Lumpsum going to Canadian Equities: DCA or all in, or?

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Lumpsum going to Canadian Equities: DCA or all in, or?

Post by jay »

Hello all,

please note that I chose to post this here rather than the Portfolio Seeking Advice board because it a question of timing, and not a portfolio review.

I just received a lump sum of 300K from the sale of my private company shares. I am planning to allocate them into a modest-growth dividend paying portfolio. The funds will be mostly in 15-20 Canadian equities picked from the usual suspects, mainly banks, utilities, telcos, pipelines, consumer etc... In this current environment with concerns about QE, tapering, raising rates, debt ceiling etc..., I would really appreciate it if you could share with me your how you would go about implementing such a portfolio, particularly in terms of the amount of time you would take to implement it.

Please note some background: I'm 40 yrs old and a salaried employee, so income is not an issue at this point in my life. The funds will be in a taxable account and I am not in a rush to deploy them. In my RRSP I have a permanent-portfolio like allocation of index funds made of 50% Canadian bonds , 33.33% world equity and 16.67% gold. I only mention this to point out that deploying the new funds to the taxable account would bring me to my desired total allocation of 25% bonds, 50% Canadian equity, 16.67% global equity, 8.33% gold.

So here is my plan: allocate funds over the course of roughly one year, once per month. Example:
- Month 1: Allocate 25K among: RY, BCE, CU, ENB, SAP
- Month 2: Allocate 25K among: BNS, RCI.B, FTS, TRP, MRU.
- Month 3: Allocate 25K among: POW, T, EMA, IPL, L
- Rinse and repeat
- If the market or a specific sector takes a plunge during that time, then allocate more funds (say 50K per month instead of 25K).

Another option I am considering is to go 50/50:
- Deploy 10K immediately in each the above 15 stocks.
- Wait 6-12 months and deploy the remaining.

Once the implementation is complete, re-balance using the dividends once a year or when opportunities arise.

I do realize this is not a science and that in a way is a classical market timing question that is open to a lot of debate. Please share with me whether you would DCA or go all in, or whether you would take a whole different approach?

Thanks
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by AltaRed »

I am not in a dissimilar position due to RE sales in May of this year, with the only exception being this cash is maybe 25% of my portfolio now, and I am retired. The plans are to deploy most of this cash in Canadian equities, and some of it in FI, all in a taxable account.

My view is NOT to deploy this cash too quickly for the primary reason of 'buyer's regret'. I hate to buy high more than I hate a missed opportunity (all other things being equal). If it takes me 1.5 years or more to deploy this cash, so be it. That said, I will deploy some of it each quarter, and if there is a significant correction of 15-20% along the way, I would deploy it all at that time.

There is no right answer for you as it depends on your temperament. However, I would recommend deploying it in some approximate DCA fashion, but not in pint sized bites. I would prefer your 50/50 option.

Another quite similar method would be to deploy $75k each quarter on the premise that if you apply $300k to 15 stocks, then each stock would attract about $20k when done. Buy half positions at a time, e.g. $10k tranches. So, in the first quarter buy $10k in each of 7 stocks, followed by $10k for each of the remaining stocks in the next quarter, then back to the first 7, etc. with the caveat that should something go on sale, dive in for a full position. That is what I did when TCK.B went on sale recently.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by deaddog »

http://www.theglobeandmail.com/globe-in ... le8408480/
The results were virtually identical for all three countries: Assuming a portfolio with a 60-40 mix of stocks and bonds, the lump-sum approach achieved better returns two-thirds of the time compared with investing in equal instalments over the first 12 months.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by deaddog »

AltaRed wrote:I am not in a dissimilar position due to RE sales in May of this year, with the only exception being this cash is maybe 25% of my portfolio now, and I am retired. The plans are to deploy most of this cash in Canadian equities, and some of it in FI, all in a taxable account.

