DCA vs. lump-sum, with a high-but-sliding transaction fees twist

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artymorty
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DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

I’m planning on purchasing shares of VWCE or a similar ETF on a regular basis for the next three decades or so, and I’ve already determined the percentage of income I’d be able to invest. However, my country’s tax system is punitive towards retail investors: unless you’re purchasing individual stocks in the local, highly illiquid stock market, transactions need to be fairly large to avoid high fees. It’s possible these fees will decrease in the future, but I can’t count on it, and I don’t want to delay entering the market for any longer than I need to.

This is by far the best bargain I could find for investing into index-tracking ETFs (in addition to the fund’s TER) from my country:

- If I make one weekly transaction, the total fees would be around 9% or higher
- If I make one yearly transaction, the position would be high enough for fees to be “only” around 1.5%

Less frequent than yearly would hit diminishing returns quickly. There are also four other possible frequencies in between those two: byweekly, monthly, quarterly, and semi-annually, with decreasing respective fee ratios.

I’m not necessarily looking for financial advice, as I’ll have to come to a final conclusion based on my own personal risk preference. But I’d love to hear what you’d do in my situation.

1) Do you think it’s even worth investing into VWCE (or other similar funds) with the smallest, 1.5% transaction fee (plus 0.22% TER)? Would you go for higher risk and pick individual stocks instead (which is not taxed nearly as much here at the moment), or even invest into different asset classes altogether?

2) Even though I’d prefer paying into the fund as soon as possible, the fees for lower (and more frequent) transactions are extreme. I believe a yearly contribution would be optimal. How would you approach it?

Thanks for your time.
superbrugha
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by superbrugha »

Can I ask which country you are resident in?

The standard advice is that lump sum investment is better than DCA.
Any possible advantage of DCA must be destroyed by a 7.5% increase in fees.
I would save my monthly contribution in a high interest savings account, and make an annual stock purchase.

Or move country.
Laurizas
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by Laurizas »

artymorty wrote: Sun Sep 11, 2022 5:41 am - If I make one yearly transaction, the position would be high enough for fees to be “only” around 1.5%
Could you provide more details, what expenses comprise these 1,5 %?
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artymorty
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

I’m in Bosnia and Herzegovina, which is a non-EU country. Moving away is increasingly becoming the choice for people of all ages here.

The 1.5% fees comprise simply the bank’s cut (0.5%) and the broker’s cut (1%). It’s essentially the best (or only feasible) game in town.
Last edited by artymorty on Sun Sep 11, 2022 6:51 am, edited 1 time in total.
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by Jack FFR1846 »

How much does it cost to buy single stocks? If zero or close to zero, maybe buy the top stocks in the fund. Looking at them, anything of any real amount include Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, TSMC, Nvidia and JP Morgan Chase. As with any fund, the top holdings affect it more than anything else, so that's what I would do is just buy these in the percentages of the fund.
Bogle: Smart Beta is stupid
Topic Author
artymorty
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

Jack FFR1846 wrote: Sun Sep 11, 2022 6:43 am How much does it cost to buy single stocks? If zero or close to zero, maybe buy the top stocks in the fund. Looking at them, anything of any real amount include Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, TSMC, Nvidia and JP Morgan Chase. As with any fund, the top holdings affect it more than anything else, so that's what I would do is just buy these in the percentages of the fund.
Ah, I failed to mention that any foreign investments are subject to the same fees. The lower fees are for local stock markets only.
Laurizas
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by Laurizas »

artymorty wrote: Sun Sep 11, 2022 6:40 am The 1.5% fees comprise simply the bank’s cut (0.5%) and the broker’s cut (1%).
Can you use Interactive Brokers?
markus75
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by markus75 »

Here are some brokers with low fees: https://brokerchooser.com/best-brokers/ ... erzegovina
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artymorty
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

Laurizas wrote: Sun Sep 11, 2022 10:14 am
artymorty wrote: Sun Sep 11, 2022 6:40 am The 1.5% fees comprise simply the bank’s cut (0.5%) and the broker’s cut (1%).
Can you use Interactive Brokers?
It is only legal for brokerages, and not retail investors, to invest directly on foreign markets from here. You actually use Interactive Brokers’ software for trading, but you need to pay an intermediary brokerage fee for legal reasons.

