Sunday, November 18

Week 385 - Let’s Dollar-Average Into 10 Stocks From The Vanguard High Dividend Yield Index

Situation: The advantage of dollar-cost averaging into specific stocks vs. dollar-averaging into the reference index is that you can focus on high-quality companies. However, those companies are less dynamic than early-movers. By investing in an index fund you’ll capture the effect that “earnings surprises” have on prices for early-movers. So, let’s compare a portfolio of 10 high quality stocks to the relevant index. Dollar-averaging identical amounts each month into either the index or each of the 10 stocks is just a way to buy more shares whenever the market is down. That way, I can assume that your returns will approximate the published total returns/Yr.

Mission: Pick 10 stocks from the Vanguard High Dividend Yield Index. Then run our Standard Spreadsheet.

Execution: see Table.

Administration: The 10 stocks I’ve picked happen to be the 10 that I dollar-average into.

Bottom Line: From the spreadsheet, I cannot discern a material difference in long-term returns from dollar-averaging in an index fund, such as the SPDR S&P 500 ETF (SPY) or the Vanguard High Dividend Yield ETF (VYM), compared to dollar-averaging into the 10 stocks I’ve picked. However, there is a material difference with respect to transaction costs: VYM has an expense ratio of 0.08%, whereas, the expense ratio for dollar-averaging into my 10 stocks is ~1.2%.

Risk Rating: 5 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

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