My view is NOT to deploy this cash too quickly for the primary reason of 'buyer's regret'. I hate to buy high more than I hate a missed opportunity (all other things being equal). If it takes me 1.5 years or more to deploy this cash, so be it. That said, I will deploy some of it each quarter, and if there is a significant correction of 15-20% along the way, I would deploy it all at that time.

There is no right answer for you as it depends on your temperament. However, I would recommend deploying it in some approximate DCA fashion, but not in pint sized bites. I would prefer your 50/50 option.

Another quite similar method would be to deploy $75k each quarter on the premise that if you apply $300k to 15 stocks, then each stock would attract about $20k when done. Buy half positions at a time, e.g. $10k tranches. So, in the first quarter buy $10k in each of 7 stocks, followed by $10k for each of the remaining stocks in the next quarter, then back to the first 7, etc. with the caveat that should something go on sale, dive in for a full position. That is what I did when TCK.B went on sale recently.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by AltaRed »

Technically yes, one shoukd want the market to fall for the second tranche, but human psychology being what it is, it can feel better being half right or half wrong than totally wrong.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by SQRT »

Given your young age and resulting long hold period, the methodology used to create the portfolio probably isn't as important as it might be otherwise. I think your original plan is fine. Keep in mind these equities are not that volatile and are paying reasonable divs. My personal view is that you would want to move sooner than later given the opportunity cost associated with the divs. Of course being retired and spending my divs, I have a bias towards income. I like your overall strategy as to what you are investing in. Good luck.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by Taggart »

You have three equities for each of five sectors (finance, telecom, utilities, energy, and consumer staples) but absolutely nothing allocated to either consumer discretion or the industrial sectors, or perhaps for personal reasons you prefer not to?

Using both price ratios and dividend yields, I wouldn't purchase anything on your list that didn't look at least reasonably priced. I always refrain from buying any Canadian dividend growth stock that has a payout ratio of over 100%, and usually a lot lower than that figure.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by AltaRed »

And there you have it. Two opposite opinions about when to buy from SQRT and Taggart. :wink:
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by jay »

Thanks all.

Alta, I think I like your 1/4 position approach. I might also use value-averaging for the fun of it.

dead and SQRT: I know the odds favour going all in, but ... the current macro developments make me and many others nervous. These are unprecedented times.

Taggart: My list is not final. I am aiming for 15-20 stocks and I will likely lean more towards 20. I am obviously missing some sectors. CNR and SNC (Industrials), POT (Materials) come to mind along with a couple of REITs.

Taggart's comment about the payout ratio makes me want to ask: is there is anything in my list that you wouldn't touch with a 10 ft pole?

thanks
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by FinEcon »

I would not do the piecemeal approach. It may make you feel good like your dipping your toes in inch by inch but honestly, it's a tad bit useless when a long time horizon is considered. Just alocate all of it in as few trades as you can and then so you can sleep better at night buy some deep out of the money puts on the TSX which pay off huge in the event or a severe market downturn (say more than 30% in a 12 month period). If you don't know how to do this, spend some of the money you saved on fewer trades on a full service trade which will help you place an order on the correct option(s).

There are a lot of worriers on this board and the world in general. The only thing which makes what you are doing (diversified blue chip dividend portfolio) risky is your own behaviour. Master that and there is no risk over the very long haul.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by deaddog »

The odds say you are better off going all in. But
the current macro developments make me and many others nervous. These are unprecedented times.
There’s that wall of worry that the market climbs. What do you do if the market keeps moving up? If it’s too high today how will you feel about buying if it goes higher?

Where do you buy if it drops? What if we get into another 2008 type of drop? Do you buy all the way down or do you wait?

All these scenarios; all these question; all these emotions. It’s easy to lose track of why you are investing. What is your goal? Is it to make money? Is it to not lose money? Is it to keep what you have? Plan your investment strategy around your goal.

