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Dollar Cost Averaging: 9 Things You Need to Know

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Dollar cost averaging is a simple strategy that can increase your investment returns and reduce your risk. With this method, an investor purchases equal dollar amounts of an investment regularly over time instead of putting a lump sum of money into the market at once.

Using this strategy minimizes the chance of buying at a high point and can help lower an investment’s average purchase price, increasing an investor’s overall return. Here’s how dollar cost averaging works and nine things you need to know about it.

1. It can protect you against market fluctuations

Perhaps the biggest advantage of dollar cost averaging is the fact that it puts the stock market’s natural fluctuations to work for you.

If you buy in a large lump sum and mistime the market, it can be a long climb out of the hole. But by spreading out your purchases over time, you could avoid putting all your cash in at the top of the market and likely will buy some shares at a lower price. This can reduce your risk and help you buy at an average value over the period of your purchases.

2. Dollar cost averaging can keep you from making emotional decisions

If you commit to dollar cost averaging — buying regularly regardless of the market’s performance — you’ll avoid a temptation that hurts many investors. Some become fearful when the market drops and don’t buy, but when the market rises, they start buying again.

In the end, they pay a higher price than they ought to. Rather than trying to make decisions as the market fluctuates, commit to a regular schedule of purchases and take the emotion out of it.

3. It works best in a falling market

Dollar cost averaging often helps you achieve a lower price for your position. While the strategy really shines when the market’s falling, it can help lower your risk in all markets.

For example, let’s say you buy 100 shares of a $10 stock in a lump sum for $1,000. Your cost basis is $10. If the stock falls to $5, you’re suddenly down $500. Even if the stock later recovers to $7.50, you’re still down $250.

With dollar cost averaging, you take advantage of this drop. Let’s say you split your buys into two $500 chunks. At $10 per share, you spend $500 and receive 50 shares. Then at $5 per share, you spend another $500 and receive 100 shares. Now you own 150 shares with a cost basis of $6.67 per share. When the stock recovers to $7.50, your investment is now worth $1,125 and you’ve made a profit of $125, even though the stock has only partially recovered.

In a flat market, a lump-sum approach and dollar cost averaging produce nearly the same profit, but the investor had to have more money in the market and so took more risk. Meanwhile, the investor using dollar cost averaging had less money in the market, took less risk and had the potential to take advantage if stocks fell.

Even in a rising market, with less money in the market at one time, dollar cost averaging reduces your risk, though it will cost gains that you could have had with a lump-sum approach.

4. It’s a long-term strategy

Dollar cost averaging forces you to think long term. When you’re buying a stock, you want it to be as cheap as possible, and that means hoping for it to go lower before it finally goes higher.

At lower prices, you’ll buy more shares, so when the stock does rise, your gains will be even greater. But you have to think long term and be willing to stomach short-term losses and consider them great buying opportunities.

5. Beware the trading costs

Dollar cost averaging can run up trading costs if you don’t carefully manage how often you’re buying and how many securities you’re using this strategy for.

Purchasing just one or two stocks or funds? You’re probably all right. But pay attention to how often you’re buying. For most people, buying weekly is too much; if you purchase too often, you won’t give the market enough time to move. Biweekly or monthly is a better option for most.

Plus, if you trade too often, fees will eat up money that could be put into stocks. Of course, if you’re using a free trading app, such as Robinhood, those extra trades won’t cost you anyway.

6. Dollar cost averaging makes the most sense for volatile assets

Dollar costs averaging generally makes the most sense for volatile assets because it takes advantage of and protects against price fluctuation. That means the strategy is ideal for stocks, stock-based exchange-traded funds and mutual funds.

It’s likely not a great fit for relatively stable securities, such as bonds or high-yield savings accounts, because they don’t move around as much. These stable assets will move, of course, but over a much longer time frame, so mistiming a purchase is less costly.

