1

The fee structure of my online broker would make a broadly diversified portfolio consisting of up to 8 ETFs very expensive in transaction fees if I decided to make monthly purchases for the purpose of Dollar Cost Averaging. Changing brokers is after all considerations not an option, therefore I would like to hear an opinion on what's the better option: reducing the number of different ETFs in the portfolio (and thereby lessening diversification) or not using Dollar Cost Averaging but instead rebalancing and upgrading the portfolio every six months?

Thank You!

alphacentauri
  • 11
  • 1
  • 4
    Why do you think you need dollar cost averaging? – Dimitri Vulis Dec 23 '20 at 22:14
  • 2
    "Changing brokers is after all considerations not an option". Why not? (Really, that's a valid question. Unless you can't change for personal reasons, it's very much an option to change brokers. – RonJohn Dec 23 '20 at 22:14
  • Yet another "why DCA?" question. Or are you confusing normal monthly contributions with DCA? – RonJohn Dec 23 '20 at 22:15
  • 1
    Lastly, you can get pretty darned high diversity with VTI and BND. – RonJohn Dec 23 '20 at 22:17
  • Once upon a time some brokerage firms required their brokers to trade their own accounts in house. I have no clue if that still exists today. If this is a retail individual, today it makes no sense to stay with a broker whose commission schedule is high, given that there are so many reputable and reliable U.S. brokers who charge no commissions. – Bob Baerker Dec 23 '20 at 22:46
  • 1
    The reason I don't want to change my broker is that the alternatives which charge less per-trade fee in my country have an order minimum that far exceeds my budget or do not fulfil other necessary requirements. – alphacentauri Dec 23 '20 at 22:57
  • Those two things DCA and Diversification aren't mutually exclusive. You shouldn't be in a situation where you are forced to trade-off between them. You can easily do both. – JohnFx Dec 24 '20 at 00:15
  • Please add a country tag. – RonJohn Dec 24 '20 at 05:26
  • 1
    Hope this helps(related Q&A): https://money.stackexchange.com/a/93849/68001 Also, google Dollar-cost averaging just means taking risk later for the Vanguard research about DCA. – user2652379 Dec 24 '20 at 05:49
  • If you are interested, search vanguard Best practices for portfolio rebalancing for Vanguard's research about the frequency of rebalancing. I quote, This paper demonstrates that the risk-adjusted returns are not meaningfully different whether a portfolio is rebalanced monthly, quarterly, or annually; however, the number of rebalancing events and resulting costs (taxes, time, and labor) increase significantly ... Annual rebalancing is likely to be preferred when taxes or substantial time/costs are involved. – user2652379 Dec 24 '20 at 06:00

1 Answers1

6

If we can't question your premise, the high cost of transactions or the need for 8 ETFs to feel diversified, then I'd suggest making the monthly contributions to one ETF per month. Next month, buy the second ETF, and so on.

Over the long term, the difference between this and buying all 8 every month will be negligible.

Instead of needing to rebalance, ever, consider that over time, if you line up all 8 by current value, deposit to the lowest total valued ETF. This will maintain balance over time with fewer transactions.

To clarify - You deposit 1000 (no currency, as I don't see country tag) each month. After 40 months, each ETF has seen 5000 deposited. But the values are not close, they are not 12.5% each. That is when you consider depositing to the ETF with the lowest balance. With a zero commission, one might simply rebalance at year end with multiple transactions, but for you, this minor change to how you deposit will maintain a close set of percentages to your target.

JTP - Apologise to Monica
  • 172,273
  • 34
  • 296
  • 560