couple questions on dollar cost averaging

[rigz]

just starting to get into the whole investing game. i started buying some mutual funds on vanguard in addition to my wife and I having the target funds for our ROTH IRAs.

1) to dollar cost average, do you simply just buy the same amount (say $200) at the same time each month (eg, the first of each month)?

2) since my wife and I both have the same target fund (is that a bad idea btw? should we diversify with different types of funds?) would it be more beneficial to DCA at different times each month? like for example, i add to my ROTH at the 1st of each month and she buys the same amount on the 15th? or in the long run, does this not matter?

thanks.

[jpg7n16]

just starting to get into the whole investing game. i started buying some mutual funds on vanguard in addition to my wife and I having the target funds for our ROTH IRAs.

1) to dollar cost average, do you simply just buy the same amount (say $200) at the same time each month (eg, the first of each month)?

Yup. DCA is just the same $$ amount invested at different periods of time.

2) since my wife and I both have the same target fund (is that a bad idea btw? should we diversify with different types of funds?)

Target date funds should be selected based on the year you expect to begin retirement. If you expect to retire at the same time, then that's just fine. In fact, that's likely how it should be.

You could do multiple funds, but IMO that just adds unnecessary complications.

3) would it be more beneficial to DCA at different times each month? like for example, i add to my ROTH at the 1st of each month and she buys the same amount on the 15th? or in the long run, does this not matter?

thanks.

40 years from now, I doubt there will be noticable difference from a 15 day gap on a $200 investment.

The most important thing (DCA-wise) is that you save regularly in an amount you can afford. Which you're doing, so you're good

[kv968]

2) since my wife and I both have the same target fund (is that a bad idea btw? should we diversify with different types of funds?) would it be more beneficial to DCA at different times each month? like for example, i add to my ROTH at the 1st of each month and she buys the same amount on the 15th? or in the long run, does this not matter?

thanks.

Having the same target date fund isn't a bad idea as long as your risk tolerance is similiar. Actually having the same would make asset allocation easier since they're identical. You'll know what you both hold just by looking at one fund.

I'd DCA at different times of the month. Like jpg said, in 40 years there might not be a big difference with a 15 day gap, but if it's no big deal for you to do it, I say why not? Maybe even have your contribution go in at the beginning of the month and her's at the end. That could add even a little more "diversification".

As far as adding different types of funds, that's fine if you want to tweek the allocation of the target fund, but just keep the overall picture in mind. If you start putting too much towards an int'l fund for instance, the next you know between contributions and possibly performance your int'l exposure could be a lot higher than you originally intended. In that case you'd have to rebalance and/or maybe scale back on adding to the int'l fund.

[kv968]

Target date funds should be selected based on the year you expect to begin retirement. If you expect to retire at the same time, then that's just fine. In fact, that's likely how it should be.

I have to slightly disagree with the target date fund selection. As a rule of thumb, and in most instances, your target date fund should be based on the year you expect to retire. However, you should take your personal risk tolerance into consideration also. Some target funds, especially those for someone who is getting ready to retire in the near future, can be quite aggressive. Maybe a little too aggressive for what you're comfortable with. So it's always a good idea to check out the allocation they have and make sure you're comfortable with it. If you're not, you can look at other dates that don't coincide with your actual retirement year to see if they offer a better fit for what you're comfortable with.

[jteezie]

If you have a long enough time horizon, you can also dollar cost average in larger intervals such as once per year. It doesn't have to be monthly, though that is a good consistent way to maintain the DCA habit.

Some studies have shown that lump sum contributions ($5k all at once each year) outperforms monthly contributions, but the more important thing is to contribute. So, if monthly will maintain the habit, go with that.

One other thing about target dated funds. Although they may seem to have low expense ratios, read the expense ratio line as "additional expense" for the convenience of having the target allocations managed over time. Target dated funds invest in other funds, which have their own expense ratios, but these expenses are somewhat hidden and not reported in the target dated fund's expense ratio (well not yet).

[jpg7n16]

One other thing about target dated funds. Although they may seem to have low expense ratios, read the expense ratio line as "additional expense" for the convenience of having the target allocations managed over time. Target dated funds invest in other funds, which have their own expense ratios, but these expenses are somewhat hidden and not reported in the target dated fund's expense ratio (well not yet).

Sorry, what is your evidence for this?

As has been discussed in a number of other threads, any prospectus identifies the expenses from those underlying funds that flow through. And the main target date funds don't have any additional management expense.

I know a lot of people have heard that there are 2 expenses, 1 for the fund itself, and another "hidden" expense of the underlying funds - but that's simply not true. The underlying fund costs are included in the total cost of the target date fund.

From: https://personal.vanguard.com/us/fun...t#targetAnchor

The total annual asset-based fee includes the weighted average of the annualized expense ratios of underlying mutual funds.