7. This method lowers risk, but you could miss out on returns

Dollar cost averaging is a great strategy for individuals and less sophisticated investors, but in a rapidly rising market, this approach is going to cost you. In a rising market, a lump-sum purchase would have worked out better. But that requires timing the market correctly, a risky approach that savvy investors usually avoid. And no one — not even the top professionals — knows which direction the market is headed.

Because of that, it’s usually best to limit your risk, avoid timing the market and take advantage of the market’s drops.

8. Dollar cost averaging can be done automatically

If your idea of a good time is watching the calendar for the right day of the month to buy stock, then make your investments manually. For the rest of us, find a brokerage that’s able to automate the process so you can spend more time on the things you enjoy.

You can set up your account to buy on a preset schedule, and all you’ll have to do is make sure the money is available. Even easier, many brokerages can pull the money right from your bank account.

This automatic approach is great because it keeps your emotions out of the investing process. Instead, set it and forget it.

9. This strategy is the norm for 401(k) programs

Do you contribute regularly to a 401(k) program and invest your contribution in the market? Then you’re already using dollar cost averaging. You’re using the power of automatic investing to continue buying even when the market dips and keeping your emotions out of the decision-making process. It’s the way to be pleasantly surprised when you check your account balance.

Dollar cost averaging doesn’t always lead to maximum gains, but it works well in many situations and can help protect your portfolio from bad outcomes. And because it’s a formulaic purchasing plan, it’s even better for beginning and intermediate investors who don’t want to spend their time thinking about how and when to invest.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James F. Royal, Ph.D.
James F. Royal, Ph.D. |

James F. Royal, Ph.D. is a writer at MagnifyMoney. You can email James here

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Investing

Wealthsimple Review 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Wealthsimple may not be the largest robo-advisor in the U.S. — though it is the largest in Canada and made the leap south of the border in 2017 — but it should be counted among the best. It’s especially valuable for newer investors, even though its fees are higher than some rivals’. For that higher fee, clients receive a portfolio review from an actual human and an all-inclusive package without additional fees, which may cost extra at other robo-advisors. Clients also have access to socially responsible portfolios and at least one other unusual perk. Altogether, Wealthsimple is the complete package for beginners to not-so-beginners.

Wealthsimple
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The bottom line: Though it’s on the expensive side, Wealthsimple delivers an investor-friendly product that’s great for newer investors.

  • Free portfolio review and no extra fees
  • Access to financial planners
  • Higher account management fee

Who should consider Wealthsimple

Wealthsimple is a great choice for investors who are looking for a few more perks from their robo-advisor and who don’t mind paying a bit more for that privilege. It’s also a solid choice for those looking to get into socially engaged investing or halal investing and those who need basic access to financial planners. In these respects, it’s a good choice for beginners who need more guidance. Finally, for those with larger accounts, Wealthsimple provides expanded access to planners as well as special airport lounge access.

Wealthsimple fees and features

Amount minimum to open account
  • $0
Management fees
  • 0.5% (less than $100K deposited)
  • 0.4% ($100K+ deposited)
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $0 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SEP IRA
  • Trust
Portfolio
  • ETFs cover 10 asset classes.
Automatic rebalancing
Tax loss harvesting
Tax loss harvesting detailTax loss harvesting is automatically activated for Wealthsimple Black clients; it is available to all Wealthsimple clients.
Offers fractional shares
Ease of use
Mobile appiOS, Android
Customer supportPhone, Email

