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Dave: 00:36 Welcome to Investing for Beginners podcast. This is episode 79 tonight. Andrew and I back by popular demand are going to talk about dollar cost averaging. Talked a lot about this before, but we have gotten a lot of questions about it recently and we thought maybe we would dedicate an episode to it so we could help you guys a little learn bit more about this wonderful strategy that you could use to help with your investing. So Andrew, why don’t you talk a little bit about this and we’ll just kind of go back and forth.
Dave: 01:06 Yeah, sure. So most basic definition of dollar cost averaging as you set aside a certain amount each month and you’re going to put that into the stock market. So why you want to do that? A, it builds a habit B. It’s something that happens kind of in the background and so you’re structuring not only your investing but your personal finances to, to work in the background without any sort of input needed from you, especially if you can do like an auto auto draft or an auto transfer from, from a checking account or something and you can just be making progress with your investing no matter what happens with the market and no mother, no matter what you’re doing with your personal situation. The rich dad poor. That mantra was always pay yourself first. And so by having a dollar cost averaging strategy in place, that’s a way you can do it.
Dave: 02:05 And a way that, again, you can make progress and start to really make your money compound over time. Everybody wishes that they can get into the market and time it perfectly and it looks so easy in hindsight. Um, and as we’re definitely seeing now as we’re recording this, at the end of October 2018, and that’s been a really rough month for the stock market. A lot of people kind of yelling at each other. If you go on twitter, the presidency that people and people are yelling at the president, uh, and there’s just a lot going on and if this, so this is like one of the best times to have a strategy, adopt something like a dollar cost averaging plan in place because it’s when things are, is when you want it the most is because it’s fine. It can also be the most beneficial to you over the long term.
Dave: 03:08 Yeah, I totally agree. And the thing that I love about what we’re talking about tonight is with the market being so volatile over the last month or so, there’s been a lot of scare about, you know, are we going to start to have a downturn in the market and you know, as we said before, I am no market prognosticator and I’m certainly not going to be able to predict whether it’s going to go up or down and nobody can know that. And if they are telling you that they absolutely know that this is the end, the beginning of the downturn, they’re lying to you because they do not know. There was just nobody that does. But one of the ways that you can help yourself in a situation where things start to go south, and I don’t mean south in a bad way, it’s just the market.
Dave: 03:55 You know we’ve talked before about how overheated it is and this is the highest it’s been since the.com burst in the 99, 2000. So it’s definitely over over priced right now and everything is in. It’s been really hard to find great companies to buy and with a possible downturn. We talked a couple weeks ago about this that this is really the only business you could ever get into, that people freak out whenever things go on sale. And that’s really kinda how you have to look at this, is that when these companies start to take a downturn in the price, it doesn’t mean that the value of the company has gone down. You know, let’s take Disney for example. It’s still a great company just because it’s gone from. I’m just going to throw out numbers here. I don’t know the exact price of it at the moment, but let’s say that it goes from $100 to $80.
Dave: 04:47 It doesn’t mean that the company is now only worth $80. It means that that’s what the stock market is pricing it at right now. But if the cash flows are exactly the same as they were the year before, then hey, now you got something awesome for $20 cheaper and who doesn’t want that? I mean, you know, I think about. I’ll give you an example. I live in Wisconsin. Snow’s coming. Winter is coming. Yes I am a game of thrones fan and yes, winter is coming and it will be here soon unfortunately. And I was preparing myself for that. That’s something we have to do, Andrew. We have to prepare ourselves for winter. I know the, those of you in this sunny, sunny parts of the world do and have to enjoy that. But uh, we have to break out our winter gear and all that fun stuff.
Dave: 05:31 So as I was going through my winter gear, I discovered that by boots that I wear in the winter are junk and so I’m going to have to go out and buy them. So what do I do? I’m looking for deals. I’m looking for sales because I want to buy Disney for $20 cheaper. And as value investors, we don’t revel in people’s misery for sure. But when things start to go south in the stock market, it’s awesome for us because then everything’s on sale and you can find great companies that you can buy it at a discount and this is where dollar cost average. You can, you know, help you very, very big time because as you’re continually buying these great companies at a cheaper price, it is going to go back up at some point. It may be down for a year or two, maybe longer, but it will go back up some day.
