Dollar-cost averaging (DCA) is often touted as a smart investment strategy. It promises to reduce the impact of market volatility and take the emotion out of investing. But when we tried to implement DCA ourselves in Belgium, we quickly realised it wasn't as straightforward as we thought.
High transaction costs, the complexities of the Belgian tax system, and the tedious nature of manual monthly investments all stood in our way. So how can you, as a Belgian investor, effectively use DCA without these hurdles?
In this article, we'll explore the ins and outs of dollar-cost averaging in Belgium, and show you how to make this powerful strategy work for you - without the headaches.
What is dollar-cost averaging
Dollar-cost averaging (DCA), or euro-cost averaging in Europe, is an investment strategy where you invest periodically instead of investing large lump sums in one go. You invest at fixed times, for instance every month, regardless of how the markets are performing.
Why you should dollar-cost average
There are several reasons why dollar-cost averaging is the best strategy for most investors:
- You're likely paid monthly
- You don't miss out on returns when you DCA
- No temptation to time the market
- Avoids regret
- Best suited for long-term investing
You're likely paid monthly
Your finances then progress at a monthly rhythm. Investing at the same frequency simplifies saving and budgeting.
You don't miss out on returns when you DCA
The best time to invest was yesterday, the second best time is today.
The financial markets go up and down. But the long-term trend is upward. The longer you wait to invest, the more likely you are to miss out on returns. By investing part of your salary as soon as you receive it, you force yourself to invest as early as possible.
No temptation to time the market
Timing the market is incredibly difficult. The global economy is amazingly complex, and the financial markets are impacted by many factors that are completely out of our control. For instance, no one could predict the exact timing of the Covid pandemic. When timing the markets, the odds are against you. You may get lucky, but in most cases you'll be worse off.
Diligently investing every month without considering market performance removes any temptation to time the market.
Avoids regret
Trying to time the markets can be exciting, but it's also stressful. You don't know whether you're buying or selling at the right time, and you'll inevitably make a wrong decision at some point. Don't regret your decisions. Dollar-cost averaging takes away the stress and potential regret, and brings peace of mind.
Best suited for long-term investing
Consistent monthly investments are the best way to save for the long term. As your career progresses, you will likely increase your monthly income. Through DCA, you can easily increase your monthly contribution to adapt to new financial situations.
How to dollar-cost average in Belgium
There are several ways of investing through dollar-cost averaging in Belgium:
- Through a broker
- Through an app like Curvo
Let's look at the pros and cons of each.
Option 1: through a broker
You can use a broker to buy shares of funds every month, and in essence, successfully perform dollar-cost averaging. Unfortunately, this method can be costly for small investment amounts. It also doesn't take advantage of using all of your cash available, and it can be extremely tedious.
Costly for small investment amounts
There are two costs associated with DCA through a broker:
- Broker fee. The broker charges a fee for every investment you make.
- Transaction tax. The Belgian state imposes a tax on every transaction, called "beurstaks" or "taxe boursière" or TOB. Depending on how the broker interprets the law, the tax varies from 0.12% to 1.32% of the transaction value.
We calculated the fees and taxes when doing dollar-cost averaging for several brokers in Belgium. As an example, we are investing €200 every month into VWCE, a popular fund for Belgian passive investors. We explain the process of buying VWCE through a broker in a step-by-step guide.
As you can see in the results below, there are wide differences in the cost of a DCA strategy in Belgium. DEGIRO is by far the cheapest broker for VWCE, with a total cost of just €2.82. The second cheapest broker in our comparison, Lynx, is over 28 times more expensive at €80. For the other brokers, Bolero, MeDirect and Keytrade, you will spend at least €208, or 8.7% of your total contributions.
This means that for any broker outside of DEGIRO, the fees make dollar-cost averaging almost prohibitive in Belgium.
Some cash is left uninvested
No broker in Belgium supports fractional shares, which means you have to buy whole units of shares. For a fund like VWCE, whose shares trade around €100 at the time of writing, you'll be left with a significant amount of cash when investing monthly. This is money that is not invested. The cash stays on your broker account and does not even earn an interest. It's not working for you.
Tedious manual task every month
It's fun to calculate the shares and make your investments every month when you first start investing. But over time this process becomes repetitive and annoying. Yet you'll have to repeat it every month when investing through a broker.
Run the simulation for your savings rate
In our example, we simulated what would happen if you saved and invested €200 a month. Do you save another amount every month? Make a copy of our spreadsheet and plug in your numbers to view the cost of dollar-cost averaging with the various brokers.
Option 2: an app like Curvo
As you saw, using a broker for dollar-cost averaging is not a simple task in Belgium. The task was so cumbersome that it led co-founders Thomas and Yoran to create Curvo in the first place. Through the Curvo app, you can make sure all of your money is invested and working for you, and it can be set up so that you can invest monthly without having to think about it. Your investments will be managed by NNEK, a Dutch investment firm supervised by the Dutch regulator (AFM), while Curvo provides the app to view your investments.
Only DEGIRO is cheaper
Instead of a fee per transaction, you are charged a yearly all-in fee which starts from 0.6% on your total investments. This means that you are not penalised for investing more frequently through monthly contributions.
And because the funds in the portfolios are not liable for the transaction tax ("beurstaks" or "taxe boursière" or TOB), you save between 0.12% and 1.32% for every purchase and sale.
In the spreadsheet, we ran the same simulation for the Growth portfolio accessible through the Curvo app, which is very close to VWCE. Over the course of the year, your fee will amount to €9.42. This means that only DEGIRO is cheaper. Note that you can't automate your investments through DEGIRO either. Other brokers such as Bolero or Keytrade are many times more expensive.
All your money is invested
Unlike investing with a broker, your investments with NNEK, through the Curvo application, support fractional shares. No matter the price of the shares and the amount you invest, all your savings are invested and put to work. There is no cash left behind just sitting on an account.
Savings on autopilot from €50 per month
Through Curvo’s app, you can set up a direct debit ("domiciliatie" or "domiciliation") so your savings are automatically debited and invested every single month. You can change the amount any time, or even cancel the automatic debits, and with Curvo's autopilot capabilities you can just sit back, relax, and watch your savings work for you. With all of the extra time you save, you can get back to the things that are important in your life rather than worry about your investments.
Conclusion
For most people, dollar-cost averaging is a great investment strategy. It forces you to contribute a set amount of money each month while ignoring the price of each individual purchase. By sticking to the strategy, you eliminate any counter-productive decision making that stems from investing based on emotions. And it makes even more sense if you get paid monthly.
But dollar-cost averaging is difficult when investing through a broker due to fees and the Belgian transaction tax. Our simulation of investing €200 every month showed that it is particularly expensive when using any broker with the exception of DEGIRO, and manually calculating and making your investments every month becomes an annoying task over time.
The founders of Curvo struggled with these issues when they were investing through a broker, and they built Curvo so more Belgians can participate in passive investing and benefit from the DCA strategy. By putting your savings on autopilot through automated monthly contributions, you set up yourself for success!