In this post I answer the question, is it better to invest in small amounts regularly or in larger lump sums to reduce transaction charges. I’ve been asked this question a few times and decided to analyse a number of scenarios to sense check my answer.
Scenario 1: Invest 200€/month in average growth year
- Invest 200€/month in Irish domiciled ETFs on the last day of each month
- ETFs make gains of 7.91% (assumes 10% performance minus 0.19% fees minus 1.9% inflation)
- ETFs make 2% in dividends
- Purchase charges: Degiro charge 4€/trade plus 0.05% of the value purchased up to a max of 60€.*
*Degiro have a number of commission free ETFs where you can buy up to 200 different ETFs each month for free. If you determine your portfolio to use these ETFs it doesn’t matter how frequently you buy.
Other fees I have found are applied depending on the country the fund is based.
Calculations:
- Fees: 200€/month = 4.10€ in fees per month = 49.20€/year (2.05% net fees per year for your 2,400€ invested) – investing 195.90€/month
- Gains: 102€ (11 of the 12 months as you lost out on gains from Jan 1-Jan 30)
- Dividends: 26€ (11 months)
Value after 12 months: 2,481€
Scenario 2: Invest 2,400€ at the end of the year in average growth year
- Invest 2,400€ lump sum on Dec 31 in Irish domiciled ETFs
- ETFs make no gains as invested at end of the year
- ETFs make no dividends as invested at end of the year
- Purchase charges: Degiro charge 4€/trade plus 0.05% of the value purchased up to a max of 60€.*
Calculations:
Fees: 2,400€ lump sum per year = 5.2€/year in fees (net fees for the year or 0.21% net fees)
Value on Dec 31: 2,400€ minus 5.20€ = 2,394.80€ after fees.
Scenario 3: Invest 200€/month in commission free ETFs in average growth year
If you go with the free commission ETFs then you end up with the full 2,533€.
Scenario 4: Invest 200€/month in bear market year
If it was a particularly bad year, for example you started investing in October of 2007 in the SPDR S&P 500 (SPY) and through the year you lost 37.4% minus 0.19% fees and 1.9% inflation but also made 2% in dividends, your end portfolio would be 1,924€. This is 471€ LESS than if you had invested one lump sum at the end of the year.
I looked at the historical trends of the SPDR S&P 500 (SPY) for Nov 2007 to Oct 2008 (as it’s been in operation since 1993) and figured that if you were investing monthly in that time frame you would have 18 ETFs at the end of the year (taking currency out of the equation for simplicity sake). The prices went down every month and were at their lowest on the last month at 96.83$. Without investing anymore after that date, based on today’s value of 286.28$ your 2,400 would be worth 5,153.
If you’d waited to purchase the lump sum on the last month your 2,394€ would have bought you 24 ETFs, which would be valued at 6,870 today (1,717 MORE than if you’d invested monthly).
Scenario 5: Invest 200€/month in bull market year
If it was a good year, for example you started investing in October of 2012 and through the year you gained 24.4% minus 0.19% fees and 1.9% inflation and also made 2% in dividends, your end portfolio would be 2,685€. This is 290€ MORE than if you had invested one lump sum at the end of the year.
Looking at the historical trends of the SPDR S&P 500 (SPY) for Oct 2012 to Oct 2013 by investing monthly in that time frame you would have 14 ETFs at the end of the year (taking currency out of the equation for simplicity sake). The prices went up almost every month and were at their highest on the last month at 175.79$. Without investing anymore after that date, based on today’s value of 286.28$ your 2,400 would be worth 4,263.
If you’d waited to purchase the lump sum on the last month your 2,394€ would have bought you 13 ETFs, which would be valued at 3,900 today (363 LESS than if you’d invested monthly).
Scenario 6: Invest 200€/month over 2 years with one year in bull market and one year in bear market
BUT since you’re in this for the long haul, how does euro cost averaging fare in these 2 years if you invested monthly during both the bear and bull market years?
After 24 months your 200€/month would leave you with 5,132€.
If you invested a lump sum at the end of each year you would have 4,789.60€ (342.40€ LESS than investing through the year with higher transaction fees).
Number of ETFs owned in each approach?
Looking at the two scenarios, buying monthly over 2 years you would own 33 ETFs. Buying in lump sums once a year you would own 38 ETFs. At today’s value, without investing any further the lump sum approach would leave you with 1,145€ more in market share.
Summary
| Scenario | Value on Dec 31 | Compare to Annual |
| 1: Monthly with fees avg growth | 2,481€ | 86€ |
| 2: Annually with fees no growth | 2,394€ | – |
| 3: Monthly without fees avg growth | 2,533€ | 138€ |
| 4: Monthly in bear market with fees | 1,924€ | -471€ |
| 5: Monthly in bull market with fees | 2,685€ | 291€ |
| 6: Monthly in bull and bear market over 2 years with fees | 5,132€ | 342€ |
What this demonstrates is that investing every month is the better option especially if you are investing in commission free ETFs. It also goes to show that time IN the market is better than timing the market. You also have the benefit of euro cost averaging where some months you may lose money and others you may gain ultimately averaging out over the long term.
In the case where your market share was less by investing monthly, the bear and bull market examples were two extreme years to make a point. Over the long term, at least historically, over the last 50 years, bear markets run for an average of 1 year while bull markets run for an average of 6. In the 1 year of bear market though it is typical that it will make almost double the losses than the bear market will make gains but for the one year you are making losses, if you keep investing, the following 6 years you will be making smaller gains and euro cost averaging will win out.
Other considerations
The above is purely the mathematical side of investing monthly vs annually. As with everything else to do with investing, this needs to balance out against the individual’s emotional approach to money.
If you know yourself to be bad at saving and would be tempted to access a lump sum of cash while waiting to invest it at the end of the year, it might be best for your to automatically have it invested each month to safeguard it from yourself.
The other side is the administrative side. From a tax reporting perspective I’ve read that investing small amounts on a monthly basis can make it difficult to calculate the taxes owed at the end of the year. However, I have not been able to confirm this yet as it will be my first year to file taxes this year. From what I can tell, Degiro (and likely other brokers) provide you with an annual report for the purposes of tax which outlines clearly what gains and dividends you have made through the year. This makes it quite simple to calculate but I haven’t been investing regularly so I’ll have to keep you posted on how the tax filing goes.
Also the fees used in this example are probably one of the lowest in the market. If you are using a bricks and mortar broker your transactions fees will likely be much higher which may swing the assumptions in this article in the other direction.
Great post this was alot of help as i am planning ti invest around 500/month in ETF’s. i found your Blog recently its really great that you explain the irish taxes and ETF’s in a way beginners can understand as other sources are very vague on the details.
Aw thanks. So glad it’s of use.