Dave: 06:22 And that’s what we’re always in for as in for the long run. And you always have to keep that in mind when you’re investing in dollar cost averaging, you know, buying up a certain amount of it every single month or however timeframe you can work with, with your budget, whether it’s once a month like Andrew does or whether it’s every two months or every three months, however you choose to do it, it’s going to help you in the long run because you’re going to be buying these companies at a lower price. And when that price continues to go back up, then it’s going to be worth more to you at that time because you know, the intrinsic value is continued to rise as the price goes up. So, you know, it’s a great, it’s a great place to be in dollar cost average. It can help you with this can help you stay involved in the market and help you stay with it.
Dave: 07:12 And, Josh Brown, who has a great blog called the Reformed Broker, and he’s been doing this for a long time, really smart guy, don’t always agree with his viewpoints. But in this particular instance, he made a comment the other day that I thought was very appropriate for the situation that’s been happening recently and when things start to, get a little volatile in the market and people start to moderately freak out, everything is going to go south and they’re going to lose all their money. That they will start to sell in a panic or just sell because they want to be smarter than everybody else. And then you become a market timer and when you start behaving that way, as opposed to looking at the actual value of the company and kind of sticking with your investment thesis, will you start reacting to all the short term noise that’s going on in the market.
Dave: 08:03 Then you become a market timer and then you are. Now you have to forecast is this the bottom or is this not the bottom? It’s going to go lower as it got going to go. Or when’s it going to go start going back up? Is there a balance and it’s all, hey, now it’s going to go back in and now you’re going to buy back in. You know, there are so many other variables that go into that and you know, as he was saying, it’s impossible for you to forecast whether it’s going to go down or go to go back up and would you start to kind of react to the short term noise that’s going on with a market. Then that’s when you can start to get in trouble and dollar cost averaging as a strategy and a plan that you can use to help you avoid that panic.
Dave: 08:42 I was reading something earlier that said that if investing was formulaic and that’s all you needed to do, it would be easy. But when human emotions get involved in all these things, that’s when we all get in trouble because we’re all human. We all have emotions and I was listening to a podcast a few days ago that Meb Faber he said one of the reasons why he’s a a quant is because he’s got so many emotions. You can’t control them. So he asked me to go everything by the book and by the numbers and that helps him maintain his, you know, rationality during all the ups and downs of everything that goes on in the stock market. And again, going back to dollar cost averaging when you buy on a consistent basis and you’re putting money into the, into the, into the market on a continuous basis, it can help you smooth out the ups and downs of everything that goes on with the market. And I know that that’s one of the things Andrew does and you know, he’s a perfect example of dollar cost averaging and he does it with this, with his portfolio and he’s talked about this many, many times and I know he’s got some great advice for us.
Dave: 09:48 Well that’s the thing, like he said, kind of smoothing that out system like dollar cost averaging will automatically set you up to buy low and to sell high in the sense that, um, you’re going to buy more when things are on sale and you’re going to buy less when things are more expensive. So as an example, let’s take your Disney example again. Let’s say we’re doing like a thousand bucks a month into our dollar cost averaging plan. So when Disney is at 80, we’re able to pick up a more than 10 shares for a thousand dollars. Compare it to maybe if it’s at 200, we can only pick up like five shares. So we’re buying less when it’s more expensive and we’re buying more when it’s cheaper and we’re not having to do anything like you don’t have to make a tough decision there. You don’t have to try to, um, pick your spots and kind of time in the market there by committing to a consistent habit and discipline of investing the same amount of money every month into, into some sort of stock.
Dave: 10:53 Then you’re automatically setting yourself up to buy more shares when they’re cheaper. And so, the way I look at it is it’s something you can equate, you know, we talked about baseball in the world series and Dave Bravo, good point about how people who can be this idea that they know where the future holds. Just go back and episode there too, and listen to us, talking about where we thought, who we thought the world series, when there’s going to be, and we were both wrong and we’re pretty big baseball fans, both of us. Yeah. So it was very wrong.
