Investing 50k into ETFs via Trade Republic?
- Thread starter dublinaam
- Start date
Don’t invest in an ETF until you understand the tax
Exchange-traded funds may be less attractive than they appear due to onerous tax reporting requirements
Putting it all in at once makes the tax a bit easier.
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It obviously depends on what the market will do over the next few weeks. Which nobody can accurately predict.
But studies are pretty clear. On average putting it all in at once usually results in better returns.
But drip feeding it in, results in lower risk.
So the choice is yours.
But studies are pretty clear. On average putting it all in at once usually results in better returns.
But drip feeding it in, results in lower risk.
So the choice is yours.
RonnieShinbal88
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That's a very light weight study with some very specific assumptions, investing in 3 months versus all at once and only looks at single year returns. I'd note that the investment management company gets more fees if you put the money in all at once.
A more interesting comparison would be on sticking 50k into the market when price to earnings ratios are at all time highs, versus dripping in say 1k a month over 50 months while keeping the rest in cash at 2.7%.
A more interesting comparison would be on sticking 50k into the market when price to earnings ratios are at all time highs, versus dripping in say 1k a month over 50 months while keeping the rest in cash at 2.7%.
Normally it would be the other way around especially if there's some fixed case cost to a trade?
Anyway, isn't it free on Trade Republic?
Trade Republic: Invest in stocks, bonds & ETFs
Earn 3 % p.a. on your cash. Invest easily and safely with just 1 €. Get your subscription free card to spend and earn 1 % Saveback.
traderepublic.com
RonnieShinbal88
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I was referring to the specific study referenced, which was put together by Vanguard.
That’s fair, Vanguard may not be unbiased.
Here is an academic paper coming to the same conclusion - https://www.researchgate.net/public...dence_from_investing_simulations_on_real_data while this one comes to a more middle of the road conclusion - https://nsuworks.nova.edu/hcbe_facarticles/769
My personal experience was having a large lump sum to invest in late 2022, knowing that investing as a lump sum made for a more positive outcome but deciding to dollar-cost-average instead over a few months to ‘reduce my risk’. October 2022 when I bought my first tranche turned out to be the bottom of the NASDAQ100 and I missed out on 50% growth as I DCA’d in over the next 6 months. Never again.
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Steven Barrett
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Yep, I reckon a company with $9.3 trillion dollars under management is going to trick people into investing in lump sums rather than over 3-6 months, so they can get a higher management fee sooner.
The Global Stock Index charges 0.18%. For €100,000, that's €180 a year or €15 a month. If I drip the €100,000 over 10 months, they get €82.50 in fees instead of €150 before the two amounts are equalised and paying almost the same (assuming the lump sum does grow by more).
I think one of the largest fund managers can take the hit instead of fabricating reports to make an extra €67.50
RonnieShinbal88
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I think there is something up with your analysis there, are you assuming they only have one customer?Yep, I reckon a company with $9.3 trillion dollars under management is going to trick people into investing in lump sums rather than over 3-6 months, so they can get a higher management fee sooner.
The Global Stock Index charges 0.18%. For €100,000, that's €180 a year or €15 a month. If I drip the €100,000 over 10 months, they get €82.50 in fees instead of €150 before the two amounts are equalised and paying almost the same (assuming the lump sum does grow by more).
I think one of the largest fund managers can take the hit instead of fabricating reports to make an extra €67.50
Thanks for the helpful response though! I know you appreciate sarcasm Steven...
RonnieShinbal88
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Here's a paper by Michael Brennan, ex editor of the journal of Finance (and co authors), that was published in the Review of Finance:
They report benefits to investors using dollar cost averaging to add stocks to a portfolio, and for index investment for more risk averse investors. In the end it comes down to individual preferences and utility again. I don't think it is wise to give rule of thumb advice that it is always better to go for lump sum or irrational to use DCA.
In your experience, if the Nasdaq had gone down 50% instead of up it's likely you'd have bigger regret in losing 50% than the regret you have over the missed upside. If someone is about to invest and they think both scenarios through and that isn't the case then they should go for the lump sum because they have low risk aversion. It's hard to see things going up 50% from here, but might be technically feasible when the US department of government efficiency kicks in...