Even if I were to personally acquire a broker’s licence, I’d have to start a company to be able to invest on my own, and that’s a whole other can of worms…
Laurizas
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by Laurizas »

artymorty wrote: Sun Sep 11, 2022 10:32 am It is only legal for brokerages, and not retail investors, to invest directly on foreign markets from here. You actually use Interactive Brokers’ software for trading, but you need to pay an intermediary brokerage fee for legal reasons.
WOW! Hard to believe this.
artymorty wrote: Sun Sep 11, 2022 5:41 am 1) Do you think it’s even worth investing into VWCE (or other similar funds) with the smallest, 1.5% transaction fee (plus 0.22% TER)?
Yes, if you hold for 5 years, 1.5 % becomes 0.3% a year, if you hold for 10 years - 0.15%, if for 30 years - 0.05% a year.
artymorty wrote: Sun Sep 11, 2022 5:41 am 2) Even though I’d prefer paying into the fund as soon as possible, the fees for lower (and more frequent) transactions are extreme. I believe a yearly contribution would be optimal. How would you approach it?
Looking at history, yearly contribution should be fine. I played with portfoliovisualizer and if you had invested in US stock market from 1972 till now:
a) 100 monthly - you get $4,169,817;
b) 300 quarterly - you get $4,165,086;
c) 1200 annually -you get $4,109,635.

The difference is despicably small.
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artymorty
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

Laurizas wrote: Sun Sep 11, 2022 11:32 am
artymorty wrote: Sun Sep 11, 2022 10:32 am It is only legal for brokerages, and not retail investors, to invest directly on foreign markets from here. You actually use Interactive Brokers’ software for trading, but you need to pay an intermediary brokerage fee for legal reasons.
WOW! Hard to believe this.
artymorty wrote: Sun Sep 11, 2022 5:41 am 1) Do you think it’s even worth investing into VWCE (or other similar funds) with the smallest, 1.5% transaction fee (plus 0.22% TER)?
Yes, if you hold for 5 years, 1.5 % becomes 0.3% a year, if you hold for 10 years - 0.15%, if for 30 years - 0.05% a year.
artymorty wrote: Sun Sep 11, 2022 5:41 am 2) Even though I’d prefer paying into the fund as soon as possible, the fees for lower (and more frequent) transactions are extreme. I believe a yearly contribution would be optimal. How would you approach it?
Looking at history, yearly contribution should be fine. I played with portfoliovisualizer and if you had invested in US stock market from 1972 till now:
a) 100 monthly - you get $4,169,817;
b) 300 quarterly - you get $4,165,086;
c) 1200 annually -you get $4,109,635.

The difference is despicably small.
Ha, it’s hard to believe for me as well, and I live here. I’ve spent some time investigating other asset classes before deciding on the bogleheads approach. Local gold dealers sell simple ingots for up to 80% over spot due to high import taxes on precious metals, and apparently people still pour their savings into buying gold (or real estate) because they feel they have little choice.

Thank you very much for taking the time to check it out. It’s nice to put things into perspective, and I’ll try playing around with portfoliovisualizer myself. It seems it’s hard to find fault with the bogleheads approach, even with higher fees than in most other countries.
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artymorty
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

I’d like to briefly revive this topic with a different-but-related question.

Making a single transaction a year would seem to preclude purchasing both stock and bond ETFs at the same time without incurring additional fees.

Ideally, I’d purchase shares of a single ETF covering both (with my preferred ratio, say 90/10 or 80/20 in favor of stocks at first, gradually changing in favor of bonds as my retirement date approaches). I also find the concept of automatic rebalancing highly appealing.

However, I’m having some difficulty finding an Ireland-domiciled, Euro-denominated, accumulating target retirement ETF combining all-world, all-cap stocks (like VWCE) with government and corporate bonds (like VAGF). Have I missed it?
TedSwippet
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by TedSwippet »

artymorty wrote: Mon Sep 19, 2022 2:23 am However, I’m having some difficulty finding an Ireland-domiciled, Euro-denominated, accumulating target retirement ETF combining all-world, all-cap stocks (like VWCE) with government and corporate bonds (like VAGF). Have I missed it?
The only ETFs I'm aware of that might come close-ish for you are Vanguard's LifeStrategy ETF range, for example V80A and V80D.