Dave: 11:26 I got close to the needed. Mine was a little bit biased, a little more emotion than numbers, but if you take like a sport like baseball or a sport like football or even basketball, if you are trying to compete and compete at a high level, all you have to, if you can set yourself up to have great form, um, that takes care of 85, 90 percent of the problems, you will automatic by getting that and putting it in the background, that’s something automatic. If you have the fundamentals down and you’re able to get the angles right and you’re able to utilize the proper muscles and you do that through this muscle memory and repetition, right? Then every time you throw a ball, every time you shoot a jump shot, you’re going to automatically have better chances because you have all these things automatically set up in place.
Dave: 12:23 So things like dollar cost averaging and diversification, those are going to be the things that make up 80 to 90 percent of your results, uh, in the big picture over the longterm. You have to establish those in the background and then they’re going to work for you and you’re gonna set yourself up for success. And that’s what really what’s key and unfortunately not talked about enough when it comes to investing and personal finance and something that’s not really mastered because a, it’s not really understood and, and it’s not that fun to talk about, it’s more fun to talk about a worst Tesla going tomorrow, right? But, but these are the things that you really want to put into place, uh, to get yourself set up, to automatically be doing things that you want to do with your portfolio and you’re investing such as buying more, let’s buy more.
Dave: 13:17 When things are on sale, it’s buy more when things are either discount. Yes, you have, you have companies and as their share prices are going down, you might see some of those earnings dropping. You might see some of those cashflows kind of shrinking, but as I’ve stressed before with my take on companies with negative earnings, the fact remains even during really, really rough recession’s, a lot of these companies like Disney for example, will continue to produce great profits. They might not be growing as high as they did during a bull market or an economic boom, but when things get rough, they tend to still be profitable. If they are good companies and good businesses, kids still want to go to the movie theaters. Even if, their parents aren’t able to go out for vacations every year because they didn’t get a Christmas bonus.
Dave: 14:10 Right? A lot of different businesses still make great profits regardless of where the economy is, regardless of where the stock market is. And so why wouldn’t you want to be buying more into those as their prices are falling? You have to really look at buying these stocks and not and trying to separate yourself from, from seeing red in the portfolio. And I know it’s really hard and it’s a lot harder to do than to say, and I, I get that too, you know, I hate looking at my portfolio and seeing the stock that I feel really good about. I got other great price, but maybe the momentum still really negative in the short term. And so, you know, you might buy a stock and then see it go down 10 percent in a month or two or three and it doesn’t make you feel good because you don’t feel like you really got.
Dave: 15:02 You don’t feel like you were right. You don’t feel like you made the right decision. But if you can kind of step back and look over the longterm, understand that either a, the, uh, there is some, some, there is some trouble coming up, cashflows are constricting and earnings aren’t growing as, as great as you’d like them to, but you know, there should still be profit and still be progress and compounding and those sorts of things. Or be the market’s completely overreacting and completely this is an underdog stock and and people are discounting it and not realizing what the true reality of their business is. So really as long as you have something like, okay, at this point, this something like negative earnings tells me that this, this, this, this company is really in trouble. Outside of that you can, you should in theory be able to dollar cost average and pick up more shares as a stock price has fallen and feel good about it.
Dave: 16:05 I think it would be really helpful and kind of cool if, if we started looking at stocks instead of looking at where their price goes as you pick up these shares to, to kind of think of it like, okay, I just add a 10 p, e, I just, I just, ah, for $100 I bought $100 stock at a 10 pe. I just gave myself $10 worth of earnings. I think that’s a really a better way, a kind of a cool way to look at it. And so every month when your dollar cost average noon and you’re buying more stocks, even if the market’s going down, you’re saying, you know what, I’m, I’m, I’m getting access to these, the I’m like plugging myself into this stream of income, right? This, this river of income and I’m, and I’m getting little bits of it coming to me.