You might even give market timing a shot. I don’t think there is any law that says you have to hold on to a stock after you buy it. I know that the studies show that market timing doesn’t work. The studies also show that DCA isn’t the best strategy. How is what you are proposing different than market timing?
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by dusty2 »

I'd say that the most important question for Jay to answer is if he owns a home and how much mortgage is left. If he owns a home and is single he could quit his job and live off the $300,000, with no worries. If he doesn't own one, the $300G's will buy him an oversized closet in Toronto with no parking even less in Vancouver. Since he says he's 40, he should have a home. $300G's should be used for a down payment on a house or condo if he doesn't have one. It's always the right time to buy a house.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by BRIAN5000 »

Please share with me whether you would DCA or go all in, or whether you would take a whole different approach?
If I was going to do what you're planning I'd DCA because it matches my style/thinking/risk tolerance. I'm prepared to miss a gain to avoid a loss. However I Am doing right now what you're suggesting but if I was to start over I would pick and ETF or two and DCA into them, easy, simple to implement and rebalance. Sometimes no matter what the statistics say you have to do what feels right for you. In a case like this you have to live with the descision no one else on here has to.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by InvestorNewb »

Personally I don't have the patience to DCA.

The market can also crash once you're finally "all in", so it doesn't really protect you from that standpoint.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by AltaRed »

DCA lowers the pain of 'buyers regret'. That matters more to some than others and is a personal decision. Forget the studies about which is better. Imagine someone going all in, in early Sept 2008.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by deaddog »

AltaRed wrote:Forget the studies about which is better. Imagine someone going all in, in early Sept 2008.
Now you are market timing. :)
How is that any different than being fully invested in early Sept 2008?
The market is uncertain. Buying in tranches doesn't make it any less uncertain.
If a strategy gives you peace of mind by all means do it.

If the pain of holding a losing investment is greater than the pain of missing an opportunity you should be actively trading. Of course then sellers regret comes into play. This goes back to defining your investment goals. Do you want to make money? Do you want to feel good?
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by AltaRed »

For me, being fully invested as of Sept 2008 (as I was) was emotionally different (no significant concern) than had I just made that full investment in Sept 2008. It's a personal reaction and that is just the way it is.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by Bylo Selhi »

AltaRed wrote:DCA lowers the pain of 'buyers regret'. That matters more to some than others and is a personal decision. Forget the studies about which is better. Imagine someone going all in, in early Sept 2008.
AltaRed wrote:For me, being fully invested as of Sept 2008 (as I was) was emotionally different (no significant concern) than had I just made that full investment in Sept 2008. It's a personal reaction and that is just the way it is.
:thumbsup:

What an investor decides about DCA vs. VA vs. lump sum, etc. doesn't have to be rational or even seem to be rational. That's not what's important. What's important is that whatever they do lets them sleep well at night and stick with the program in the midst of market turmoil.

(Bonus points and bonus returns go to those with the balls to back up the truck to buy cheap from the panickers all around them. But that's just icing on the cake. Ya gotta keep yer eye on the ball. [More mediocre mixed metaphors mercifully mopped...])
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by Chuck »

Bylo Selhi wrote:What an investor decides about DCA vs. VA vs. lump sum, etc. doesn't have to be rational or even seem to be rational. That's not what's important. What's important is that whatever they do lets them sleep well at night and stick with the program in the midst of market turmoil.
Agreed. I think the key though is if the investor does not lump sum, he should set a firm DCA schedule and stick to it.

Otherwise you get in the situation where you are always questioning whether to make the next move. For example, let's say he does not lump sum, put's in a portion of his capital, then the market runs up 20%. Good news right? But if nervousness about an overvalued market was holding him back before, now that the market is 20% richer how nervous will he be? It would probably be the same if the market falls 20% and everybody is doom and gloom. Next thing you know, it's 3 years down the road and he is still sitting on some of the cash.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by ockham »

Bylo Selhi wrote:
AltaRed wrote:DCA lowers the pain of 'buyers regret'. That matters more to some than others and is a personal decision. Forget the studies about which is better. Imagine someone going all in, in early Sept 2008.
AltaRed wrote:For me, being fully invested as of Sept 2008 (as I was) was emotionally different (no significant concern) than had I just made that full investment in Sept 2008. It's a personal reaction and that is just the way it is.
:thumbsup:

What an investor decides about DCA vs. VA vs. lump sum, etc. doesn't have to be rational or even seem to be rational. That's not what's important. What's important is that whatever they do lets them sleep well at night and stick with the program in the midst of market turmoil.

