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Auto-pilot investing

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Either invest full-time or put it on auto-pilot. It’s rare to have great success otherwise.

The best auto-pilot approach is to decide how much you want to invest each month and then buy that same dollar value each month whether the market is up or down. The technique is called “dollar-cost averaging“.

Over the long-term, it tends to average your cost in a downward direction (which is good). This happens because when the market is up, you buy fewer units. Conversely, when it’s down, you buy more units at cheaper prices. It lowers your average cost and benefits you when the market turns around.

For example, if you’re investing $100 per month in Fund X, when Fund X’s shares are $10, then that month you buy 10 shares. If next month the price drops to $5/share, you buy 20 shares. If it jumps to $20 per share the next month, you buy 5 shares. In this scenario, your average cost for 35 shares would be: $300 / 35 shares = $8.57 each.

By dollar cost averaging, you automatically buy more when it’s cheap and less when it’s expensive. That way, your average cost per share will tend to be lower over time.

Index funds

Another important factor is to focus on whole-market index funds and avoid specific stocks and sector- or industry-focused funds. Individual stocks and sector funds will be subject to greater fluctuations than the general market, and (regardless of what an “advisor” might say), very, very, very few fund managers outperform the general market over the long-term. By sticking to a general market index fund, you can avoid the risk of a bad stock pick.

If [investors] are not going to be active investors — and very few should try to do that — then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They’re not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock.

– Warren Buffett

Allocation

It’s best to select three or four funds that expose you to (for Canadians) corporate bonds, Canadian equities, US equities and international equities. Once you have the low-cost index funds selected, then a good allocation between them is:

  • 20% in bonds;
  • 30% in Canadian equities;
  • 30% in US equities;
  • 20% in international equities.

Let’s say you can spare $500 a month. By owning and dollar-cost averaging into just three index funds — $300 into one that holds the total US stock market, $100 into one that holds foreign stocks, and $100 into one that holds US bonds — you can ensure that you own almost every investment on the planet that’s worth owning.

– Jason Zweig, commentary on chapter 5 of The Intelligent Investor Auto pilot investing

Regardless of the funds you choose, it’s important to remember to only select funds that:

  • Represent the total market of the securities included. No industry- or sector-focused funds regardless of how hard the sales pitch is;
  • Have a Management Expense Ratio (MER) below 1%, preferably below 0.5%. The MER is the fee (regardless of performance!) that the manager will take every year. It represents a direct drag on any gains or losses that are made in the fund.
  • Have no “load”. A fund load is a fee that is charged either when you purchase the fund (a “front-end load”) or when you sell it (a “back-end load”).

Sample funds

The following collections of funds from two Canadian banks will get you into Canadian bonds (which tend to hedge the general market), and Canadian, US and international equities. Each bank has its own family of funds and may allow you to buy funds from other banks.

The important thing to remember is that it doesn’t matter who the manager is in a whole-market index fund, because the corresponding index decides what to buy and sell. The manager just executes the transactions. Minimizing your fees is more important than who the manager is.

RBC Royal Bank index funds

TD Bank index funds

CIBC index funds