Dave: 16:55 So whether that’s, you know, whether you want to track, Oh, I’m getting this dividend income stream, which is like a real income stream and you kind of track that cool. This year I kind of got like $20 worth of income from dividends straight up and, and then maybe the next year you got 40 or 100 or a thousand that you want. When you see that and you see it really grow and compound and, and, and kind of role positively like a snowball down the hill, that’s where you can really start to flip the script a bit and see stock ownership for what it really is. It’s not buying and trying to sell again higher. It’s, it’s getting p part ownership of businesses. You’re picking up these little pieces of businesses that are giving you little income streams and whether that’s through their earnings or through their dividends a, those are yours and yes, it’s not going to be a straight line.
Dave: 17:51 Nothing in life. I don’t care what what you’re trying to pursue. It’s not going to be a perfectly straight. I made progress at a consistent rate every single day. There’s going to be ups and downs and that’s no different in the stock. Market’s no different with your financial, your portfolio value and the number of shares you have and how much those are worth. And so if we can focus on the input instead, instead of the end result, then we can understand that over the longterm the end result will take care of itself as long as we are continuing this habit of dollar cost averaging, especially when things and prices are getting cheaper because that’s when dollar cost averaging is really works. The best is when is when you can pick up more and more of these companies when they’re cheap and then when they kind of rebound, then you get all that.
Dave: 18:47 All those gains from a, from a recovery, which is so impossible the time, but historically it’s always, always happen, so you just have to be invested through it and then you can kind of fast forward and look back in the mayor later on and be like, wow, I survived that and my portfolio recovered and wow, look at these gains. That’s just not going to happen. If you’re always trying to jump in and out of stocks and, and, you know, if you’re going to try to pile money in all at once after the stock market’s gone up 25 percent and then you’re going to try to sit on cash for like another two years and then maybe try that, wait for another huge uptick to, to put a bunch of money in the stock market. Again, I just don’t see that as something that you can sustainably and consistently expect to have a maximum participation in any of these recoveries, maximum potential of compounding.
Dave: 19:47 And so that’s something to really keep in mind is dollar cost averaging is going to keep you in the game and it’s going to give you progress every single month. Let’s say you have a stock and it goes down, but it’s paying a dividend, so because your dollar cost averaging and you’re picking up shares and then even if the stock price is going down, you’re getting paid a dividend which allows you to repurchase more shares. So you’re already growing your wealth, you’re growing the ownership, your, your personal ownership of that business is growing as you’re collecting those dividends and reinvesting them. And that’s one of the stock goes up or down. So you, you, if you can get that process started right away, then you can get that compounding going and that’s going to have a big multiplier effect over the long term, especially the longer you do it.
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Dave: 20:46 Points. And I love the things you were referencing. And, I think those are great things to think about as everything kind of slides up and down.
Dave: 20:57 I know we have some questions that we received or would you like to answer some of those down?
Andrew: 21:02 Yeah, let’s knock some of those out because you know, uh, the application of dollar cost averaging can sometimes be tricky and there are some listeners who at some, a smaller little things, I think we can answer some of them and be helpful for a lot of people. Okay. So why don’t we take, did you want to take the first one here? Okay. So this is from Sam asks, he says, Hey Andrew, first off, I’ve been listening to your podcasts from beginning of, reached to about the February 2018 episodes. This podcast has given me so much valuable information to investing for my future and I want to thank you for that. Also recently purchased the Vti and read your book, which is also excellent. Thank you Sam. Now finally to the point, if you’re a dollar cost averaging $150 a month, how do you dollar cost average five or 10 or even 20 stocks at the time?
Andrew: 21:52 I have several purchases in the stock market and was wondering how you split this $150 up among your portfolio. Thanks for your time and I look forward to hearing from you. This other questions kind of related so I’ll tackle them both at once. The Sun’s from Giuliani says, hi Andrew. I’d like to get into investing. I came across your podcast and thoroughly enjoying, so thank you for material. I’m going through the back to the basics episodes and came across the one where you discussed dollar cost averaging. I’m interested in this method but I’m from the UK, so if I was to do a one hundred and fifty cent euros. Yeah, no, I meant that’s pounds, pounds, pounds, 50 pounds a month. About 10 percent of that would go on trading fees before anything. It doesn’t seem that that’s the right thing to do. As straight away. Ten percent of my investment is wasted and appreciate your view.
