forum well before closing, so you could've taken action then:
http://www.bogleheads.org/forum/viewtop ... 77#1083977

So being patient is waiting for another day.
Livesoft, that's easy for you to say with 20-20 hindsight. In reality we never know what the future will bring. I quit trying to think this way. For example I contribute to my IRA three times per year, $2000 each buy. I schedule the contributions on my calendar and I buy the ETF on that day, regardless of how the market is doing.

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Post by daytona084 » Wed Jun 29, 2011 9:01 pm

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Post by daytona084 » Wed Jun 29, 2011 9:01 pm

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Post by livesoft » Wed Jun 29, 2011 9:22 pm

There was no 20-20 hindsight involved at all. If you look at the link in my post, you will see that I declared before I bought some large cap developed that I would buy it. I have since unwound that position because it went up and I needed to rebalance out of it.

BTW, the last time I bought some VSS is discussed in this link: http://www.bogleheads.org/forum/viewtop ... 901#742901 which shows I bought on May 21, 2010. Let me ask this question: For all of calendar year 2010, which day had the lowest price for VSS?

That entire thread will be instructive to the OP. That thread shows patience since it has posts from May 11, 2010 into July 2010. It also shows that May 20th was a RBD as mentioned in other posts at that time.
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Re: "My first time" (Buying an ETF that is)

Post by YDNAL » Wed Jun 29, 2011 9:22 pm

.
.

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Post by gsmith » Wed Jun 29, 2011 9:28 pm

nisiprius wrote:ETFs, I tell ya, are the first big step on th' road t' degraydaytion. They turn honest investors into adrenaline-crazed, hopped-up speculators who don't eat, don't drink, don't sleep! They stay glued to their screens I say glued twenty-four-seven staring, staring, staring! Getting burned out eyeballs! Carpal tunnel. Callus on their mouse hand! Staring at their screen, not at wholesome porn my friends, no sir, but quotes, quotes, quotes. When they should do their tasks, they're looking bid-asked! You ask 'em to weed the flowers, and they're trading after hours! They forget to update their Facebook status and their friends unfriend them! Let me be perfectly frank, let me tell you it goes. First it's Vanguard. Then it's Spiders. Then it's ProShares! And th' next thing you know they're buying inverse 3X leveraged molydenum futures. And that means trouble, my friends, right here in River City and--

--oh, excuse me, I got carried away.
Speaking as someone who buys SPY puts to hedge my passive investments, I found this amusing.
(What do you mean this $3.5k in YTD trading profits is the devil's money? I just wanted to buy an insurance policy.)

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Post by daytona084 » Wed Jun 29, 2011 9:38 pm

livesoft wrote:There was no 20-20 hindsight involved at all. If you look at the link in my post, you will see that I declared before I bought some large cap developed that I would buy it. I have since unwound that position because it went up and I needed to rebalance out of it.

BTW, the last time I bought some VSS is discussed in this link: http://www.bogleheads.org/forum/viewtop ... 901#742901 which shows I bought on May 21, 2010. Let me ask this question: For all of calendar year 2010, which day had the lowest price for VSS?

That entire thread will be instructive to the OP. That thread shows patience since it has posts from May 11, 2010 into July 2010. It also shows that May 20th was a RBD as mentioned in other posts at that time.
I'm not sure I understand. Are you saying the OP should have known on June 14th that June 15th was going to be a really bad day?

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Post by livesoft » Wed Jun 29, 2011 9:49 pm

The OP already knew this:
... shares were up about 1.5% for the day, which others have also mentioned is not ideal,
He should have known this:
It was also a low-volume up day, so that was a clue not to trade.
simply by looking.

That is enough knowledge not to buy on that day. It also might be a clue to SELL on that day.

Although the 14th and 15th are not really connected, the 15th was a RBD, so he should have bought that day even if he bought the day before on the 14th. Note that the 15th was not the low for VSS (the 16th was lower and also there have been lower days since). It's just that the 15th was significantly lower than on the 14th.

