The Young Investor's ETF Strategy - October Performance Update

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Includes: SCHB, SCHD, SCHE, SCHF
by: Matthew Utesch

Summary

With time on my side and a market that appears fully valued, I decided to implement a new strategy of ETF cost-averaging using Charles Schwab ETFs.

ETFs that are eligible to be purchased include the following: SCHD, SCHE, SCHB, and SCHF. I will not be reviewing another ETF fund to add in this article.

Commission-free trades and adherence to guidelines are the most important aspects of this strategy.

Young investors with limited capital and those who aren't as concerned with above-average yield are likely to find this strategy very attractive.

This method is the ultimate way to cost-average and establishes great long-term investing habits.

Investment Thesis

For those who are familiar with my work, I think it would be easy to accept the argument that a majority of my writings focus on near-term and/or current retirees. I'll even admit that I have neglected my own portfolio over the last year as I tend to get caught up in writing and monitoring my clients' portfolios.

This is the fifth article in this series that documents the changes I'm making to my own personal investment portfolio (specifically, concerning the ETF portion of my portfolio). The primary goal of this series is to improve my investment returns while also providing a roadmap for young investors who are looking to invest but often feel overwhelmed by it.

My previous articles can be found via the links below

This series is truly meant for the average investor who is looking for reasonable returns but who don't have the ability/desire to put in a significant amount of time into researching investment options.

As always, I believe it is important that readers understand the following:

  • This series will focus on building up my Charles Schwab ETF portfolio only. I still hold a significant amount of common stock that will not be discussed in this series.
  • Much like my series on John and Jane, I strongly believe in transparency, which is why I will include actual documentation (when possible) of my trades and account activity.
  • To further emphasize the second bullet point, this is a real portfolio of mine with my actual money being invested.

The most compelling aspect of this strategy is that it reduces cost (barrier to entry for young investors with less money) but is also simple enough that it can be used by investors regardless of education or income.

Rules For My ETF Strategy

Here are the six rules I will follow when implementing this strategy:

  1. I am only allowed to purchase one share of any commission-free Charles Schwab ETF per day (per Taxable and Roth IRA account).
  2. Even more specifically, I may only purchase a Charles Schwab ETF on a day when the price is currently sitting at a loss to the previous end of day price.
  3. If the first and second criteria are met and I have cash available to invest, I will make the purchase; however, if there is no cash available, then I will forgo making a purchase on that day.
  4. I am only allowed to sell up to 50% of my holdings in a Schwab ETF when the total gain exceeds 10%. If gains exceed 10%, I may continue purchasing shares, stop purchasing shares, or choose to sell (0-50% of my shares) at my own discretion. Any shares I sell will be used to invest in another one of my approved Charles Schwab ETFs (allowing me to rebalance the portfolio) and will not be held as cash.
  5. All distributions will be collected as cash and added to the pot for purchasing additional shares.
  6. The Charles Schwab funds I have approved include the following: SCHD, SCHB, SCHE, and SCHF. No Schwab ETF will be considered eligible until I have performed the necessary research.

I have decided that this approach is acceptable for both my Taxable account and my Roth IRA.

ETFs In The Portfolio

As mentioned above, my portfolio of stocks is currently focused on the following funds:

  • Schwab US Dividend Equity ETF
  • Schwab US Broad Market ETF
  • Schwab International Equity ETF
  • Schwab Emerging Markets Equity ETF

These funds currently offer me a reasonable degree of diversification and exposure to varied areas of the market. SCHD and SCHB have both performed much better in the last few months than SCHF or SCHE have and the chart below paints a clear picture of how much International and Emerging Markets have struggled since April 2018.

Chart SCHB data by YCharts

The peak and valley effect is the primary reason why I believe the daily purchase of a single share for each account (only on days when the ETF is selling for less than its closing price on the previous day) is superior to lump sum investing. To support my position, I thought it would be interesting to look at the date I approved each ETF for investing and its share price at that time versus the total cost basis of the same shares that I currently hold.

There are two things that I find extremely compelling about this table:

  1. The strategy isn't perfect and the reduced returns of SCHD and SCHB using this strategy are very real. To be fair, assuming that we will always enter in when the price is low is one of the biggest fallacies that most investors cannot truly live by. This slight underperformance is to be expected from the two stocks that have performed well for the entirety of 2018.
  2. On the other hand, my SCHF and SCHE are actually performing better by using this method and it's largely because they have struggled tremendously for the majority of 2018. As a result, we can take advantage as investors and continue to reduce our cost basis associated with these shares. As of late, the majority of my purchases have been in SCHF and SCHE.

Taxable Account

I began implementing this strategy on April 20, 2018, when I made my first ETF purchase. Here are my purchases for the taxable account since my last update on July 23, 2018. (The last purchase I confirmed in my previous article was on July 19th).

Source: Charles Schwab

  • SCHB - I invested $208.90 on shares of SCHB in my Taxable Account during the time period of August 20th through October 9th.
  • SCHD - I invested $105.65 on shares of SCHD in my Taxable Account during the time period of August 20th through October 9th.
  • SCHF - I invested $231.09 on shares of SCHF in my Taxable Account during the time period of August 20th through October 9th.
  • SCHE - I invested $278.18 on shares of SCHE in my Taxable Account during the time period of August 20th through October 9th.