Andrew: 22:38 So this really goes and what makes dollar costumer great and I am getting so excited, I’m mispronouncing. Well, Max dollar cost averaging. So um, there’s no one size fits all. It’s such a personal part of uh, the way you invest because everybody has different amounts that they’re able to invest. Right? And so for example, with the, with Julian here from the UK, if he’s going to pay a 10 percent of 150 pounds a month into trading fees, that’s, that’s, that’s too much. Right now you’re looking at a situation where 150 a month is not really a good dollar cost average amount. So for something like Julian situation, the reason why I personally do $150 a month, uh, a obviously it’s easy to follow and something that people can track quite easily. But it also with the broker I have and the transaction fees I pay, I still get, I don’t lose as much from transaction fees for doing something like $150 a month. So at four 95, I think it goes, I lose like a percent and a half right off the bat,
Andrew: 24:01 Or I think it might actually be closer to three percent, but you know, I’m losing, I’m losing some return right off the best three point three percent, but you know, it’s not three point three percent. That’s like one year of dividends. Um, in the grand scheme of things, that’s not much. It’s, it’s something, right? And we’re just trying to start small. Obviously if you have more money than you, you have the luxury to, to invest more and you can mitigate that. I certainly do with some of my other accounts. Um, but something like 10 percent on a fee, now you’re looking at a, with the stock market averaging 10 percent a year, you’re like losing a year of returns right off the bat. That’s really, really high. So you want to structure your dollar cost averaging so that, um, that’s, that’s not the case for you.
Andrew: 24:50 So kinda like what they have said before where whatever your time period of the, of dollar cost averaging is a, you can still apply to our costs, our dean and get all the benefits and it doesn’t have to be exactly the way I do it or the exactly the way somebody else does it. So maybe instead of doing the 150 pounds a month, you do 450 pounds every three months and now it’s something around three percent of, of your deposit goes to a transaction fee rather than 10 percent. And that can, you know, that can make a difference too. And a couple months of kind of delaying that compounding is not as bad as, as, you know, take the average investor who might just invest whenever they feel like it. Those couple months aren’t, aren’t gonna really move the needle compared to, you know, you’re going to still get star there, then get your compounding star that, but at the same time not pay too much for fees.
Andrew: 25:47 And then, going back to Sam’s question about how do you split up with five, 10 or 20 stocks? At the time, this is the other thing that, um, when I built the real money portfolio for the leather I, it took me months to get fully diversified so I wasn’t trying to split this $150 per month and you know, buy a 10 or 20 stocks at the time. First off, that’s impossible because a lot of these stocks might trade and you know, a lot of the purchases the I make sometimes I can only buy one share, cause the stock something like a Disney might try that $110. So you can only buy one share with that what that. Well, what I would do, I would buy a share and that I have $40 left over for example, and then just roll that over into the next month. Next month I have $190 and I can buy however you know, what’s the maximum amount shares I can buy with that.
Andrew: 26:40 And then you just keep going from month to month to month. So you have to remember again, it has to be on the grand scale on the grand scheme of things. And what’s the big picture? It might be hard to kind of build a portfolio and feel like you’re not really properly diversified, but you know you shouldn’t be looking at your results in the beginning anyways. If you consider that your investing is something that you take with you for the rest of your life, I assume you’re going to need to eat for however long you live. So you’re going to need money in some capacity. And so investing should really be a part of your money picture for the rest of your life. So if you really look at that and you think about being patient enough to wait five, 10, 20 months to get a fully diversified portfolio, that’s just a drop in the bucket.
Andrew: 27:28 And so you know, because you don’t want to spread yourself too thin, you don’t want to pay too much and can’t imagine buying like five stocks. Even like five, like $10 stocks, five transaction fees right there. And doing that every month. That would be so costly at you’re. You’re giving, you know, you’re putting your money to work for the broker instead of the planet to work for you. So don’t do something like that. Be Smart. Think about how am I going to structure this for my personal situation and try to limit that. The fees that you pay, try to get below. You know, I, I would definitely try to get below four percent at least, you know, three percent maybe that you’re paying then transaction fee to get invested in the market. And you know, if that means waiting longer to be fully diversify, they’re waiting longer to make that dollar cost, average amount, whatever, whatever it takes, just do that.
