Canadian ready to invest 20k in ETFs

[housenuts]

Hey guys,

I've read lots of the recent threads about investing in index funds or ETFs. Basically I am prepared to do this now for about 20k. I'm into medium+ risk for medium+ return.

Vanguard and iShares were the two names thrown out there. I went to both sites and they seemed to be for American investors. I found ishares.ca and registered there.

Obviously it wasn't as simple as gull's plan in the other thread

[ QUOTE ]
The simplest plan:
1) Go to vanguard.com
2) Open an account, and an IRA if possible too
3) Stick it all in Target Retirement 20XX
4) Sit back and relax


[/ QUOTE ]

Note: change Target Retirement fund to Total Market and Emerging Market funds

So being Canadian does anything change? Can I still invest in the same funds?
Do I need to open an account at etrade or some other place to buy the ETFs?

Thanks guys.

[housenuts]

So I'm going to open an etrade account to buy up some of these ETFs.

They have the Cash Account and the Cash Optimizer account. I don't really see any downside to the Cash Optimizer account so I think I'll go with that one. Basically it allows you to hold money there at 4.15% as you decide where to invest it.
The Cash Account requires funds to be paid as you place orders.

I guess I'm posting this so someone can tell me if I'm doing something wrong. Thanks.

[Maurader1]

I'm in the same boat. The only thing that I found against ETF is that if you plan on making frequent contributions, then the commisions might be substantial. I've yet to find an equivalent mutual fund tho..so i still carry cash...

[MarkD]

[ QUOTE ]
The only thing that I found against ETF is that if you plan on making frequent contributions, then the commisions might be substantial.

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That seems to be a HUGE negative though. It's the main reason I have not bought any ETF's as dollar cost averaging appears quite important from the little that I've read so far. At my bank I'm paying $29 commission. With a MF I pay zero so can make $100 monthly contributions which is nice.

[Trencherman]

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[ QUOTE ]
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[/ QUOTE ]
More details here.

[Maurader1]

Is it possible for a Canadian to open an account with an American brokerage?

[gull]

[ QUOTE ]

That seems to be a HUGE negative though. It's the main reason I have not bought any ETF's as dollar cost averaging appears quite important from the little that I've read so far. At my bank I'm paying $29 commission. With a MF I pay zero so can make $100 monthly contributions which is nice.

[/ QUOTE ]

Actually, dollar cost averaging is simply a suboptimal psychological crutch. Mathematically, lump summing produces higher returns. And while it's true that dollar cost averaging reduces risk, it does so very inefficiently. You can reduce risk most efficiently by making your asset allocation more conservative.

However, despite dollar cost averaging making no theoretical sense, some people still use it because it helps them sleep at night.

[housenuts]

[ QUOTE ]
I'm in the same boat. The only thing that I found against ETF is that if you plan on making frequent contributions, then the commisions might be substantial. I've yet to find an equivalent mutual fund tho..so i still carry cash...

[/ QUOTE ]

that does sound like a valid point, but at least for the next year i'll be in no position to make frequent contributions. i'm taking off travelling and what to get some money put away before i do. so i'm going to put a lump sum in now.
i'd rather put in 20k now, than set it up so 2k is put in every month for the next 10 months to dollar cost average. i have the money sitting in my BMO account now doing nothing so i may as well get it invested.

[Maurader1]

Is DCA only sub-optimal due to transaction costs? Or are there other mathematical reasons?

[MarkD]

[ QUOTE ]
[ QUOTE ]

That seems to be a HUGE negative though. It's the main reason I have not bought any ETF's as dollar cost averaging appears quite important from the little that I've read so far. At my bank I'm paying $29 commission. With a MF I pay zero so can make $100 monthly contributions which is nice.

[/ QUOTE ]

Actually, dollar cost averaging is simply a suboptimal psychological crutch. Mathematically, lump summing produces higher returns. And while it's true that dollar cost averaging reduces risk, it does so very inefficiently. You can reduce risk most efficiently by making your asset allocation more conservative.

However, despite dollar cost averaging making no theoretical sense, some people still use it because it helps them sleep at night.

[/ QUOTE ]

Ok. I do not know much about investing and I'm not that smart but dollar cost averaging makes a lot of sense to me mathematically and it's easy to see why. I do not see how lump summing produces higher returns (I am assuming that I can not predict the future so will not know when exactly to "buy low").

Let's talk in terms real numbers. Let's propose that I currently have 25k to invest and due to diversification requirements decide to buy 5 different index funds (do not argue against investing in index funds, as that is not relevant to the discussion - let's assume this is the investment vehicle of choice). Each fund get's 5k to start.

Every month I have $500 extra to invest after paying my bills. If I do dollar cost averaging I will allocate $100 evenly to each of the 5 funds every month and will perform one rebalancing of funds per year. Dollar cost averaging ensures that I purcahse more units of each fund when it drops in price and also ensures that I buy less units when the prices goes up.

You are saying this is a bad monthly investment policy? What should I do with my monthly $500?

edit: I should note that through my bank purchasing mutufual funds is entirely free (assuming no load). I'm not sure if that is the same in the US or not.