Dollar cost averaging is the act of investing on a regular basis instead of putting a lump sum at one fixed point in time. For example, if you had $12,000 to invest, with dollar cost averaging, you may choose to invest $1000 each month instead of the $12,000 all in one go. This is a post explaining my investing strategy: To Dollar Cost Average ETFs and also invest in individual stocks that pay dividends.
The Dollar Cost Averaging Strategy
I dollar cost average on a monthly basis with ETFs (exchange-traded funds), which are basically a basket of companies (and some ETFs can be a HUGE basket) that may be created to track the index.
Despite research according to Vanguard and the Globe and Mail showing that lump sump investing trumps dollar cost averaging, I am proud to be part of the dollar cost average club.
Just like I have a fixed mortgage instead of a variable mortgage because I am one of those people that can’t sleep at night knowing I have a variable mortgage (even though variable mortgages are proven to be more economical over fixed mortgages). I don’t like to time the market all the time.
Even though ETFs are a huge part of my investment portfolio, they do not comprise all of my investment portfolio. Many people (including me!) recommend just indexing 100% because selecting individual companies to invest in is much riskier (and more costly if you are dollar cost averaging using simple US dollar accoutnts)
I like to be a little risky- must stem from my Scratch and Win days when I used to go buy scratch tickets even though I was under the age of 19. The most I won was $2 but the adrenalin was addictive. Hence, there are a few reasons why I dollar cost average with ETFs in addition to buying individual stocks.
Like many things in life, I like to do things in moderation. Therefore it makes sense that I also like to invest in moderation. A little bit of adventure (individual stocks) with a lot more safety (indexing and ETFs).
I have just over 67% of my portfolio in ETFs and the rest is in individual stocks. Ideally, I would like to have 70% in ETFs and 30% in individual shares.
The Allure of Individual Stocks is Just too Powerful
I started off with individual stocks and even though the peaks and valleys of individual stocks are FAR greater, the allure of individual stocks is just too powerful.
I take pride in being a shareholder of individual companies and even though I am technically a shareholder of Apple… it doesn’t feel the same even though I own Apple within my ETFs (I don’t actually own Apple individually, I have missed that boat).
You just feel a bit more invested. Pardon the pun.
I Like Big Dividends I Cannot Lie
Another reason why I still have individual stocks in my portfolio is that I like dividends. I like big dividends I cannot lie (please sing it to Sir Mix-A-Lots Baby Got Back tune). I am a HUGE FAN OF DIVIDENDS. It is my favourite form of passive income, and they are so reliable and consistent, just like the ocean waves (usually they are reliable). With ETFs (well, many of them) you just don’t get the same percentage yield of dividends as you would from an individual stock.
Take, for example, XIC (iShares Core S&P/TSX Capped Composite Index ETF). The distribution yield is 2.64%.
The top ten holdings of XIC includes a lot of financials. For example, Royal Bank is trading at $100.60 and the dividend yield is 3.74%. If you had bought RY.TO (Royal Bank) at a lower price let’s say $80 in August 2016, your dividend yield would be even higher today because of the dividend increases (namely 4.7%). There have been three dividend increases from August 2016 to June 2018.
If you bought XIC in August 2016, there has been a slight increase in the dividend yield (2.85% estimation compared to 3.0%) though in one quarter (in 2018) the yield was quite low compared to the other distributions. The distribution varies with ETFs.
For the Complete Guide to Canadian Dividend ETFs, check out Dividend Earner’s comprehensive post.
With individual stocks, you also get to cheer when you get a dividend increase announcement. In fact, dividend bloggers cheer each other on when they get dividend increase announcements and it’s a great way to keep up to date with the increases! You don’t really get the same excitement when you say “I got an increase from XIC today!” compared to “Royal Bank increased their dividend by 9% again!”.
Keepin’ It Real with my Investment Contract and Dollar Cost Averaging
I signed an investment contract to myself years ago to invest a certain dollar amount every month. I got the idea from reading The Intelligent Investor and a version of an Investment Contract is included in the Young Money Bootcamp eCourse.
I keep the dollar cost average contributions consistent and it prevents me from putting my EGO into investing so that I can continue to be disciplined, unemotional, and rational about my money. It provides a bit of stability when the rest of the world is screaming “we are at the top of the market, the bears are coming!” It helps me ‘keep it real’ with myself and my investment portfolio. Then with the rest, I can use a bit of the fun money to invest in individual stocks.
I can’t say I recommend this way for you, it’s just what has worked for me (after investing for over 15+ years and making a TON of mistakes in the meantime, I finally figure what works for me haha) and what I prefer. What works for someone can be completely different for another. I also don’t have it all figured out too! We all think that we do just because the market is churning out cash right now but we may think very differently when the next bear comes, and it will come!
Related Post: My Tell All: Investing Mistakes in My 20’s
If you’re interested in checking out my dividend income journey, check out my recent dividend income updates here. If you would like to download a free dividend yield spreadsheet to track your passive income, feel free to download it!
Here are some other Canadian personal finance blogs that have different investing approaches.
For a list of books to get you started on dividend investing, check it out here.
What do you do for your portfolio?
Do you have 100% individual stocks or do you have some ETFs mixed in your investment portfolio?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.