Strengths of Wealthsimple

  • Free portfolio review: Wealthsimple offers a free portfolio review as a way to get its foot in the door, much like FutureAdvisor does. With Wealthsimple, you provide your personal details, upload your financial statements and make an appointment with one of the company’s financial planners. The review includes an assessment not only of your investments but also of your debts and how much you’re paying for the funds or investments you currently have. It also includes plans to minimize your taxes and sets up your financial goals — so you know where you’re going. The entire process is led by a Wealthsimple financial planner, who has a fiduciary duty to act in your best interest. Even if you don’t opt for Wealthsimple, it’s a free review of your whole financial life by a professional, so it’s hard to go wrong there.
  • Expanded access to financial planners: While everyone at Wealthsimple has some access to financial planners, those enrolled in Wealthsimple Black (for accounts of more than $100,000) receive more access. This includes a formalized financial plan, which features a strategy for generating retirement income and a goals-based investing plan for retirement or for those big purchases in life. This access is one of the larger perks of the service and should be a draw for those who need this kind of planning and advice.
  • No extra fees and access to some unusual perks: Even if Wealthsimple does charge one of the higher account management fees, it doesn’t nickel-and-dime you on other fees like many other robo-advisors do. A transfer-out fee that might run you $75 at a rival is free here. And tax loss harvesting and portfolio rebalancing are included as a standard part of the management fee.Wealthsimple also allows you to purchase fractional shares, which is a nice bonus for beginning investors who may not have enough money to buy a full share of a fund with a high price tag. That ability allows you to purchase the full range of funds recommended for you and fully diversify even smaller cash deposits immediately — getting you in the game more quickly.Finally, the most unusual perk offered by Wealthsimple has nothing to do with investing. If you have more than $100,000 with the robo-advisor, you’ll become part of Wealthsimple Black, the firm’s upgraded service that offers access to more than 1,000 airline lounges in over 400 cities. If you’re a frequent traveler, that’s a nice perk.
  • Socially engaged investing: Looking to build a portfolio filled with socially responsible companies? Wealthsimple can help you do that, investing in six exchange-traded funds (ETFs) that support major socially engaged themes, such as low carbon, gender diversity and affordable housing. The company builds three types of portfolios using these investments depending on your risk tolerance: conservative, balanced and growth.Wealthsimple also offers Shariah-compliant halal investing, which is in accord with Islamic law. All investments avoid profiting from gambling, tobacco, arms or other industries that violate Islamic law. The diversified portfolio consists of 50 Stocks that have been vetted by a third-party committee of Shariah scholars. Because the portfolio is all Stocks, it’s riskier than more balanced portfolios that include Bonds (which are forbidden under the investment mandate).

Drawbacks of Wealthsimple

  • Account management fee: The account management fee — clocking in at 0.5% (less than $100K deposited) for basic accounts — is probably the biggest drawback at Wealthsimple. Basic accounts at other major rivals are around 0.25%. But it’s not always an apples-to-apples comparison, as Wealthsimple clients have some access to financial planners as well as the other free services above. And Wealthsimple manages the first $5,000 for a year for free, so that helps newer investors get started with their nest egg.Clients who deposit more than $100,000 will automatically join Wealthsimple Black, reducing their management fee to 0.4% and gaining more extensive access to a financial planner. Still, this reduced fee remains above those of rivals offering access to financial planners, including Schwab Intelligent Advisory (at 0.28% and a minimum of just $25,000) and Vanguard Personal Advisor Services (0.30% and a $50,000 minimum). These options beat Wealthsimple on the minimum for the higher tier of service too.
  • Customer support: Wealthsimple provides adequate customer service, and you can call in to have your account or investing questions answered by a professional. But the hours feel somewhat limited: Monday through Thursday from 9 a.m. to 8 p.m. EST and Friday from 9 a.m. to 5:30 p.m. EST. You also can drop Wealthsimple a line via email, but don’t expect an online chat or off-hour responses.

Is Wealthsimple safe?

Wealthsimple manages more than $2 billion in client assets, so it’s a trusted name in the industry. Client assets — which technically are held by the company’s broker, Apex Clearing, and not Wealthsimple itself — are safeguarded by the Securities Investor Protection Corporation (SIPC). This ensures that in the event of a bankruptcy, customers’ assets are insured to at least $500,000 (including $250,000 in cash only). That doesn’t protect you against the market falling or other risks of investing, but it should give you peace of mind about Wealthsimple.