(Bonus points and bonus returns go to those with the balls to back up the truck to buy cheap from the panickers all around them. But that's just icing on the cake. Ya gotta keep yer eye on the ball. [More mediocre mixed metaphors mercifully mopped...])
+2
As it happens, my spouse and I received a not insubstantial inheritance in the summer of 2008. I divided it into chunks, and was part way into DCAing those chunks by Sept/Oct 2008. Watching newly invested money evaporate proved to be much more painful than the old money. Getting to know yourself can be the most difficult part of investing.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by SQRT »

AltaRed wrote:For me, being fully invested as of Sept 2008 (as I was) was emotionally different (no significant concern) than had I just made that full investment in Sept 2008. It's a personal reaction and that is just the way it is.
Agree. my personality is more of an all in type guy. In March 2007 I invested a large lump sum for my spouse. It was way under for quite a while. Didn't bother me as we were collecting divs. Over the long term makes less difference. I really don't fret whether I bought my first TD shares at $21 or really screwed up and bought them at $23 back in 1997.
Last edited by SQRT on 24 Sep 2013 21:03, edited 1 time in total.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by ig17 »

My 2c...
jay wrote:So here is my plan: allocate funds over the course of roughly one year, once per month. Example:
- Month 1: Allocate 25K among: RY, BCE, CU, ENB, SAP
- Month 2: Allocate 25K among: BNS, RCI.B, FTS, TRP, MRU.
- Month 3: Allocate 25K among: POW, T, EMA, IPL, L
- Rinse and repeat
Let's take a quick look at the valuations. Just the P/Es, for simplicity.

Six Banks

BMO 10.9
BNS 11.8
CM 10.2
NA 9.6
RY 12.3
TD 13.3
Average: 11.4

Six Utilities & Pipelines

CU 16
ENB 55
FTS 19.3
TRP 21.8
EMA 15.3
IPL 22.7
Average: 25

I would have no problem putting a lump sum in the banks. If they get cheaper down the road, so be it.

I would definitely NOT lump sum the second group. Valuations seem too rich. DCA doesn't really address the issue of high valuations. I'd try to be more selective. Buy the names that are reasonably priced. Leave expensive ones alone until they go on sale. If Enbridge never goes on sale, that's okay too. There is no rule that says that I must own it. I can find something else to buy. Investment ideas are like buses; there is always the next one.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by InvestorNewb »

It's amazing how different the forum is compared to the U.S. equivalent, bogleheads.org. Over there, you have die-hard indexing fans. While on here, there are plenty of stock pickers.

I'm not saying this is a bad thing; it's just interesting to see the difference between the two.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by ig17 »

InvestorNewb wrote:It's amazing how different the forum is compared to the U.S. equivalent, bogleheads.org. Over there, you have die-hard indexing fans. While on here, there are plenty of stock pickers.

I'm not saying this is a bad thing; it's just interesting to see the difference between the two.
The difference is easy to explain. Canadian market is fairly small. You can buy the top 20 Canadian names for $200 in commissions. You don't pay another cent in MERs after that. Your long-term performance will track XIU/VCE fairly closely.

See Norm's article about unbundling Canadian ETFs:

http://www.ndir.com/SI/articles/0604.shtml
http://www.ndir.com/cgi-bin/ETFsVsStocks.cgi

Unbundling an ETF is not the same as stock picking.
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Re: Lumpsum going to Canadian Equities: DCA or all in, or?

Post by jay »

wow :). Thanks to you all for your comments.

Dusty, to answer your question, I do own a home. It is actually a small condo that is worth 250K and I am happy with it. I don't have a mortgage. I don't see envision buying a bigger home in the next 5 years.
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