Of course, no one has to follow this strategy. I am just answering the OP's question frankly.
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Post by JasonR » Wed Jun 29, 2011 9:58 pm

The ETF thing is too complicated for me. Honestly, my eyes glaze over when you day-traders start to talk about it.

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Post by torius71 » Wed Jun 29, 2011 9:59 pm

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Post by torius71 » Wed Jun 29, 2011 10:02 pm

livesoft wrote:It appears you probably bought on June 14th. Since VSS dropped by a few percent after you bought it, you did not do well. It was also a low-volume up day, so that was a clue not to trade. You currently have a loss in your position.

You could've bought around $97.40 a couple days later. You'd be up almost 4% already instead of down about 1%. :twisted:

And June 15th was bona fide "Really Bad Day" for VSS and mentioned on the forum well before closing, so you could've taken action then:
http://www.bogleheads.org/forum/viewtop ... 77#1083977

So being patient is waiting for another day.
I am well aware of the subsequent plummet. :( Thanks for the link, I will take a look. Unfortunately, June 15th I was working a double and had 3 patients crash throughout the day. So to my patients benefit, but not my wallets, I bought on June 14.

Any thoughts on how I actually did on June 14?

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Post by torius71 » Wed Jun 29, 2011 10:09 pm

nisiprius wrote:ETFs, I tell ya, are the first big step on th' road t' degraydaytion. They turn honest investors into adrenaline-crazed, hopped-up speculators who don't eat, don't drink, don't sleep! They stay glued to their screens I say glued twenty-four-seven staring, staring, staring! Getting burned out eyeballs! Carpal tunnel. Callus on their mouse hand! Staring at their screen, not at wholesome porn my friends, no sir, but quotes, quotes, quotes. When they should do their tasks, they're looking bid-asked! You ask 'em to weed the flowers, and they're trading after hours! They forget to update their Facebook status and their friends unfriend them! Let me be perfectly frank, let me tell you it goes. First it's Vanguard. Then it's Spiders. Then it's ProShares! And th' next thing you know they're buying inverse 3X leveraged molydenum futures. And that means trouble, my friends, right here in River City and--

--oh, excuse me, I got carried away.
Are you likening ETF's to a gateway drug? I am officially terrified. I do think this is a bit overboard though.

Now, excuse me while I google molydenum...

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Post by livesoft » Wed Jun 29, 2011 10:20 pm

Actually, nisiprius's post is spot on. Your post is not too far from it. You yourself wrote
...and with my heart pounding out of my chest, ...!

Similar to my other “first time”, I left the experience feeling not only “lucky”, but completely convinced that I was a pro.
Do this next time: Submit a limit order well below the current bid/ask. Only look a few days later to see if the order went through. Since it doesn't cost you money to submit orders that are unlikely to be filled, why not submit a good-for-the-day limit order to buy VSS at $75 right now? If it gets filled tomorrow, then your heart deserves to pound and you will deserve feeling lucky. If it doesn't get filled, then you should feel nothing which is the way it should be.
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Post by HongKonger » Wed Jun 29, 2011 10:29 pm

or start using the American Bulls site.

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Post by Grasshopper » Wed Jun 29, 2011 11:03 pm

There are still some that use market orders. You may catch a flounder.

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Post by torius71 » Wed Jun 29, 2011 11:16 pm

livesoft wrote:Actually, nisiprius's post is spot on. Your post is not too far from it. You yourself wrote
...and with my heart pounding out of my chest, ...!

Similar to my other “first time”, I left the experience feeling not only “lucky”, but completely convinced that I was a pro.
Image
livesoft wrote:Since it doesn't cost you money to submit orders that are unlikely to be filled, why not submit a good-for-the-day limit order to buy VSS at $75 right now?
Please forgive my ignorance, but if I submitted a good-for-the-day limit order of $75 everyday since August of last year, I would still be waiting to buy all the shares I want of this ETF. And would that not cost me money?