Nobody can know that for one specific instance whether lump sum vs cost averaging will get a better return.
E.g. with that 50K, if it was invested in one go, but the market was to decline gradually over the next year, then you would have been better off cost averaging at 4K per month, getting more for your money as the price fell each month. And if it gradually went up, then lump sum would be better.
But as the market has historically grown over time, and had more up periods than down periods, then across a population, lump sum will outperform cost averaging. Just not for everyone, and not all the time.
Right now, we are close to a market all time high - but predicting the future based on that - well that’s just trying to time the market.
Having said all that, my own preference would be for cost averaging - it just feels easier for psychological reasons.
E.g. with that 50K, if it was invested in one go, but the market was to decline gradually over the next year, then you would have been better off cost averaging at 4K per month, getting more for your money as the price fell each month. And if it gradually went up, then lump sum would be better.
But as the market has historically grown over time, and had more up periods than down periods, then across a population, lump sum will outperform cost averaging. Just not for everyone, and not all the time.
Right now, we are close to a market all time high - but predicting the future based on that - well that’s just trying to time the market.
Having said all that, my own preference would be for cost averaging - it just feels easier for psychological reasons.
There are at least 3 options for a potential investor with a lump sum
DCA
Lump sum
Not investing
Judging by the amount of money in Irish 0% deposit accounts, option 3 is the default.
If fear of an ill timed lump sum is causing investment paralysis then DCA is not that bad an option.
DCA
Lump sum
Not investing
Judging by the amount of money in Irish 0% deposit accounts, option 3 is the default.
If fear of an ill timed lump sum is causing investment paralysis then DCA is not that bad an option.
Personally, I wouldn’t invest using ETF’s due to exit and deemed disposal tax.
As regards DCA versus all in for a lump sum, the method I have used was,
40% invested in first month.
Further 5% of the original total then invested each month.
However, if the target investment vehicle dropped by 5% or more in value in a month, I brought forward the next instalment.
It was like an each way bet and would cushion somewhat any potential regret.
It could have been better but it could have been worse
As regards DCA versus all in for a lump sum, the method I have used was,
40% invested in first month.
Further 5% of the original total then invested each month.
However, if the target investment vehicle dropped by 5% or more in value in a month, I brought forward the next instalment.
It was like an each way bet and would cushion somewhat any potential regret.
It could have been better but it could have been worse
Steven Barrett
Registered User
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Jeysus, 5% a month? You're certainly dragging it out
This is it. I explain to clients that 2/3 of the time, they are better off to invest in a lump sum. But if they feel nervous about investing a lump sum, in one go, spread it out over 6 months. It is likely that they will be worse off but they won't be anxious about their investment and if values fall, they will only be down on 16% of their money and will buy in at a lower price. Likewise, if markets go up, only 16% of their money will grow and their next installment is bought at a higher price.
It is a trade off that they understand and are willing to make. Neither lump sum or DCA is the incorrect option, it is what suits each individual investor and their attitude to investing.
Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
I had a lump of cash in DC Pension transferred in in July 2022.
I used a hybrid of lump and DCA to get it into funds.
It worked out okay. A little less advantageous than had I invested fully lump sum in July.
The cash wasn’t completely idle though as the returns in the money markets were positive and much improved.
If however I had been investing a lump all in in the first quarter of 2022 it would have been a completely different outcome.
Probably first quarter 2024 before back in the green.
Huge amount of luck involved.
I believe all we can do is look at the probabilities and what allows a good night’s sleep.
Done this twice now (investing money from sales of employer shares); in both cases I drip-fed it in. I was and am aware that this is, on average, not optimal, and as it turns out I would've come out slightly better if I'd invested it as two lump sums, but from a "sleep at night" perspective it was easier.
As someone mentioned further up, if the options are drip-feeding, lump sum, or procrastinating about it and keeping it in a bank account, then there's very little difference in expected return between options 1 and 2, relative to the difference between either and option 3
As someone mentioned further up, if the options are drip-feeding, lump sum, or procrastinating about it and keeping it in a bank account, then there's very little difference in expected return between options 1 and 2, relative to the difference between either and option 3
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