Not target retirement; that is, they are fixed ratio, so to create a glide path you would have to either rebalance which incurs trading costs, or start combining with lower percentage variants at some point to shift the stock/bond ratio. Also, the ETFs in this range all hedge bonds to EUR, and you might not want that.
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artymorty
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

TedSwippet wrote: Mon Sep 19, 2022 4:28 am
artymorty wrote: Mon Sep 19, 2022 2:23 am However, I’m having some difficulty finding an Ireland-domiciled, Euro-denominated, accumulating target retirement ETF combining all-world, all-cap stocks (like VWCE) with government and corporate bonds (like VAGF). Have I missed it?
The only ETFs I'm aware of that might come close-ish for you are Vanguard's LifeStrategy ETF range, for example V80A and V80D.

Not target retirement; that is, they are fixed ratio, so to create a glide path you would have to either rebalance which incurs trading costs, or start combining with lower percentage variants at some point to shift the stock/bond ratio. Also, the ETFs in this range all hedge bonds to EUR, and you might not want that.
Thanks for your information. I guess the closest I can get to a “target retirement” fund might be to gradually purchase different types of “V[equity allocation]A” ETFs. I am a little concerned over slightly higher TER, but I’m guessing that’s inevitable with these mixed funds.

I’ll have to mull this over a little bit more, I guess. It’s almost like I have a good excuse to delay bond allocation by a few more years…
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by vineviz »

artymorty wrote: Mon Sep 19, 2022 5:12 am Thanks for your information. I guess the closest I can get to a “target retirement” fund might be to gradually purchase different types of “V[equity allocation]A” ETFs. I am a little concerned over slightly higher TER, but I’m guessing that’s inevitable with these mixed funds.

I’ll have to mull this over a little bit more, I guess. It’s almost like I have a good excuse to delay bond allocation by a few more years…
I think, given what I know about your situation, you probably want to apply something like a DIY lifecycle calculation to your strategies.

Basically, you'd buy 100% VWCE (or the equivalent) at the beginning of your accumulation phase, and then switch to purchasing 100% bonds once two different estimated values come into balance.

A) The future value (at retirement) of your current stock holdings. You can you the future value function in Excel or a financial calculator to estimate this.

B) The present value of your future bond holdings, assuming you only invested the rest of your future savings in bonds. You can use the present value or NPV function to estimate this.

If you think your goal at retirement is a 60/40 portfolio, then you'll buy stocks until A is equal to [.6 x (A+B)]. Then switch to buying bonds.

This way you build your own glide path, using just one fund purchase each year (or half year).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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artymorty
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

vineviz wrote: Mon Sep 19, 2022 11:01 am
artymorty wrote: Mon Sep 19, 2022 5:12 am Thanks for your information. I guess the closest I can get to a “target retirement” fund might be to gradually purchase different types of “V[equity allocation]A” ETFs. I am a little concerned over slightly higher TER, but I’m guessing that’s inevitable with these mixed funds.

I’ll have to mull this over a little bit more, I guess. It’s almost like I have a good excuse to delay bond allocation by a few more years…
I think, given what I know about your situation, you probably want to apply something like a DIY lifecycle calculation to your strategies.

Basically, you'd buy 100% VWCE (or the equivalent) at the beginning of your accumulation phase, and then switch to purchasing 100% bonds once two different estimated values come into balance.

A) The future value (at retirement) of your current stock holdings. You can you the future value function in Excel or a financial calculator to estimate this.

B) The present value of your future bond holdings, assuming you only invested the rest of your future savings in bonds. You can use the present value or NPV function to estimate this.

If you think your goal at retirement is a 60/40 portfolio, then you'll buy stocks until A is equal to [.6 x (A+B)]. Then switch to buying bonds.

This way you build your own glide path, using just one fund purchase each year (or half year).
Since this would mean delaying any bond allocation until stocks have reached, say, 60% of the total estimated future value, could the reduced time of bonds in the market potentially hurt the stability of the portfolio at the point of retirement, at least compared to a more gradual approach?

While I haven’t yet attempted to calculate the results using your proposed formulae, I suspect there are potential scenarios (especially those resulting from earlier estimation errors) where I’d be purchasing large volumes of bonds across a relatively small timeframe late in my investing lifetime.