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Post by empb » Thu Jun 30, 2011 2:59 am

Please forgive my ignorance, but if I submitted a good-for-the-day limit order of $75 everyday since August of last year, I would still be waiting to buy all the shares I want of this ETF. And would that not cost me money?
Buying ASAP, assuming the market's open, is the only rational way to go about it. Sitting around and waiting for an 'RBD' to buy into a positive expected return asset class doesn't pass the smell test.

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Post by nisiprius » Thu Jun 30, 2011 6:48 am

torius, let me be serious. $10,000 in invested this ETF at inception in 4/2009 would be $20,000 today. OK, $19,956.82, but who's counting?

That's like 40% per year annualized.

But let's say it merely earns the inflation-adjusted long-term rate of return for small company stocks from 1926 to 2004, which is 9.5% real.

You and Livesoft are discussing 1%, 2%, 4% differences between buying on one day and another. Convert those percentages to time, in an investment that averages 9+% per year. You're investing for, say, thirty years, and even if Livesoft is right you're talking about a difference measured in months over an investment period measured in years.

In other words, the random-noise variations between one hour and another or one day and another are smaller than the effect of what year you invested in. It's more important to get that dollar in a year earlier than it is to get it in at the right minute.

Furthermore, the differences between one hour or one day and another pale by comparison with other differences. (I have not looked at this before this instant. I'm a sloppy, satisficing, get-it-roughly-right investor whose is still not sure it was worth the effort to swap 500 Index for Total Stock Market). Just for laughs, let's find some other company's small-cap foreign stock ETF. Does Fidelity have one? Fidelity has two.

On a chart like this, what is 1% difference? Well, it is, roughly, the thickness of one of those lines.

Image
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Post by Beantown85 » Thu Jun 30, 2011 7:01 am

empb wrote:Buying ASAP, assuming the market's open, is the only rational way to go about it. Sitting around and waiting for an 'RBD' to buy into a positive expected return asset class doesn't pass the smell test.
That's the way I do it, and the bonus is that I don't have to pay very much attention. If I have money I want invested, I put a limit order in at the bid price (just like the OP), and every time I have it's been executed that day. Maybe I could get risky and put it for a dollar or two less, but for me, just getting the money into the market where I want it and no longer having to deal with it seems like the right move.

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Post by empb » Thu Jun 30, 2011 7:27 am

livesoft wrote:If it doesn't get filled, then you should feel nothing which is the way it should be.
This is where you lose me. Assuming an investor wants to...invest, what is acceptable about being uninvested (at least in the asset class called for by your plan) because you're speculating on short-term volatility?

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Post by livesoft » Thu Jun 30, 2011 11:49 am

torius71 wrote:Please forgive my ignorance, but if I submitted a good-for-the-day limit order of $75 everyday since August of last year, I would still be waiting to buy all the shares I want of this ETF. And would that not cost me money?
The purpose of submitting a bid at $75 was not to actually buy any shares. It was to train yourself not to hyperventilate every time you submitted an order and treat every order matter-of-factly without any emotions. It was also to show you that orders that expire are no big deal.

Then when you submit an order to actually buy some shares, you should not experience the physiological responses that you did this first time and you should not really care much if your order is executed or not because there is always another opportunity.
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Post by livesoft » Thu Jun 30, 2011 1:53 pm

nisiprius wrote:torius, let me be serious. ...

You and Livesoft are discussing 1%, 2%, 4% differences between buying on one day and another. Convert those percentages to ....

On a chart like this, what is 1% difference? Well, it is, roughly, the thickness of one of those lines.
Yet folks around here are quick to jump through hoops to use Admiral shares with a 0.1% advantage in expense ratio over Investor shares. Thus, that 3% difference in original buy price is not unlike 30 years of difference in expense ratios. That 3% difference will persist until you sell. So if your VSS grows to $500,000 that's $15,000 or a month or two of expenses or even a nice vacation when retired.

If you are going to worry about low-cost, then you should also buy when the prices are lower. One can easily tell if the price is lower than yesterday. So if it was good buy yesterday, is it not a better buy today after a 3% drop? :)
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Post by nisiprius » Thu Jun 30, 2011 2:20 pm

livesoft wrote:
nisiprius wrote:torius, let me be serious. ...

