Investing in ETF. Recurring Purchase or Lumpsum

OzzyBoy1 on 11/07/2024 - 22:36
Last edited 11/07/2024 - 22:38

So looks like many people buy ETF's for investment. Pretty new to ETF's and overall stock investment game. So instead of picking individual stocks, ETF's can be pretty good approach as it allows better diversification. However my question is which is better approach over long term (5 to 7 years horizon at least) when compared to recurring purchase of set ETF's every month (or fortnight) VS buying lumpsum (for example $20k or $50k)

Ideally would like to get at least 10 to 12% retruns on ETF but it will depend on which ETF, exposure, risk and fees. Lot of people seem to be invested in VAS which gives 7% returns if I am not mistaken. If one invests regularly everymonth as compared to lumpsum, fees can chew into any profits as you buying small amounts ($500 for example) regularly? I have both Commsec and Stake accounts. I am not retiring anytime soon so can take some risks.

Any ideas would be helpful.

Financial Exchange Traded Fund

Comments

  • sumyungguy on 11/07/2024 - 22:42
    -2

    If it's not money you're planning to spend later on travel/property/transporation/surgery would it not be better in high growth super?

    • OzzyBoy1 on 11/07/2024 - 22:52

      While super is excellent vehicle and probably makes sense from tax pov as well. But i don't want my money tied into it for so long. I want to withdraw it when I want to and hence exploring ETF path. Bit late to the game, but still many years ahead to go.

      • sumyungguy on 11/07/2024 - 23:01

        I've been researching this as I know a young person whose bank balance exceeds $100K. Have ruled out RPI (low return) and gold. Pondering Betashares A200, Vanguard VHY or VAS and Stockspot. Will follow responses here with interest.

        • OzzyBoy1 on 11/07/2024 - 23:05

          I heard Stockspot is expensive due to high management fees. Not sure how worth is Stockspot in terms of returns though. Not worth exploring anything if it's below 7% imo.

  • skid on 11/07/2024 - 22:43
    +5

    As ETF's steadily go up in price over the long term, it's best to buy as early as possible. Therefore, a lump sum is the better way to go. This means that there is less spent on brokerage too.

    As for the fees chewing into small amounts, use this calculator for the answer: https://investcalc.github.io/

    • OzzyBoy1 on 11/07/2024 - 22:54

      If i get some decent tax return, I am inclined to invest some of it to ETF. Looking at few thousands here. Challenge will be to find something that gives me returns I am looking for. Will look at that link and see what works best

      • skid on 11/07/2024 - 22:59
        +1

        The link is for regular investment.

        Treat the ETF(s) as one part of your whole portfolio. Not a good idea to put all of your eggs in one basket.

    • changyang1230 on 12/07/2024 - 00:12
      +1

      The answer to OP's question can be confusing as there are two potential interpretation of "is it better to buy lump sum or DCA (dollar cost averaging)"

      It all depends on do you already have a lump sum ready to deploy. Say 50,000 ready to go now.

      Now if the answer is yes, you have a lump sum ready to deploy, then the answer is "buy it all straightaway as statistically you do better compared to DCA". Vanguard has some excellent backtesting that showed that this gives superior outcome 2 out of 3 times.

      However, if the answer is no, you don't have a big lump sum ready to go, then the answer is, you put in however much spare cash you have as soon as possible, but with the optimal frequency being mathematically calculated with the investcalc website above - this website calculates the optimum balance between having money in share asap but without the additional brokerage eroding any additional return you gain.

      • SlickMick on 12/07/2024 - 09:08

        If lump sum, invest now. If DCA, get a free broker.

  • soan papdi on 11/07/2024 - 23:42
    +1

    If you’re investing in vanguard’s ETFs like VAS and VGS, open a personal account with them to save on brokerage fees. No comment about other index funds like fidelity or black rock.

  • Daniel Plainview on 12/07/2024 - 07:56

    1) You're talking lump sum vs dollar cost averaging (DCA) - studies show that historically Lump sum is better 55% of time vs 45% DCA (done via modelling scenarios). Essentially at its heart you're 'timing the market' if you go DCA and this is something investors historically should NOT do - otherwise you should be an active fund manager, as even they cannot manage it.
    https://youtu.be/w_aOERmUWdA?si=AHX3f469gzeu2YVm

    2) I've no idea where you're getting this 'fees chew through returns' info. Suffice to say if you're looking at end results LS >DCA. If you want a low/no cost broker theres options for that too.

    3) 10-12% returns over 5-7yrs? Possible sure. But so many variables there, the main one as you say is your selection of what to achieve that. Just bear in mind thats above the 5-7yr returns for most quality funds, so you will need to know your stuff &/or get lucky.

    The biggest challenge for most investors isn't any of that stuff - it's….themselves. As whatever plan one comes up with it's very likely you self sabotage by getting greedy, fearful or impatient:
    https://youtu.be/I8gH5bR3clg?si=2zFyEeVXqDflXJ72

    Just whatever you do make sure you have a plan in place you can stixck with - even if the market dumps 20% in a week. Your 5-7yr minimum timeline though is prudent, always laughable the folks who say buying a house at the end of the year - what ETF should I buy until then for good returns. Lol.