Final thoughts

Wealthsimple should be an attractive candidate for any new investor looking to understand how to build a portfolio. The firm provides access to its financial planners for all investors, though clients in the higher service tier will receive more extensive time with them. The free portfolio review also is a solid service for beginning investors, and those looking to build a socially engaged portfolio should consider Wealthsimple.

Beginning investors who are focused primarily on fees (and need less access to education and advice) might consider shifting to Wealthfront or Betterment. Those who need more advice and can bring more than a little coin to their accounts also might want to consider Vanguard Personal Advisor Services or Schwab Intelligent Advisory. But Wealthsimple will be a solid fit for most.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James F. Royal, Ph.D.
James F. Royal, Ph.D. |

James F. Royal, Ph.D. is a writer at MagnifyMoney. You can email James here

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Investing

YieldStreet Review 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

YieldStreet is the type of fintech company that the internet makes possible: The investment manager, founded in 2015, connects borrowers with investors in alternative assets, taking a fee from each deal it completes. These alternative investments include short-term loans that might traditionally have gone to well-connected investors, such as placements in real estate, litigation finance, and marine vessel acquisition and deconstruction.

The appeal for investors (who must be accredited) is the high yields offered on the deals, and YieldStreet has engineered financings worth more than a half-billion dollars. Also of interest is what YieldStreet claims is its investments’ low correlation to the stock market, meaning these assets won’t zag when the market does. That provides diversification away from publicly traded companies and offers greater safety to an investor’s overall portfolio.

YieldStreet
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The bottom line: YieldStreet provides high yields on illiquid real estate and alternative investments, albeit with high fees.

  • Clearly explains the benefits and risks of individual investments
  • Offers a variety of investment types
  • Charges pricey management fees

Who should consider YieldStreet

The prospect of high interest on a limited-term loan can be enticing, but you’re invited to the club only if you’re an accredited investor. That means you’ll need to have at least $200,000 in income for the past two years as an individual, or $300,000 if joint. Alternatively, you need at least $1 million in assets, not including your primary residence. So YieldStreet is not for casual investors who decide they want to invest in real estate loans.

Another factor: As an investor, you’ll need to analyze the prospectuses of various loans, which the company will provide you. While YieldStreet outlines many of the risks, it’s ultimately up to you to decide what to invest in, and that requires more work than simply buying an index fund and kicking back. These are illiquid investments, so if you need the money soon, you’re better off elsewhere.

YieldStreet fees and features

Amount minimum to open account
  • $10,000 (possibly higher for specific offerings)
Commission1% to 4% management fee on all offerings
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • Solo 401(k) (for small businesses)
  • Trust
Customer supportPhone, Email

Strengths of YieldStreet

  • High yields and easy-to-make investments: YieldStreet couldn’t really make it any easier, technically, to select potential investments. It’s easy to allocate a certain amount of your capital to each loan, and the prominent details of each are presented in an easy-to-read summary. You’ll read sections on the investment’s positives and negatives, and you can download further information too. It’s easy to go by what YieldStreet says, but investors will want to investigate and analyze each investment themselves.And those high yields? The company is targeting 8% to 20% annual returns, a level that would make almost any investor’s mouth water. The company projects that already-financed investments are on track for a 12.6% annual return.
  • High interest on cash account: Investors can fund their investments from the YieldStreet Wallet, which allows users — even unaccredited investors — to earn 2% on the cash in their account. It’s like an online bank account, and it’s backed by a real bank, Evolve Bank & Trust. That’s an attractive rate for investors looking to stash their cash while waiting on their next YieldStreet investment or even for average investors to stockpile their money at an above-average yield.
  • No principal loss on prior investments: YieldStreet really wants you to know upfront that investors have lost no principal on their investments. It’s one of the first things the company’s website highlights. Each investment is asset-based — that is, backed by collateral — meaning it’s supported by an asset such as real estate or a legal settlement. Collateral provides greater safety to the loans that are on offer. If a loan does go sour, YieldStreet works with the loan’s originator to recoup as much of the principal and outstanding interest as possible, potentially through legal action. While the track record has been good so far, it can turn at any time.