You and Livesoft are discussing 1%, 2%, 4% differences between buying on one day and another. Convert those percentages to ....

On a chart like this, what is 1% difference? Well, it is, roughly, the thickness of one of those lines.
Yet folks around here are quick to jump through hoops to use Admiral shares with a 0.1% advantage in expense ratio over Investor shares.
Yes, too quick in my opinion, and when I'm involved with a discussion about that I usually suggest doing the math. The same math that shows that the difference between a bond fund with a 1.2% ratio and one with a an 0.2% ratio really matters, will show that the difference between an 0.2% ratio and an 0.1% ratio only matters a tenth as much.

Admiral shares are like a recent gas station offer I got in the mail: every time I buy a total of 200 gallons from them, they'll give me $0.10 a gallon of on my next fill-up. It's not buy one, get one free; it's not buy ten, get one free; it's buy ten, get 1/40th free. Well, actually quantitatively Admiral shares are a better deal than that but you get the point.

You can't argue that you'll have more money if you pick up pennies off the street, but you can try to put it into perspective.
Thus, that 3% difference in original buy price is not unlike 30 years of difference in expense ratios. That 3% difference will persist until you sell. So if your VSS grows to $500,000 that's $15,000 or a month or two of expenses or even a nice vacation when retired.

If you are going to worry about low-cost, then you should also buy when the prices are lower. One can easily tell if the price is lower than yesterday. So if it was good buy yesterday, is it not a better buy today after a 3% drop? :)
It's a subtle and complicated point, and not one I wish to argue particularly when I often suspect you might be right. It sounds good, but there's not a person who buys stocks who can't see that prices can change a percent or more overnight, and who can't see whether the price is higher today than yesterday, so somehow I think it just can't be that easy.

Anyway, you think you can get a small, systematic, worthwhile edge by buying ETFs in some simple, sensible way, and you're trying to show the original poster how to do it, and that's good.

I'm trying to show him not to worry about it. If you feel lousy every time you make investment choice A and discover that you could have done a couple of percent better if only, if only, if ONLY you'd chosen B instead, you're going to feel lousy a lot and I don't think think the result of that is going to be an improvement in investing performance.
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Post by kenyan » Thu Jun 30, 2011 3:14 pm

Don't really follow any complex strategies for my ETF purchases, because I don't think that I have the stomach/patience for it. The RBD strategy, as I understand it, will outperform at times and underperform at others (surprise surprise). When the market is rising consistently without any large drops, it will underperform. When the price is flat, as it has been for much of this year, I'm sure it probably outperforms buying immediately. Perhaps it will outperform overall, but I don't have the patience or the desire to implement something like that.

Of course, I don't believe that livesoft has ever told anyone else to follow his strategy; he has only stated that he follows it - and that it works for him - and explained what it is. I would not recommend it to anyone new to ETFs.

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Post by Jay69 » Thu Jun 30, 2011 3:16 pm

From a person who has just started using ETF's I can feel where the OP is coming from. You question the first few as it is all new to you.

The first ETF I bought was the bond fund BND, I spent a good few hours chasing around a few cents of $80 share price hitting the quote button every few minutes to see what was going on.

Now I just take my monthly $1000 and just toss it in. I’m only buying large funds like BND, VTI that don’t seem to have to big of a bid/ask spread. I look at the last day or two and see if I'm in the ballpark and punt.

livesoft, being your are our top ETF gurus do you have a top 5-10 list of items a person should look at when buying/selling ETF's? Like don’t buy when trading volume is down that you mention. I have read Rick's ETF book and that had a lot of the mechanics of how they work but a nice easy top 10 things to look for may help many from a veterans point of view.
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Post by 555 » Thu Jun 30, 2011 7:12 pm

ETFs are just not worth the hassle.

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Post by livesoft » Thu Jun 30, 2011 7:50 pm

empb wrote: Buying ASAP, assuming the market's open, is the only rational way to go about it.
That's presented without any evidence of truth and also doesn't pass a smell test. Perhaps a more rational method might use Bayes' Theorem.