I’m fairly new at this, so I thank you for your responses and your
patience.
Last edited by artymorty on Mon Sep 19, 2022 4:11 pm, edited 3 times in total.
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vineviz
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by vineviz »

artymorty wrote: Mon Sep 19, 2022 3:47 pm
Since this would mean delaying any bond allocation until stocks have reached, say, 60% of the total estimated future value, could the reduced time of bonds in the market potentially hurt the stability of the portfolio at the point of retirement, at least compared to a more gradual approach?
The exact path of asset allocation will depend on your savings rate and market performance, of course, but typically the expected growth rate of stocks is sufficiently higher than bonds that you actually could end up purchasing bonds for 1/2 or even 2/3 of your accumulation period .

It’s surprising but often true, again, depending on the sequence of returns you actually experience.

And the glide path is largely self correcting when approached this way, so by the time retirement hits any estimation errors will likely have been repaired.

There may be some periods where you have to go back to buying stocks, or rebalancing if that’s cost-effective for you, but my and large you get a glide path much like US target date funds but customers zed to your situation.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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artymorty
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

vineviz wrote: Mon Sep 19, 2022 4:09 pm
artymorty wrote: Mon Sep 19, 2022 3:47 pm
Since this would mean delaying any bond allocation until stocks have reached, say, 60% of the total estimated future value, could the reduced time of bonds in the market potentially hurt the stability of the portfolio at the point of retirement, at least compared to a more gradual approach?
The exact path of asset allocation will depend on your savings rate and market performance, of course, but typically the expected growth rate of stocks is sufficiently higher than bonds that you actually could end up purchasing bonds for 1/2 or even 2/3 of your accumulation period .

It’s surprising but often true, again, depending on the sequence of returns you actually experience.

And the glide path is largely self correcting when approached this way, so by the time retirement hits any estimation errors will likely have been repaired.

There may be some periods where you have to go back to buying stocks, or rebalancing if that’s cost-effective for you, but my and large you get a glide path much like US target date funds but customers zed to your situation.
Both the longer bond investment lifetime and the self-correction make total sense. Thanks again, this is an avenue worth exploring, especially given that in this scenario I’d be able to just purchase stock ETFs for the time being and postpone the final decision for a while.

In case local laws change in my favor in the interim, I could rebalance more easily. If not, I could proceed with stock allocation until I’ve reached a specific fraction of expected total future value.

Of course, there’s also the matter of having to suffer through potential wild market swings in the meantime, but bonds’ utility to me is less in day-to-day psychological effect and more about withdrawing stable returns in retirement.
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by Valuethinker »

artymorty wrote: Mon Sep 19, 2022 4:31 pm
vineviz wrote: Mon Sep 19, 2022 4:09 pm
artymorty wrote: Mon Sep 19, 2022 3:47 pm
Since this would mean delaying any bond allocation until stocks have reached, say, 60% of the total estimated future value, could the reduced time of bonds in the market potentially hurt the stability of the portfolio at the point of retirement, at least compared to a more gradual approach?
The exact path of asset allocation will depend on your savings rate and market performance, of course, but typically the expected growth rate of stocks is sufficiently higher than bonds that you actually could end up purchasing bonds for 1/2 or even 2/3 of your accumulation period .

It’s surprising but often true, again, depending on the sequence of returns you actually experience.

And the glide path is largely self correcting when approached this way, so by the time retirement hits any estimation errors will likely have been repaired.

There may be some periods where you have to go back to buying stocks, or rebalancing if that’s cost-effective for you, but my and large you get a glide path much like US target date funds but customers zed to your situation.
Both the longer bond investment lifetime and the self-correction make total sense. Thanks again, this is an avenue worth exploring, especially given that in this scenario I’d be able to just purchase stock ETFs for the time being and postpone the final decision for a while.

In case local laws change in my favor in the interim, I could rebalance more easily. If not, I could proceed with stock allocation until I’ve reached a specific fraction of expected total future value.

Of course, there’s also the matter of having to suffer through potential wild market swings in the meantime, but bonds’ utility to me is less in day-to-day psychological effect and more about withdrawing stable returns in retirement.
Minimizing transaction costs is intrinsic to Boglehead philosophy.