Drawbacks of YieldStreet

  • Pricey management fees: The company clearly outlines that it takes a 1% to 4% management fee on all offerings on its financed deals, and that isn’t cheap. For each deal, the company highlights the expected net investment return, and it would be all too easy to bury the management fee in the fine print. But it does disclose the fees on its summary page for each deal (and not in illegible legalese either), so kudos for that.Still, those fees are expensive, especially as management fees on index funds of publicly traded companies are quickly plummeting. Of course, the appeal of YieldStreet is the access to traditionally inaccessible deals, and the company is charging a premium for that access.
  • Illiquid investments: Another downside to these investments, relative to traditional stock and bond investments, is that they are tied up completely for the life of the project and are illiquid. The company clearly spells out how long each project should last, and projects may run for just a few months to several years. If you can’t keep your money in that long and need access to it, this kind of investing won’t be for you.
  • Ongoing fees: It’s not just the management fee that comes out of your account but also an ongoing fee for each investment, and this fee depends on the type of legal structure set up to house the investment. This fee pays for such things as an annual audit and filing fees with the SEC. Depending on the specific type of structure, first-year fees run $100 to $150, while subsequent years cost $30 to $70.That can be more pricey than you think and can really ding your returns, especially if you’re investing smaller amounts. For instance, if you invested the minimum in each deal — $10,000 — and earned a 9% return, a $150 fee would eat up one-sixth of your first-year interest and as much as one-twelfth of your interest in subsequent years. That’s no trivial fee, and it encourages you to invest more in each deal, which may or may not be prudent.
  • Uncertain risks and an unproven business model: The company does provide key details of each deal, a useful guide for what to watch out for and a prospectus. However, there may be further or unknown risks investors must ascertain for themselves (just as there are in publicly traded investments). That means investors in YieldStreet really need to be able to analyze these potential investments effectively and perhaps even have some background conducting such analysis. There’s no one who’s going to do this work for you, so if you’re not comfortable doing it, YieldStreet may not be for you.In addition, the quality of YieldStreet’s investments is still untested by a significant recession — remember that the company was founded in 2015 — and such a test will prove how viable this model is longer term. The returns on offer here imply high risk, and risky investments often perform poorly during tough times. Of course, this is not a prediction but something prudent investors will want to analyze for themselves.

Is YieldStreet safe?

The biggest risk at YieldStreet is the investments themselves, and that varies on a case-by-case basis. That said, the company boasts that investors have had $0 loss of principal while enjoying (or slated to enjoy) an annual return of 12.6%. Each investment fund is held in a separate company whose sole purpose is keeping the investment secure, and in the event of YieldStreet going bankrupt, a new manager could be appointed for the funds.

The company’s YieldStreet Wallet, which pays interest on cash balances, is held by the FDIC-backed Evolve Bank & Trust, meaning that any cash deposits are insured up to $250,000. None of this protection, however, means that your at-risk investments at YieldStreet won’t lose money.

Final thoughts

YieldStreet is an interesting investment offering enabled by the connective power of the internet, and it’s allowing investors and borrowers to come together in new ways. The potential for high returns is there for investors, but these returns also imply high risk. While the track record is favorable so far, YieldStreet is too young to have gone through a recession. With high-risk investments, things can change quickly, so investors should invest accordingly.

Accredited investors who find the risk and fee structure a bit too much also may turn to publicly traded stocks, where fees are moving ever lower. While such investments don’t offer the low correlation to stock markets, they offer a time-tested model and potential exposure to the world’s best businesses (and you can even invest in real estate if you want).

Open a YieldStreet accountSecured
on YieldStreet’s secure website

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James F. Royal, Ph.D.
James F. Royal, Ph.D. |

James F. Royal, Ph.D. is a writer at MagnifyMoney. You can email James here

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