Who did that study where they invested monthly with different scenarios:
(1) First trading day of month
(2) Lowest price of the month
(3) Highest price of the month
(4) Any day after first trading day that was 0.5% (or pick your X%) below first trading day or end of month otherwise if no lower price.
and didn't find much difference? Or did they?
Sitting around and waiting for an 'RBD' to buy into a positive expected return asset class doesn't pass the smell test.
True. One cannot wait forever.

Another note: I am not in the accumulation phase anymore. So I simply use RBDs as signals to think about rebalancing.
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Post by relentless » Thu Jun 30, 2011 7:52 pm

livesoft wrote:It appears you probably bought on June 14th. Since VSS dropped by a few percent after you bought it, you did not do well. It was also a low-volume up day, so that was a clue not to trade. You currently have a loss in your position.

You could've bought around $97.40 a couple days later. You'd be up almost 4% already instead of down about 1%. :twisted:

And June 15th was bona fide "Really Bad Day" for VSS and mentioned on the forum well before closing, so you could've taken action then:
http://www.bogleheads.org/forum/viewtop ... 77#1083977

So being patient is waiting for another day.
Sounds like he already has a chance to TLH! I thought that was a good thing in your book. :wink:

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Post by livesoft » Thu Jun 30, 2011 7:54 pm

... had a chance .... He's got a gain after today. :)
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Post by torius71 » Thu Jun 30, 2011 7:57 pm

My original post was only a dramatized analogy. In reality, the entire experience may not have been much more exciting than my bagel break. :lol:

However, I was looking for serious feedback, so thank you.

The RBD method does look like something even a Joe Schmoe such as myself could pull off successfully, if my scheduled allowed it. And when you put it like this, it sure looks tempting:
livesoft wrote: That 3% difference will persist until you sell. So if your VSS grows to $500,000 that's $15,000 or a month or two of expenses or even a nice vacation when retired.
However, the patience and added effort involved would probably force me to reevaluate why I still don’t:

Cut my own loan, brownbag my lunch, brew my own coffee, wash my own car, do my own oil changes, cut my own hair, buy my food in bulk, use the library more, eat leftovers for the week, cancel my cable, hand wash my own clothes/dishes, use candles, roll my own coins, etc…

And I’m not prepared to open that can of worms. (I will say that I do still build my own computers, probably for the same reasons you buy ETF’s the way you do.)

I would second Jay69 on this one though:
jay69 wrote: livesoft, being your are our top ETF gurus do you have a top 5-10 list of items a person should look at when buying/selling ETF's?

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Post by torius71 » Thu Jun 30, 2011 8:04 pm

Also, when comparing my VSS buy directly to the Vanguard alternative MF, how much of the bid/ask spread did I eat?

Was it the entire spread, half or none?

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Post by relentless » Thu Jun 30, 2011 8:08 pm

livesoft wrote:... had a chance .... He's got a gain after today. :)
Darn it! Lost opportunity... :lol:

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Post by livesoft » Thu Jun 30, 2011 8:29 pm

torius71 wrote:I would second Jay69 on this one though:
jay69 wrote: livesoft, being your are our top ETF gurus do you have a top 5-10 list of items a person should look at when buying/selling ETF's?
I'm thinking about this and will probably write my opinions up.

I already linked the SCZ-to-VSS trade earlier in this thread. I found another thread where I discussed an ETF trade: http://www.bogleheads.org/forum/viewtop ... 384#121384
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Post by kerplunk » Thu Jun 30, 2011 8:30 pm

I've been using ETFs for a week or so now, and I absolutely love them. No more having to worry about minimums or what the market will be like after Vanguard processes my mutual fund buy request.

ETFs are intimidating at first, but once you use them you won't go back.

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Post by Beantown85 » Fri Jul 01, 2011 8:26 am

555 wrote:ETFs are just not worth the hassle.
They really aren't a hassle, but you can certainly make them that way.

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Post by kenyan » Fri Jul 01, 2011 9:03 am

They're a bit of a hassle to get started with, though some of that is due to Vanguard's convoluted Brokerage Services structure (if you're using VG). From that point on, there is a bit of a learning curve, but if you want to use ETFs simply, you can get past that after a few trades.