Many of us grew up in the era of mutual fund "Front End Loads" of 5-10% of purchase price (that paid the commission to brokers). So we did grow up in this world, too. Vanguard changed everything, then ETFs did the same in many other countries (that have a smooth running ETF market like Ireland).

Depending on how many decades to retirement, build your equities first, and worry about bonds later. Bank deposits can be an acceptable alternative to bonds. I suspect in your case you probably want maximum financial diversification out of a financially weak country, so probably not in your case, but it's worth having that at the back of your mind.

I think Europe will go into recession this winter because of the energy crisis (I cannot see how not). Consumers and businesses will shift other spending to paying energy bills, major energy-using industries will encounter "demand destruction" and shut down, etc.

Thus Eurozone interest rates are likely to rise less fast than British (where there is a bit of a currency crisis going on, softly) and US (economy doing relatively well). So waiting to buy Eurozone bonds is a reasonable strategy - higher yields will probably come in the future.

(I am taking the Euro as your default currency - I don't think BH is actually in the Eurozone? But perhaps someday).
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

Valuethinker wrote: Tue Sep 20, 2022 2:48 am Minimizing transaction costs is intrinsic to Boglehead philosophy.

Many of us grew up in the era of mutual fund "Front End Loads" of 5-10% of purchase price (that paid the commission to brokers). So we did grow up in this world, too. Vanguard changed everything, then ETFs did the same in many other countries (that have a smooth running ETF market like Ireland).

Depending on how many decades to retirement, build your equities first, and worry about bonds later. Bank deposits can be an acceptable alternative to bonds. I suspect in your case you probably want maximum financial diversification out of a financially weak country, so probably not in your case, but it's worth having that at the back of your mind.

I think Europe will go into recession this winter because of the energy crisis (I cannot see how not). Consumers and businesses will shift other spending to paying energy bills, major energy-using industries will encounter "demand destruction" and shut down, etc.

Thus Eurozone interest rates are likely to rise less fast than British (where there is a bit of a currency crisis going on, softly) and US (economy doing relatively well). So waiting to buy Eurozone bonds is a reasonable strategy - higher yields will probably come in the future.

(I am taking the Euro as your default currency - I don't think BH is actually in the Eurozone? But perhaps someday).
Bosnia is not in the EU at the moment, but the currency is pegged to the Euro, so our economy moves along with it (except usually worse: e.g. our local stock market’s indices have yet to recover from ‘08, which is partly why I’ve avoided purchasing local index funds).

The majority of my portfolio is indeed in bank deposits at the moment. Still, I feel like waiting for changing bond yields might be akin to market timing, similar to waiting for a recession to buy stocks?

In my relatively short bogleheads journey, I’ve found that fixed-income allocation is far more difficult to determine than equity. With stocks, I can simply pick a level of diversification/tilt I’m comfortable with, turn a few more knobs, and I’m done.

There are way too many variables with bonds, though, including the question of whether or not they might be considered fungible with cash, CDs, precious metals, or even social security (our retirement funds are fully reliant on a scheme similar to Social Security in the U.S.).

However, I’m likely to start off with zero bonds, so I won’t have to make a decision for a few more years anyway.
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by vineviz »

artymorty wrote: Tue Sep 20, 2022 3:58 am
There are way too many variables with bonds, though, including the question of whether or not they might be considered fungible with cash, CDs, precious metals, or even social security (our retirement funds are fully reliant on a scheme similar to Social Security in the U.S.).
Bond decisions aren't as difficult as people often make them out to be. You'll figure it out eventually.

The bond allocation should have a have duration that matches your investment horizon, should probably be (mostly) denominated in (or hedged to) the currency you will use to consume goods and services, and be nominal vs. inflation-linked in proportion to how sensitive your portfolio withdrawals are to overall price levels.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by Laurizas »

artymorty wrote: Tue Sep 20, 2022 3:58 am our local stock market’s indices have yet to recover from ‘08,
Do these indices include reinvested dividends?
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

Laurizas wrote: Tue Sep 20, 2022 9:30 am
artymorty wrote: Tue Sep 20, 2022 3:58 am our local stock market’s indices have yet to recover from ‘08,
Do these indices include reinvested dividends?
Good point, they only include price. It’s hard to find the numbers, but it’s possible the total return was actually positive. There are other issues, though, including the fact that each index covers an extremely small number of companies, and that the shares are quite illiquid. There is also a component of mistrust in the local markets on my part. I may be making a mistake by skipping them, but I prefer the diversification and relative fairness of funds tracking global indices, even with higher fees.
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

vineviz wrote: Mon Sep 19, 2022 11:01 am
Basically, you'd buy 100% VWCE (or the equivalent) at the beginning of your accumulation phase, and then switch to purchasing 100% bonds once two different estimated values come into balance.

