In my recent article titled “Investing – the time to start is now” I was asked a very thought provoking question about the effect of investing less frequently in order to save on transaction costs. I initially suspected that investing more frequently would allow an investor to capture more of the market up and downside risk. Since market risk tends to favour the upside this would overcome the losses from the transaction fees presented in the question by giving available funds more time in the market. So to test this I used the flat $10 transaction fee and $1000 monthly investment amount parameters that were provided to me in the question. I constructed 4 portfolios to compare monthly, quarterly, half yearly and yearly investing frequencies and invested a total of $240,000 (before fees) in the Australian All Ordinaries Index from a period of 1/2/1999 to 1/1/2019.
Investment amounts
| Monthly Portfolio | $1,000 – $10 = $990 invested monthly |
| Quarterly Portfolio | $3,000 – $10 = $2,900 invested quarterly |
| Half-yearly Portfolio | $6,000 – $10 = $5,900 invested quarterly |
| Yearly Portfolio | $12,000 – $10 = $11,900 invested yearly |
Here’s the graph of the portfolio value over time when investing monthly
The monthly invested portfolio value finishes at $328,686 with an internal rate of return of 3.12% p.a. In the next graph I’ve subtracted the various portfolio values at 12 month intervals from portfolio invested monthly to show the out/under-performance of the other 3 portfolios. The graph obtained by doing this is as follows:
The dots that are above 0 represent a sample period where that particular portfolio has outperformed the portfolio that is invested with a monthly frequency; conversely a dot below 0 represents an under performance.
The first thing that we can observe is that the portfolio that has a yearly investing frequency tends to be outperformed by the other 3 portfolios. This effect is the worst between 2005 and 2007 – I suspect that keeping the money on the side-lines to save of transaction costs result forgoing the strong growth that the market provided during this period. Quarterly investing tends to follow the monthly investing portfolio fairly closely with a small outperformance between 2009 and 2013, the largest difference being $577 in January 2009.
The final values as at 1/1/2019 are as follows:
| Monthly | Quarterly | Half-yearly | Yearly |
| $328,686 | $328,700 | $328,352 | $326,556 |
Concluding thoughts
In this particular simulation the final portfolio values are very similar for all 4 portfolios. There are times when the quarterly and half-yearly portfolios do outperform the monthly portfolio however I would consider this difference to be minor. So from this simulation I can say that if you are concerned about transaction costs I would consider reducing my investing frequency from monthly to quarterly but not any further. Hope this article has provided you with some food for thought around the topic of investing frequency. Big thanks to the Sanj for posting this thought provoking question in the comments section of the article “Investing – the time to start is now”.
Engineer your freedom
References
Yahoo finance, 2019, ALL ORDINARIES (^AORD), last accessed 14/1/2020, <https://finance.yahoo.com/quote/%5EGSPC/history?period1=-631180800&period2=1565884800&interval=1mo&filter=history&frequency=1mo>
Thanks for analysis. It’s good to see the numbers laid out like that. Looks like I have a bit of room to move then. I also realised (for myself) the more frequent I am – the less disciplined I am with what I buy. Whereas I’m more likely to be stringent with my purchases if I was only going in quarterly.