For those who want true simplicity, I agree that they're probably not worth the hassle, since you can't just set up a monthly contribution and forget about it, nor can you just click a rebalance button or direct new flows by percentages. However, with a little bit more effort, they can certainly be worth it.

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Post by torius71 » Fri Jul 01, 2011 10:35 am

Assuming I went into this week ready to buy using the RBD method, would I not have just fallen victim to the RGW??!!

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Post by nisiprius » Fri Jul 01, 2011 10:57 am

By the way--same message as my "trouble in River City post" but less over-the-top... Isn't it curious that...

...if you go to Morningstar.com and type in VTSMX next to the "quote" box, they give you a ten year chart...

...but if you go to Morningstar.com and type in VTI, they give you a five day chart?

There may not be any real difference between a mutual fund and an ETF, but there sure is a difference in Morningstar's perception of a mutual fund investor and an ETF investor.

That's a 100-to-one ratio in investment attention span.

Your attention span may vary. I mean, I don't really think there's really any danger in buying my O'Doul's at the liquor store.
Last edited by nisiprius on Fri Jul 01, 2011 11:03 am, edited 3 times in total.
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Post by livesoft » Fri Jul 01, 2011 11:00 am

I noted above how I use RBD for rebalancing.

Did you rebalance into more VSS so that you profited even more from this really good week?

Is it now time to rebalance again after that 6% gain in the last 2 weeks?
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Post by nisiprius » Fri Jul 01, 2011 11:13 am

livesoft, forgive me if you've posted a precís of your method--just point me to it if you have. Is this a reasonable summary of your suggestions?

"My notion of what you've been saying"

a) If you have made a predetermined decision that you wish to purchase a certain ETF, you should not wait for an opportune time.

b) If you have a stable portfolio that does not need to change, then you should do opportunistic rebalancing when one of your holdings has a "really bad day."

c) The opportunities are unpredictable, occur on the order of a few times a year, require intraday monitoring to spot them and ETF investing to act on them.

d) Exploiting each opportunity gives you a single-shot boost to your portfolio total. Over time, they collectively boost your total annual return by an amount measured in basis points. But it's safe, it's a free lunch, and is at least as good as the difference between Investor and Admiral shares.

Something like that?

Continuing with mind-reading, the "really bad day" is presumed to represent a market inefficiency caused by insanity or overreaction to an event or a liquidity issue, and can't be exploited by a big investor because the attempt to do so would move the price, but can be exploited by an individual investor. Is that the theory?
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Post by livesoft » Fri Jul 01, 2011 11:42 am

nisiprius, that's a reasonable summary of my suggestions.

However, one does not necessarily need to use ETFs and the intraday monitoring is minimal. Furthermore, I believe big investors do exploit these events which seem to signal a change in momentum as well. I would not be surprised if the managers of Wellesley and Wellington were using a similar strategy sometimes.

I will add that a RBD is an excellent day to check to see if you need to do any tax-loss harvesting.

For completeness, please revisit this thread: http://www.bogleheads.org/forum/viewtopic.php?t=73160
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Post by torius71 » Fri Jul 01, 2011 2:32 pm

livesoft wrote:I noted above how I use RBD for rebalancing.
Thanks for clarifying. That's not how I originally read this quote, but I'm guessing you were just making a theoretical argument, not a practical one.
livesoft wrote:Thus, that 3% difference in original buy price is not unlike 30 years of difference in expense ratios. That 3% difference will persist until you sell. So if your VSS grows to $500,000 that's $15,000 or a month or two of expenses or even a nice vacation when retired.
I hope there are no newbies out there who also read this the wrong way and just had a really bad week! :lol:
livesoft wrote:Did you rebalance into more VSS so that you profited even more from this really good week?
No, because my IPS didn't call for it. My numbers showed from June 14 to nadir only a 2.5% dip.
livesoft wrote:Is it now time to rebalance again after that 6% gain in the last 2 weeks?
According to my IPS, no again, because my numbers show only a 3.3% gain from June 14 to present. I guess in both cases, my "noise", was your gain?

