- May 7, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Understanding Investments in ETFs
Hey there! As someone who is new to investments, it’s great that you’re taking the initiative to educate yourself about ETFs. ETFs can be a great way to diversify your investment portfolio and potentially achieve long-term financial growth.
### Different Investment Approaches
When it comes to investing in ETFs, there are different approaches you can take. One option is to buy an ETF one time with a lump sum amount, such as 300 EUR. The benefit of this approach is that you don’t need to repeat the purchase every month. However, the downside is that your potential long-term investment may not grow as much compared to regular contributions.
### Monthly Investing vs. Lump Sum Investment
On the other hand, you can also choose to invest in an ETF monthly with smaller amounts, like 50 EUR. Over time, these monthly contributions can accumulate to a significant sum, potentially leading to higher returns. This approach is often referred to as an “ETF saving plan.”
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There are two buttons when you select an ETF on Trade Republic.
Buy – one-time purchase, costs 1€, needs to be repeated manually. Could be worth it if you need to invest quite a large sum right at the moment.
Save – creates a saving plan which executes purchase on a recurring basis. Costs nothing and sum could be adjusted at any time. Should be used for all other use cases.
The one time trade is when you simply decide to buy some stocks. Example: I wake up today and I decide I want to invest 300euros of SWDA. The monthlty investment\saving plan means that every month (but could also be quarterly or else) the app is automatically going to invest an x amount of money on a certain stock. In trade republic for the first option you pay a fee, while the saving plan is free.
The saving plan is in reality something called dollar cost averaging, i.e. by buying over a spreaded period of time you basically buy the average price of the stock. If you have an initial capital that you want to invest, you might also consider lump sum invest, basically investing everything in one go. See the Ben felix video to decide for yourself. In theory lump sum investing performed better most of the time compared to DCA based on hystorical data. If you have no initial capital then basically DCA is your only option, and the trade republic saving plan just gives you the option of making it automaic and periodic.
Already answered above, but a little addition on nuances:
* The savings plan can be done only in the amount of money, never in the number of shares. As such, you always end up with “fractional shares”. Some people (like me) consider this weird: I do not understand it and how the fractional ownership is guaranteed, and how 2×0.5 shares are then combined into 1 whole share, so on. That might be rather a taste issue, not something to worry.
* The savings plan is executed only on specific schedules, and even with a weekly schedule, it can start only on the 1st or 16th of the current or next month, not even on the next Monday (I have just tried). Which is not a big deal for long-term investments, but might be an issue if you want to start playing with the account right now (for an extra cost of €1 per regular manual order). Or if you want to “time the market” and “buy the dip” — neither of which is also recommended, but nevertheless.
* For small investments like €50-100/month, even €300/lumpsum, this €1/month can be noticible — it is 1-2% deducted from the overall growth of 2-4-8%/year, which is roughly a quarter, if not a half of the growth “lost” (besides the taxes). Here, using the comission-free saving plans is a better approach. Mind that you will also have to pay €1 when/if exiting (selling) those savings, so it might be €2 in total — €1 in, €1 out. For mid-to-large lump sums (€1k-10k+), the €1-2 fee is negligible and can be ignored.
Otherwise, no essential differences from the trading/investing perspective.
* Specifically in TradeRepublic, having one ore more savings plans totalling to min €50/month is a prerequisite for the “saveback” (cashback) on the card expenses — if you care about those max €15/month profits.