InvestSMART

InvestSMART Q&A: July Highlights

Recently we launched the InvestSMART Q&A section and a number of investors and visitors have found their way to there. Each month we will highlight a handful of questions. Please feel free to come along and send through a question.

Dividend rounding

Hello and was wondering about dividend reinvestment as in if you are opting for "full reinvestment" and say an ETF like IVV is trading at $455 per share and your dividend is say only $206 all up what happens to it? Thank you - Submitted by Warren

Hi Warren,

What you are referring to here is having residual dividends left over as you cannot buy half a share or a third of a share. This remaining dividend isn't lost in the ether, it gets carried forward to the next dividend. If you sell your holding prior to the next dividend period, your residual balance will be paid out.

 

What is the more conservative InvestSMART portfolio?

Hi As a general rule, of the two, which InvestSMART investment option "Interest Income Portfolio" or "Conservative" would you consider the most conservative and a reasonable place for an investor to park some cash as an alternative to the banks.Thank you and Regards - Submitted by Dianne

Hi Dianne, 

Great question! 

If we define ‘more conservative’ as ‘less volatile’, then the Interest Income portfolio is the more conservative of the two. Since inception, the conservative portfolio has been 2x as ‘volatile’ as the interest income portfolio.

This is due to the difference in asset allocation between the two. The interest income portfolio is an Australian bond portfolio, while the conservative portfolio holds Australian equities, International equities, and property securities. These asset classes are generally more volatile than bonds over time. 

However, if you are seeking income, then conservative portfolio has delivered a yield of 3.6% since inception while the interest income portfolio has only delivered 2.6%. Similarly, the conservative portfolio has delivered an annualised return since inception of 4.1% while the interest income has seen 3.3%.

 

Lump-sum investing vs dollar-cost averaging

I've just sold an investment property so have received a lump sum of cash. Should such a large amount be invested all at once or drip-fed into the markets using dollar-cost averaging? - Submitted by Catherine

Hi Catherine. 

First, congratulations on the sale of your property, I assume you have made a good return on this so well done. 

Normally when we discuss dollar cost averaging versus lump sum investing it comes down to a few factors as both strategies have pros and cons.

Lump sum investing will mean your investment funds are immediately working for you as they are in the market. And being in the market will, overtime, outperform being out of the market. Secondly your brokerage will be, on average, cost efficient as the investment is all done in one shot at an average percentage that will be lower than say a fixed amount of brokerage.

If we also look at the current market situation that has been created from COVID-19 the ASX 200 for example is some 1200 points from its high so it could be argued that there is a solid discount in the market. 

However, under normal circumstances lump sum investing can cause investors to try and 'time' the market. It also leads people to buy when news is good, which is normally when investments are expensive and sell when news is bad, which is normally when investments are cheap (like right now).

This why dollar cost averaging can make things simple as it removes your desire to ‘time the market’ and means you buy more when things are cheap and less when its expensive.

Why?

the strategy works as follows –

First, you make the call on how often you want to invest; it could be monthly, every six months, or yearly – it really doesn’t, what does matter is that you stick to this strategy a every time point.

Second is the amount.

For arguments sake let’s say you are going to invest $5000 and you’re going to do this every month.

So, let’s use 2020 as the example of how dollar cost averaging would have worked for you. In February, your $5,000 would have brought investment X at $1 therefore you would have brought 5,000 parcels of X (I have ignored brokerage).

In March when the market had fallen 25% investment X was now worth $0.75 so a $5,000 investment in investment X at $0.75 would have netted you 6,667 (rounded up and ignoring brokerage again) parcels of X.

At the end of March, you would have had 11,667 parcels of X at an average price of $0.857. If you kept doing this strategy in April, May and now June that average price will have continued to come down and your February purchase will have been diluted to a much better price as your purchases from March through June would have been bigger and cheaper. That how dollar cost averaging works.

Now, how you structure your investment strategy from your investment property lump sum is up to you. You could do half as a lump sum now the remainder as a dollar cost average strategy or other variations of this idea. Again, there isn’t a right or wrong answer here its more around working out what will be the best option for you but once you have worked that out – stick to this strategy as best you can.

Hope this helps.

 

You can view more questions and submit your own via the InvestSMART Q&A section here


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