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Post by nisiprius » Sat Jul 02, 2011 7:00 am

livesoft, another question, which I see that your previous post defining Really Bad Day, does not address.

You've used the word "rebalancing." If I take that literally, that would seem to involve relatively small transactions.

For example, suppose that two hypothetical investors who I'll call "volefist" and "suprisini" both have asset allocations that call for equal allocations of VXUS and VTI--that VXUS is selling for precisely $50 a share, and that yesterday we each held precisely $10,000 worth of each

volefist: $10,000 + $10,000 = $20,000
suprisini: $10,000 + $10,000 = $20,000

Today is a Really Bad Day for VXUS, and it drops 4% to 48 on news that Olympia Dukakis will replace Daniel Craig to star in the next James Bond movie, "Spectrum of Violence."

volefist: $9,600 + $10,000 = $19,600
suprisini: $9,600 + $10,000 = $19,600

Rebalancing involves moving $200 from BND to VXUS, which is actually impossible since it would involve fractional shares but never mind:

volefist: $9,800 + $9,800 = $19,600
suprisini: $9,600 + $10,000 = $19,600

The next day, the market realizes the news actually had nothing to do with Greek bonds and VXUS returns to $50 a share, gaining 4.617%:

volefist: $10208.33 + $9,800 = $20,008.33
suprisini: $10,000 + $10,000 = $20,000

What I've just shown at tedious length is that if all you actually do on a Really Bad Day is literally "rebalance," then rebalancing on a 4% dip does not produce a gain of 4% on the portfolio (and your final retirement accumulation), it only produces an 0.042% gain. And the ETF trades had better be free.

I believe that in this situation rebalancing on a dip of X% produces a gain of approximately (X * X) / 4 basis points. That is, it goes with the square of the dip because after a bigger dip, the rebalancing involves a bigger purchase, so the recovery produces a bigger gain on a bigger purchase.

So, at length I get to the point. Is this really what you're talking about, locking in a gain on the whole portfolio, not of 4%, but of 4 basis points, every time the opportunity arises and is successfully acted on?

Or are you talking about purchases larger than would be strictly implied by the word "rebalance," and, if so, how do you gauge the size?
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Post by Jay69 » Tue Jul 05, 2011 10:45 am

livesoft wrote:
torius71 wrote:I would second Jay69 on this one though:
jay69 wrote: livesoft, being your are our top ETF gurus do you have a top 5-10 list of items a person should look at when buying/selling ETF's?
I'm thinking about this and will probably write my opinions up.

I already linked the SCZ-to-VSS trade earlier in this thread. I found another thread where I discussed an ETF trade: http://www.bogleheads.org/forum/viewtop ... 384#121384

Hope everyone had a good 4th, I think this would be most helpful.

A good common sense of ETF trading for Boglehead use would be great.
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Post by livesoft » Tue Jul 05, 2011 11:56 am

@nisiprius, I will answer more fully in the future.

@Jay69, I will describe the details of a trade I did today.

1. I needed raise some cash for a monthly tuition payment coming up. I looked in my taxable account where I hold only ETFs and saw that I had shares of VEU, SCZ, and VSS that were purchased in May-June 2010 (see e.g. this chart: http://www.bogleheads.org/forum/viewtop ... 591#825591 ). With their 28% to 33% gains over the past year, they were my taxable holdings with the least amount of gains, so would have the least tax impact. Selling some large-cap foreign would also not put my asset allocation out of whack, but if it did I could make an exchange in an IRA from a short-term bond fund to the total international index fund.

2. I decided to sell some shares of VEU because they had the least overall gain and had gained nicely in the past 2 weeks. Any gains will be offset by previous carryover losses from tax-loss harvesting.

3. I logged into my brokerage accounts. I displayed the real-time Level II quote for VEU (see next figure). I started a real-time plot of the bid, the ask, and the last price. The bid/ask spread varied between 1 and 2 cents and there were plenty of orders at both the bid and the ask, and my number of shares was small, so I thought: "A market order is just fine in this instance and I will not benefit from a limit order."