From: https://personal.vanguard.com/us/Lit...ceDomain=false

Vanguard Target Retirement 2020 Fund

Annual Fund Operating Expenses
(Expenses that you pay each year as a percentage of the value of your investment)
Management Expenses None
12b-1 Distribution Fee None
Other Expenses None
Acquired Fund Fees and Expenses 0.17%
Total Annual Fund Operating Expenses 0.17%

From: https://www.actionsxchangerepository...%2352%23-99%23

Fidelity Freedom 2020 Fund

Annual fund operating expenses
(expenses that you pay each year as a % of the value of your investment)

Management fee
None

Distribution and/or Service (12b-1) fees
None

Other expenses
0.00%

Acquired fund fees and expenses
0.69%

Total annual fund operating expenses
0.69%

[kv968]

One other thing about target dated funds. Although they may seem to have low expense ratios, read the expense ratio line as "additional expense" for the convenience of having the target allocations managed over time. Target dated funds invest in other funds, which have their own expense ratios, but these expenses are somewhat hidden and not reported in the target dated fund's expense ratio (well not yet).

Some target date funds, such as American Funds', do have management fees, 12b-1 fees, "other expenses", etc...but it's all shown in the total expense ratio.

Here's the breakdown from the prospectus of AF's Livestrong 2035 Fund Class R-1. In the end, the total expense ratio is 1.57%

Management fees - 0.10%
Distribution and/or service (12b-1) fees - 1.0%
Other expenses - 0.17%
Acquired (underlying) fund fees and expenses -0.40%
Total annual fund operating expenses - 1.67%
Fee waiver and/or expense reimbursement - (0.10)
Total annual fund operating expenses after fee waiver and/or expense
reimbursements- 1.57%

[disneysteve]

Target dated funds invest in other funds, which have their own expense ratios, but these expenses are somewhat hidden and not reported in the target dated fund's expense ratio

I know a lot of people have heard that there are 2 expenses, 1 for the fund itself, and another "hidden" expense of the underlying funds - but that's simply not true. The underlying fund costs are included in the total cost of the target date fund.

Some target date funds, such as American Funds', do have management fees, 12b-1 fees, "other expenses", etc...but it's all shown in the total expense ratio.

Here's the breakdown from the prospectus of AF's Livestrong 2035 Fund Class R-1. In the end, the total expense ratio is 1.57%

jteezie and jpb7n16 are both correct. When most of us here talk about target funds, we are referring to the good ones like Vanguard and Fidelity. They are low cost and don't mask a bunch of underlying fees. As kv968 points out, however, there are also some really crappy target funds out there like the Livestrong fund. Their ER is more than 8 times higher than Vanguard's (1.57% vs. 0.19%). Stay far away from funds like that. It is those funds that have given target funds a really bad reputation.

[kv968]

jteezie and jpb7n16 are both correct. When most of us here talk about target funds, we are referring to the good ones like Vanguard and Fidelity. They are low cost and don't mask a bunch of underlying fees. As kv968 points out, however, there are also some really crappy target funds out there like the Livestrong fund. Their ER is more than 8 times higher than Vanguard's (1.57% vs. 0.19%). Stay far away from funds like that. It is those funds that have given target funds a really bad reputation.

One other thing to pay attention to regarding expense ratios is if there's a load or not. American Funds offers an "A" Class share of the same fund with a reasonable expense ratio of 0.77% however there's a 5.75% load associated with it. Front-end and back-end loads won't show in the expense ratio.

My rule of thumb is, unless you can get an institutional share class of a fund via a 401k, 403(b), etc... with a low expense, don't invest in anything with different share classes (alphabet soup I call them). You're almost always guaranteed to be paying way more than you need to with them.

[YLTL_Dan]

1) to dollar cost average, do you simply just buy the same amount (say $200) at the same time each month (eg, the first of each month)?

I'm a big fan of dollar cost averaging because it takes the emotions out of investing. Every time I try to 'time' the market, I usually end up buying high and selling low! I wrote an article on Dollar Cost Averaging if you want to learn more, below are some excerpts:

The S&P 500 has a negative return between February 2000 and today (Jan 5, 2012) when dividends are excluded. That means if you put $30,000 in the stock market in 2000 it would be worth less today! Why the heck would I want to endure the risk of investing in the stock market for 11 years for no return on my money?!?!

.....

When you look at the stock market over the last 12 years, it's been anything but flat. In fact, the S&P 500 went all of the way down to 735 in February 2009 and all of the way up to 1,549 in October 2007! Today it stands at 1,277. How do you take advantages of the big swings (especially on the down side)?

....

For this analysis, I'll use the S&P 500 index fund (SPY) to track your $200/monthly investment. Index funds are meant to mimic the movement of the market so it will match the fluctuations of the S&P 500 like a mirror. Your $200 contribution will automatically enter the market the first of the month. Here we go:

Total contribution period: 143 months (just under 12 years)
Monthly contribution: $200
Total contribution amount: $28,600
Value after 12 years: $35,317

There you have it… by dollar cost averaging, you would have had an overall return of 24.5% on your money. Granted, it's still pretty low when annualized, but at least it's better than losing money.