    • changyang1230 on 12/07/2024 - 16:36

      Brokerage Fees chewing through DCA is for the question where people are asking “I have 500 dollars left each fortnight, do I put it in shares every fortnight or 3000 every quarter”.

      And it’s a legitimate question, and there have been an attempt at finding mathematicaly optimal answer here.

      https://investcalc.github.io/

      • Daniel Plainview on 12/07/2024 - 17:22

        Understood but thats just common sense stuff i.e investing $500 if you're paying $20 brokerage.

        So many low & even no brokerage options around. If anyone can't get their brokerage costs right - I shudder to think how their actual investment choices have fared.

        • changyang1230 on 12/07/2024 - 17:33

          If brokerage is sufficiently low (lots of options nowadays) it’s not much of an impact indeed (as long as we are not talking about miniscule amount eg 100 per fortnight).

          • Daniel Plainview on 12/07/2024 - 17:47

            @changyang1230: And while every dollar counts - brokerage as a big focus is more relevant to 'traders' - where profit margins might be quite slim. OP is a buy & holder, with a 5-7yr minimum term stated - so even if you spend a tad more on brokerage than desired I'd say there's a strong argument to saying thats fine due to investment period.

            As the OP has conceded themselves they need to dot i's and cross t's a tad more yet. I thik they've got the will but not the way…

  • Daniel Plainview on 12/07/2024 - 09:18
    +1

    I think the OP could benefit from reading this entire site: https://passiveinvestingaustralia.com/

    Covers their question & many other things it appears they could benefit from.

    • OzzyBoy1 on 12/07/2024 - 15:39

      Will check this out

  • dtc on 12/07/2024 - 09:28
    +1

    https://www.morningstar.com.au/insights/personal-finance/251…

    Detailed back testing analysis.

    Lump sum better about 2/3 of the time; lump sum is better if the market goes up after you invest and on average the market goes up 2/3 of the time (from any particular point in time)

    DCA better if the market goes down after your first investment point in time (because you have less invested during the drop).

    Which is better? You can only tell after the event ie after you invest and discover whether the market has gone up or gone down

  • jugsy on 12/07/2024 - 11:28

    Lump sum and then buy the dips, otherwise you're rolling a dice

    • dtc on 12/07/2024 - 11:35

      what constitutes a 'dip' vs 'a pause before further decline'?

      • jugsy on 12/07/2024 - 11:49

        How long you're willing to hold for

  • brad1-8tsi on 13/07/2024 - 11:16

    Investment frequency calculator https://investcalc.github.io/

    The "experts" say invest the lump sum.

    When I got a retrenchment payout it wasn't something I could psychologically do so I invested $10k/month. It was big enough that brokerage wasn't an issue and small enough that I felt like I was DCAing.

    I am loling at your expectation of 10%-12% returns. I managed 14% before tax on my high growth fund last FY and that was a really good year. My "balanced" fund returned 7% before tax (which is great for a conservatively invested balanced asset mix)

    • Mad Max on 13/07/2024 - 20:34

      But with current interest rates on a safe hisa at 5.5%, is it worth taking the risk on a balanced fund?
      I know the risk is minimum as funds in a balanced are spread across many assets, but still there is some risk of negative return in a large market downturn.

      • dtc on 13/07/2024 - 21:52
        +1

        Plenty of people said 12 months ago ‘the market is going to crash, why would I invest when I can get 5% risk free’.

        The market went up 8-15%, depending on where you invested

        One day people will be right and their 5% return will beat equities. Of course they might be 30% or 40% behind by then.

        Hence a balanced portfolio

      • brad1-8tsi on 14/07/2024 - 08:40
        +1

        People conveniently forget that $10k at 5.5% (5.64% effective rate when interest is paid monthly) is taxed at the applicable marginal rate.

        A franked dividend already has 30c of the tax already paid and a growth stock will usually have capital growth as well as a dividend or distribution.

        Deciding whether to invest in a Balanced or High Growth fund is dependant on your risk profile and when you want to access the money.

        A High Growth Fund will underperform a 5.5% HISA 9 or 10 times in a 25 year period so if your time frame is 2 years you might get burned. If it's 20 years you'll probably do OK.

        Personally I usually keep enough cash in the bank to keep me going for ~6 months of normal expenses; 12 months if I really pull my head in. The rest is pretty much in equities.

        • Daniel Plainview on 14/07/2024 - 13:35

          You are 100% correct, people are awfully selective with their memory & application when it comes to such matters. On the simplest level the very best active funds managers in the world - struggle to do this (timing the market) and yet Joe Bloggs feels that he can?

          Just think about the grief you'd cop if you said you were better than the best surgeon or chefs in the world - but people all selectively assess their results that they can know when to get in & out.

          As they say, don't confuse good luck with good management.

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