4. Nevertheless, I was not sure about a new difference in the way my broker allowed one to specify which tax-lot to sell and I wanted to be sure to sell shares with my highest cost basis in order to have the least capital gain. So instead of a market order that would get executed right away, I put in a limit order to sell about 4 cents above the current best bid and 3 cents above the current lowest ask. Example best bid was $50.11 (@12:04 pm), so I entered my order to sell at $50.15. This would prevent my order from being executed right away and perhaps give me a moment to cancel it before it was executed if I did something wrong with specifying the tax lot. Furthermore, VEU had traded above $50.15 earlier in the day, so I expected (hoped) that my order would have a good chance of eventually being executed at that price which was neither the low of the day nor the high of the day so far.
Image
(Note above figure made after entering my order, but before my order was executed.)

5. My order was not executed right away, but I saw how the brokerage software allowed me to specify a tax lot after I confirmed my order, so I solved that puzzle.

6. I watched the trade get entered and saw the bid/ask prices march right up to $50.15/$50.16 where my order was executed (see figure) around 12:11 pm.
Image

7. Since typing in this the share price of VEU has changed for the better.

8. Do you see in the second figure how there are 100 shares for sale at 50.16, 2000 shares for sale at 50.17, and some more shares for sale at 50.17? If one entered a market order to buy 200 shares, then they should capture all 100 shares at 50.16 and another 100 shares at 50.17 (unless those orders at 50.17 were 'all-or-none' and the broker did nothing special). Most people would not care about paying 50.17 as opposed to 50.16 for a 200 share order. The difference in total would be $2 out of a more than $10,000 order.

============
Edit later in the day after market close:

There is quite a lot of detail in those 2 screen captures now that I look at them again.
Disclaimer: NOT ALL TRADES are shown in the graphs because the software does not show all exchanges and off-exchange trades. With that caveat, indulge me the following additional comments.

Did you notice in the 2nd figure that there is only 1 trade at $50.15 and that was my trade. All those other "asks" at $50.15 in the first figure were changed or cancelled or combined into that trade.

Also note that the 3 bids in both figures are entered by computer programs. The programs simply change their bids up and down automatically. Note that the "exchanges" for those 3 bids also match the "exchanges" for the top 3 asks. These 6 orders are just someone's computers hanging out.

In the real-time graphs, any times(s) where there is no purple circle means that no trades took place at those time(s) (but see Disclaimer above). For example, no trades took place at 12:05 pm and for few seconds on either side of 12:05 pm. Nor did any trades take place after 12:10 pm until the trade at a price of $50.15 where it appears the bid/ask converged momentarily.

Furthermore, suppose this was you (you the person reading this). At 12:04 pm, you do not see what's going to happen next (put your hand over all time points past 12:04 pm). It appears that the price of VEU is dropping from 50.145 to 50.14 to 50.13 to 50.11 .... Do you panic and submit a market order to get out? Or do you chuckle and submit a limit order at a higher price than anything seen so far on the chart?
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Post by Jay69 » Tue Jul 05, 2011 2:44 pm

livesoft

Thanks for the post, lots of information in those old threads. The definition of "Worst Day" is very intresting to say the least.

I have never seen a level II quote, that really does give more insight to how this stuff works.

For right or wrong I just take my little monthly contribution and look back a week or so and if its close I buy, not much of a strategy. At this point I have not been to point where I said I'm not buying as I really have no max % of change set anyway.

Also have tried looking at the day low after the market has been open for a few hours and do a limit order a cent or 2 above the low and that has worked as well but not every time.

Being in the learning/accumulation phase I would like to develop some kind strategy that makes me feel like I did it close to right. We all like to think we got a good deal right :wink:
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Post by LadyGeek » Tue Jul 05, 2011 3:33 pm

I've never seen a live trading session screen shot, either. livesoft - this is an excellent illustrative example - which is now in the wiki.

Wiki article link: Orders
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