A) The future value (at retirement) of your current stock holdings. You can you the future value function in Excel or a financial calculator to estimate this.

B) The present value of your future bond holdings, assuming you only invested the rest of your future savings in bonds. You can use the present value or NPV function to estimate this.

If you think your goal at retirement is a 60/40 portfolio, then you'll buy stocks until A is equal to [.6 x (A+B)]. Then switch to buying bonds.
I was looking over your proposed algorithm once again, and I have a question regarding the value of B.

Shouldn’t the total bond amount actually be calculated as the sum of all future bond values, rather than NPV? Something like:

B = Future value of present value in period 1 + Future value of present value in period 2 + … + Future value of present value in period n =
PV1 * (1 + r)^n + PV2 * (1 + r)^(n - 1) + … + PVn-1 * (1 + r) + PVn

where PVi is the amount invested in a specific period, r is the expected interest rate, and n is the total number of remaining periods.

And if PV1 = PV2 = … = PV2,
then
B = sum from i = 0 to n of PV * (1 + r)^(n - i)

Wouldn’t that be the actual (estimated) total value of the bond holdings at the point of retirement, that we can then add to the total future stock holdings? (It’s possible I’m missing something.)
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Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by vineviz »

artymorty wrote: Wed Sep 21, 2022 4:51 pm I was looking over your proposed algorithm once again, and I have a question regarding the value of B.

Shouldn’t the total bond amount actually be calculated as the sum of all future bond values, rather than NPV? Something like:
I was trying to simplify the calculation, but upon further reflection I think I made it harder and more confusing.

So forgive me if I roll back and try again. For more reference you might look for the book "Lifecycle Investing" by Ayres and Nalebuff. It's probably easier to just use their method and calculate the following.

A. The current value of your accumulated retirement savings.

B. The NPV of your future retirement savings contributions.

"A" is just your portfolio value, so that's easy.

"B" is the net present value of future contributions, discounted at the risk-free rate (or slightly more, depending on how stable your income actually is).

So, if your goal is to have 60% of your portfolio in stocks at retirement then every year during accumulation your target equity allocation is 60% of (A+B).

Using this approach presumes that you can rebalance during accumulation between stocks and bonds, which will be difficult for you I think. So I was trying to design the equations in an attempt to minimize the amount of that you might have to do, but I think I just made the concept more opaque.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
artymorty
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Joined: Mon Sep 05, 2022 12:44 pm

Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

vineviz wrote: Wed Sep 21, 2022 7:39 pm A. The current value of your accumulated retirement savings.

B. The NPV of your future retirement savings contributions.

"A" is just your portfolio value, so that's easy.

"B" is the net present value of future contributions, discounted at the risk-free rate (or slightly more, depending on how stable your income actually is).

So, if your goal is to have 60% of your portfolio in stocks at retirement then every year during accumulation your target equity allocation is 60% of (A+B).
Thanks, that does make more sense, although I don’t think I have a complete grasp on the method yet. I’ll try to check out the book, and if you have any additional links to similar approaches to share, I’d appreciate it.
Topic Author
artymorty
Posts: 16
Joined: Mon Sep 05, 2022 12:44 pm

Re: DCA vs. lump-sum, with a high-but-sliding transaction fees twist

Post by artymorty »

There’s another bizarre aspect of my situation that I’ve failed to mention, as I didn’t think it mattered for my long-term strategy. However, people here are knowledgeable enough to have some potential insight into an angle or a micro-optimization I might take advantage of.

Due to current tax laws, I’m able to get away with paying no capital gains or dividend taxes for the time being. However, I expect the laws to change in the coming years.

Since I’m investing for the future, I expect this fact to be completely irrelevant by the time I start withdrawing decades from now. Still, do you think there’s a way to utilize it until the laws change, while keeping a diversified ETF strategy and a large single yearly contribution? I’m planning on investing into the accumulating total world stock fund, VWCE.
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