Andrew: 28:23 And, and uh, you can set yourself up for great dollar cost averaging if even if your situation is not as ideal currently as you’d like it to be. All right? So Aaron says, I’m hoping this is an edge case and never have to worry about in the. Even if it does happen, I only miss out on a portion of gains. So yeah, I, I look at it as the way I would look at a dollar cost averaging is, uh, the same as like a line item in your budget, the same as paying rent, right? Even if you go through recession, if you’re out of work for a time, maybe you’re working odd jobs to keep the lights on, or you might, you might be fortunate to have an emergency fund that you’ve prepared you would, you would still continue to pay the rent. And so if you’re really truly committed to dollar cost averaging, you would, you would treat it in the same way and look at it as an expense that you have to pay just like you would keep the lights on.
Andrew: 29:20 That’s what I’ve done with my $150 a month kind of commitment. And so like having the EA leather there, there’s been times trust me where I really, really things were really, really tight and I was. The last thing I wanted to do was to make that dollar cost averaging deposit. But I’m really glad I did because you can just see the progress as time goes on. And as I look at the portfolio, I’m seeing good amounts of compounding and already I’m seeing a lot of dividend reinvestment and these shares that are accumulating and that all can only really happen if you’re consistent. And so you just have to plan and mentally prepare for it. Think of it just like, you know, I think it’s reasonable to say we will all be unemployed at some point, so you try to have an emergency fund in place, whatever that means for you and whatever’s comfortable for you. Um, but even at the time like that, that’s why I think it’s reasonable to think that when you’re unemployed is probably when stocks will be the very best deals and it’s going to be hard to it. I think it’s a big reason why a lot of why the market can stay low for awhile because it does happen for a lot of people. I know have definitely thought about that before too.
Andrew: 30:42 But if you can, if you can stay committed to it and really put it as a priority, I, I’ll put mine on the first of the month and that’s the first thing I pay. Pay Yourself first. So if you can do that, then yeah, then you can. Then it is realistic to to think about 10 to 11 percent returns per year because you’re gonna, you’re gonna participate in the recovery, you’re going to be buying low successfully and that’s goes back to everything we talk about. But you do have to prepare and really treat it like a line item on the budget. That’s kind unnegotiable at like rent it. If you really, really want to stay consistent and continue to make those investments regardless of what’s going on in your personal life.
Dave: 31:28 Those are excellent points and I agree with a lot of the things that you were saying. I think the two key things that I, that I took away from that are continuing to be invested. I think that has so many benefits for you in the long run. You know, Erin was talking about, you know, over the next 25 years or so of his career, if he continued to stay in the market with his investing over the next 25 years, he’s going to reach such a huge benefit from that. And I think the other thing that really kind of stuck out with me too was, you know, the pay yourself first mentality of, you know, creating your budget and having that as a line item. You know, I’ve talked about that in the past as well about that being, you know, I consider it a, a bill that I have to pay every month and however you need to look at it to mentally prepare yourself to make sure that you’re setting aside money for yourself, for your retirement is so critical to what we’re talking about.
Dave: 32:24 You have to have money to be able to invest and if you just quote unquote wait until the end of the month and I’ll take the money that I have leftover. We never have money leftover. It just doesn’t happen. I saw that so many thousands of times in the banking world and if you do not it a priority, it will not happen. So those are two things that I took away from, from Andrew’s conversation and I think those are so critical and you really need to seriously think about how you approach both of those ideas and I think the more successful you’re going to be is by making those priorities in your life.
Dave: 33:01 All right folks, we’ll that is going to wrap up our discussion tonight on dollar cost averaging, one to thank all the people that wrote into us over the last few weeks. Those were fantastic questions. We really, really enjoy talking about those and thank you again for bringing those up. I think dollar cost averaging is such an important strategy and it needs to be discussed and it’s not discussed enough and so Andrew and I, we’re happy to talk about it a little bit more tonight.
Dave: 33:25 Without any further ado, we’re going to go ahead and sign us off. You guys got, have a great week. Invest with a margin of safety. Emphasis isn’t on a safety and we’ll talk to you next week.
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