Unlike most people’s brokerage accounts, mine doesn’t reinvest dividends or interest automatically into new shares of the indexes I own.
I wish it did. It just lumps cash into the account and I have to manually direct it, at some stage.
If you have an account like mine, at DBS Vickers, you’ll want to wait until you have a few thousand dollars worth of dividends/interest income before making a purchase. Doing so ensures that you won’t pay as much, relatively, in commissions.
For example, it costs me $25 U.S. to make a purchase, so why would I place an order to buy $50 of my exchange traded index fund when 50% of it would be gobbled by commissions? Instead, I can wait for my cash to grow to $5000, make the purchase I want, and only give up 0.5% in commissions when paying $25 to the brokerage.
But here’s where I admit to being exceptionally lazy
When I purchase something for my brokerage account, the proceeds are automatically wired from my savings account. So if I have a few thousand dollars in my brokerage account, in cash, it will just sit there until I manually make it available for a purchase.
You might think I’m exceptionally odd, and there’s really no excuse for this:
I have been using cash from my savings account, while completely ignoring the cash building up in my brokerage account. A few days ago, I looked at the accumulated dividends: $24,000. Hmmmm.
It wasn’t making any money just sitting there (and nor would it) so I decided to allocate it to one of my three index funds.
Here are the funds I own:
- A short term Canadian bond index (40% of my portfolio)—XSB
- Vanguard’s total U.S. stock market exchange traded index (30% of my portfolio)—VEA
- Vanguard’s first world international stock market index (30% of my portfolio)–VTI
Choosing which one to allocate this $24,000 to was easy.
Have a look at the chart below. It’s a three month chart comparing the short term Canadian bond ETF that I own, to the first world international exchange traded index fund that I also own. You might not be able to see the percentages, so let me tell how each of them fared:
The international stock index rose 6% over the past three months, and the short term Canadian bond index dropped very slightly over the same time period.
Now let’s have a look at my U.S. stock market index, and compare it to the bond index.
The bond index, as mentioned, has dropped in value over the past 3 months, and the U.S. stock market index has gained 8% in the same time period.
My target allocation is as follows:
- 40% Canadian short term bond index—XSB
- 30% First world international stock index—VEA
- 30% U.S. stock market index–VTI
When looking at my account, I noticed that my bond allocation was worth roughly 39% of my total. So I took my $24,000, and I bought more of my bond index. This is what I will do every month—month after month after month. I’ll buy the lagging index….the one with the poorest recent performance. That’s going to ensure that I remain as close as possible to my target allocation.
This kind of investing isn’t sexy, but this is why it will beat more than 90% of investment professionals:
1. Each of my exchange traded index funds will beat the vast majority of their actively managed counterparts. For example, my U.S. index will beat the vast majority of U.S. actively managed funds. And my international index will beat the vast majority of international funds. My bond index will pound most of its counterparts as well. That’s irrefutable, based on the albatross of costs associated with active management.
2. I have the courage to buy the lagging index, rebalancing over time. When the stock markets crashed in 2008/2009, I did what I was supposed to do: I bought stocks and stock indexes because my bonds were making up a disproportionate amount of my investment account when my stock indexes fell. I did the same thing in 2002/2003, when the markets were on sale: I poured money into the stock market.
Although we all know that we’re supposed to do this when markets fall, most of us don’t, including most investment professionals. This gave my performance a huge gap over the pros. And it will again, at some point. I highly recommend rebalancing dispassionately when markets go haywire, or at the very least, continuing to buy the laggard, as long as it’s not some falling stock you’re betting the farm on, or a single foreign country index. Go broad, with your indexes, and you’ll be fine for the long term.
Having said all this, I’m definitely not perfect. What other chump would leave $24,000 in cash, from dividends, just sitting in his/her investment account? If it’s cash you want to keep aside, a smarter investor would have put it in a high yield savings account, rather than let it fester in a brokerage account.
But like I said before: I can be pretty lazy sometimes.