Since the inception of this portfolio (April 20, 2018), SCHB, SCHD, SCHE, and SCHF in the taxable account now have the following characteristics:

SCHB

  • I have invested $1,014.86 on a total of 15 shares.
  • SCHB has a cost basis of $67.66/share.
  • SCHB is currently sitting at $69.25/share, which results in a total return since inception of $23.89 or approximately 2.35% on an annualized basis.

SCHD

  • I have invested $1,266.24 in a total of 24 shares.
  • SCHD has a cost basis of $49.91/share.
  • SCHD is currently sitting at $52.76/share, which results in a total return since inception of $68.43 or approximately 5.71% on an annualized basis.

SCHE

  • I have invested $278.18 on a total of 11 shares.
  • SCHE has a cost basis of $25.29/share.
  • SCHE is currently sitting at $24.60/share, which results in a total return since inception of -$7.58 or approximately -2.72% on an annualized basis.

SCHF

  • I have invested $530.86 on a total of 16 shares.
  • SCHF has a cost basis of $33.18/share.
  • SCHF is currently sitting at $32.50/share, which results in a total return since inception of -$10.86 or approximately -2.05% on an annualized basis.

Roth IRA

I began implementing this strategy on April 20, 2018, when I made my first ETF purchase. Here are my purchases for the Roth account since August 20th through October 9, 2018.

Source: Charles Schwab

  • SCHB - I invested $208.86 on shares of SCHB in my Roth Account during the time period of August 20th through October 9th.
  • SCHD - I invested $105.65 on shares of SCHD in my Roth Account during the time period of August 20th through October 9th.
  • SCHF - I invested $231.08 on shares of SCHF in my Roth Account during the time period of August 20th through October 9th.
  • SCHE - I invested $278.16 on shares of SCHE in my Roth Account during the time period of August 20th through October 9th.

Since the inception of this portfolio (April 20, 2018), SCHB, SCHD, SCHE, and SCHF in the taxable account now have the following characteristics:

SCHB

  • I have invested $1,082.63 for a total of 16 shares.
  • SCHB has a cost basis of $67.66/share.
  • SCHB is currently sitting at $69.25/share, which results in a total return since inception of $25.37 or approximately 2.34% on an annualized basis.

SCHD

  • I have invested $1,290.85 for a total of 26 shares.
  • SCHD has a cost basis of $49.65/share.
  • SCHD is currently sitting at $52.76/share, which results in a total return since inception of $80.91 or approximately 6.27% on an annualized basis.

SCHE

  • I have invested $278.16 for a total of 11 shares.
  • SCHE has a cost basis of $25.29/share.
  • SCHE is currently sitting at $24.60/share, which results in a total return since inception of -$7.56 or approximately -2.72% on an annualized basis.

SCHF

  • I have invested $530.86 for a total of 16 shares.
  • SCHF has a cost basis of $33.18/share.
  • SCHF is currently sitting at $32.50/share, which results in a total return since inception of -$10.86 or approximately -2.05% on an annualized basis.

Conclusion

Recent market volatility has had a significant impact on my ETF holdings over the course of the last two weeks. I think that the chart below says it all.

Chart SCHB data by YCharts

For those of you who are considering following the strategy is important to remember that the short-term price fluctuations are actually to your benefit because the best investing happens when you can buy something of value for less than what is truly worth. In the long run, a market that never corrects or doesn't offer these types of opportunities is one that you would not want to invest in since there would be little benefit to capitalize on.

The ETF strategy works because it exploits the ups and downs of the market. Am I concerned with the near-term losses associated with SCHE and SCHF? I can honestly say I could care less at this point because they were both sitting at a capital gain no less than a month ago. In all honesty, I am glad that these two funds have dropped because it is allowing me to add shares at prices that haven't existed since July 2017.

Chart SCHE data by YCharts

Since the inception of this strategy, I have purchased a total of 66 shares in the Taxable account and 69 shares in the Roth IRA. When we factor in that each share was purchased in its own transaction, it means that I have saved $668.25 in transaction fees by using Schwab ETFs compared with other ETF funds that are subject to the $4.95 trading fee.

As of October 9, 2018, I have a cash balance of $105.17 in the Taxable Account and $175.72 in the Roth IRA. I have not added any capital to my Taxable Account or Roth IRA since the implementation of this strategy. Any increases in my available cash have come from the buying/selling of individual stock. In the next few days, I plan on liquidating select stock holdings to increase my cash reserves so that I can continue growing my ETF portfolio.

On a personal note, I am excited to say that I will have additional funds for investing soon as my accelerated car payments will finish paying off my loan that was taken out only 15 months ago.

What do you think of my strategy? I love to hear feedback from readers and will do my best to respond to all comments.

Final Note: If you enjoy my articles, please take the time to follow me. While I enjoy performing analysis, following me is the best method for showing me that SA subscribers are finding my work useful. I welcome all meaningful feedback and I enjoy using the Seeking Alpha platform to enhance and improve my own knowledge as well. My promise to readers is to be as open and transparent as I can be. The numbers presented are accurate as of the time I wrote this article.

Disclosure: I am/we are long SCHB, SCHD, SCHE, SCHF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article reflects my own personal views and is not meant to be taken as investment advice. It is recommended that you do your own research. This article was written on my own and does not reflect the views or opinions of my employer.