Larry Berman

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ANALYSIS: Last week we showed you that smart dollar cost averaging can add about 3% per year to your returns versus a simple month end purchase if you are going to set up a monthly purchase program by buying on the days that are down at least 1.57% versus a simple random day of the month purchase.

I’ve included the formula for calculating why that 1.57% is important. A volatility (VIX) reading of 25 implies a daily trading range of 1.57%, according to the math behind the calculation: 1.57%=25/SQRT(# 252 trading days in year).

In recent years, we use 25 because when we look back historically and exclude the papa bear markets, VIX above 25 measures the typical correction at 2 standard deviations. Historically, the level of the VIX should change given the constituents of the index. For example, from 1997 to 2002 when technology was becoming a bigger part and then a smaller part of the index, volatility readings on average were rising as technology stocks tend to be more volatile than other sectors.

Because markets tend to roll over slowly at tops compared to more of a panic at bottoms, it make sense to make your monthly withdrawals on days where shorter-term monthly momentum is closer to an historical high point. One way to measure that is to compare the market (ETF) versus the 21-day average. If we measure the entire history of the S&P 500 since 1927, the average monthly return is about 0.80%, which is about 9.6% per year. As it turns out, that 1.57% volatility metric we used for downside volatility is about double the average monthly return, so if we take money out of the account rather than on the 15th of the month (or some other random day), you take it out when the price is at least 1.6% above the monthly average, you can add to your money weighted returns.

In taxable accounts, one other consideration when using ETFs is to withdraw the money before a monthly or quarterly x-dividend day turning a dividend payment in your account into a more tax efficient capital gain, but that depends on your tax rate and the province you are in as they are all a bit different (consult your accountant). This makes the most sense when the dividend comes from a foreign source (even if the ETF trades in Canada it’s the source of the dividend that matters.)

There are ways to make a difference in portfolio returns with simple techniques like this and others that we will share with BNN viewers on my newest across Canada speaking tour. The current tour will feature the Berman’s Call format where we will look at what is currently moving markets off the top, have a live segment of audience Q&A and e-mails, and as always, will finish off with some great education like this to help empower investors to make better investment decisions.

Register at www.etfcm.com

Our voluntary charitable goal this year for Alzheimer’s research is $50K. Over the past 3 years Berman’s Call viewers have helped Larry raise over $100,000 for Alzheimer’s research in Canada.

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