I’ve seen this question a few times recently. It usually goes something like “I can set aside x kr. a month for investments. How many months should I save before I invest it?“. The question makes great sense because if you invest too little and too often the brokerage fees might eat up a relatively large percentage of your investment. What people sometimes forget is that if you save up in a savings account for too long to save on fees you are missing out on potential growth. So here I will try to guide you through the process of answering this question for yourself. It should be noted though that the difference you can make will be realtively minor over a long period of time – the most important thing is to save money and get them invested!
In a world of no fees
Before we get started you should probably check my previous post if you haven’t and make sure you built your emergency fund and that you paid off expensive debt: “what to do with the money I saved?“. When that is out of the way let’s start by looking at the root of the problem – the brokerage fee! Let’s assume for a moment that the fees weren’t there. You could buy and sell stocks at precisely market value. In this scenario it should be quite obvious that if you expect a market growth that is at all higher than the interest rate of your savings account you should invest the money right away. With a slight fear of sounding like a teenage girl going on about Justin Bieber, they have exactly that over at Nordnet. If you save either through a retirement account into their Superfonden or if you save through their “månedsopsparing” (scheduled monthly investments) they waive their usual brokerage fee of 29 kr. Both Superfonden and their månedsopsparing has a minimum of 100 kr. per month so there really is no excuse not to get started. There are probably competitors that do the same and by all means mention them in comments and by all mean use any services that save you this brokerage fee!
I know that there are big limitations on both retirement accounts and on Nordnet’s månedsopsparing and this post would also be pretty trivial if we just skipped the essence because of an alternative solution. But let me impress upon you that even though 29 kr. isn’t that much it still does make a small difference. If you can only manage to save and invest 500 kr a month then 29 kr. would be almost 6%. If the 500 kr. is invested and grows at 6% per year then after one year due to taxes you will actually have less value that if you had just kept the money in a savings account. If you decided to sell after a year another fee of 29 kr. would be taken out and you’d be far behind the curve. Actually if you had 500 kr. in your account, paid the 29 kr fee and invested the 471,- into a stock with a yearly 6% growth it would take almost 3 years before you could pull out your original 500 kr after taxes and fees. On the other hand after 3 years you would still be up so clearly if you can only save 500 kr every 5 years you should still invest them rather than wait 5 years to invest 1000 at lower fees. There must be some optimal schedule to limit fees while capturing potential growth.
Finding an optimal investment schedule
So first of all we will need to make some assumptions. If you have different assumptions just follow along with those numbers in mind or try pluggin them into the spreadsheet at the end. I had hoped to deduce some nice simple formula, but since I couldn’t figure that out I just made some simulations 🙂
For me personally I will assume 7% annual growth (nominal so before inflation but after any fund fees), 1% inflation, 2500 kr. a month saved, 29 kr. in brokerage fees per investment and 27% tax on return. If we choose to invest every month we will add 2471 kr each month and have it grow at 0.49% per month (1.0049^12=1.06). If we alternatively invest every second month we will add 4971 each time and have it grow 0.98% per period. If we calculate the resulting balance after say 10 years of those investment schedules and then subtract taxes (on the interest only) then we have 364,659.89 kr. on the montly schedule and 366,093.06 kr. on the bi-monthly. So as I said in the introduction to this post it doesn’t actually matter that much – still every two months was better than every month. If we instead try with every three months or every four months we get 366,098.06 kr. and 365,746.87 kr. respectively. It would seem that with the given asumptions we should save up for three months and then invest 7500 kr, but it doesn’t actually matter all that much.
I’ll link a spreadsheet in a second so you can try for yourself. If you have another payment schedule than monthly then of course you should adjust for that in the spreadsheet (let me know if you need help). If you want to invest in more than 1 fund (to preserve a certain asset allocation) you can adjust the fee to 2*29 kr or whatever you need. Instead though I’d advise you to just put your full investments into a single fund each time and just switch where they go from time to time. So if you want a 50/50 split in two funds and the simulator says to invest bi-monthly, then I would personally just invest bi-monthly into whichever fund is lowest.
If you have any corrections you think would improve the sheet let me know and I’ll definitely consider it! I’m most uncertain on how to handle inflation – currently I don’t inflationadjust money saved between investments but I figure that small amounts over very few months have negligible inflation. I tried embedding the sheet this time – if this gives you any trouble or you miss any functionality just let me know!
And finally the sheet: How often should I invest?