I recently made an investment mistake that made me feel like a complete idiot. Instead of keeping up appearances, I decided to share my experience in case you ever thought of doing something similar or can learn from it. I did my homework and thought that the probability of making some extra money was worth the risk. However, things did not turn out as I expected and I lived to tell the tale.
The business case
Exchange-Traded Funds (ETFs) pay dividends that usually yield about 2%. This is because the shares that are held in the ETF pays dividends and at the end of the quarter all these dividends are distributed to the shareholders. Dividends are typically paid on a quarterly basis, which means that each dividend will be approximately 0.5%, although it varies significantly.
To receive this dividend you only need to own the ETF for about four days. The first of these days is called the last day to trade and the last day is called the record date. So, it is possible to hold the share for only a few days and then dump it while still receiving the dividend.
This cannot be done with traditional shares. Once the dividend is declared, the price of the share rises slightly and then there is a massive sell-off on the day following the record date. This drops the price by approximately the same percentage as the dividend. You might be able to sell it while it drops but it is highly unlikely.
With a Real Estate Investment Trust (REIT) ETF however, it did not look like there is a sell-off after the record date. This is because the sell-off for each underlying asset happens long before the ETF pays dividends. So now we only need to determine whether you can get in and out of the ETF for cheaper than the dividend you receive.
If you trade on Easy Equities you can get in and out of ETFs quite cheaply. With trading costs of 0.25%, it will cost you 0.5% to get in and out of an ETF and then another 0.5% to reinvest it in the ETF you sold to buy the dividend-paying ETF (assuming you do not keep the money in cash).
Then the cost of the ETF is also subtracted before the dividend is paid. So if the Total Expense Ratio (TER) is 0.8% and it is spread out between four dividend payments, it costs 0.2% in fees to get the dividend. Then lastly you also pay the Dividend Withholding Tax (DWT) of 20% on dividends before it is paid to you.
So adding all these costs mean that the total cost of earning a 3% dividend is about 1.8%. If the dividend is more than 1.8% it is worth it. It will therefore not work on share ETFs since they typically pay about 3% dividends spread out over four dividends. It will however work or property ETFs since they are averaging dividends of about 9%, with the highest single dividend being about 3%.
In January the Satrix Property ETF paid a dividend of 3.2% and I decided to try this strategy. I backtested it to make sure that the price of the ETF does not drop more than the dividend payment and saw that it almost never does. The Satrix Property has a TER of only 0.29%, so the total cost for getting in and out (excluding DWT) was just under 1.1%. This left me an error margin of about 2.1%.
I was selling the Ashburton Global 1200 to buy the Satrix Property ETF, so I was betting that the difference between the movement of the two ETFs would be less than 2.1%. Since the ETFs were held in a Tax-Free Savings Account (TFSA), I would not be paying the DWT, which increased my potential profit margin.
I had another reason for deciding to try this, I wanted to rebalance my portfolio to only keep local shares in my TFSA for maximum tax benefit. The Ashburton Global 1200 that I was holding in the TFSA was still attracting DWT, so I wanted to hold it in my discretionary account.
How it played out
On 14 January I sold R91 082 worth of Ashburton Global 1200 and bought R90 108 worth of Satrix Property. The first day the price held beautifully, but on the second day, 15 January, the monumental fuckup started. Between 15 January and 20 January (when I could sell the ETF), the price fell by 4.6%. In that same period, the Ashburton Global 1200 grew by 1.4%.
After selling the shares and buying the Satrix Top 40, I ended up with shares worth R89 078. So instead of making R1 820 as I predicted, I lost R2 010. Adding insult to injury, I also lost out on the growth of the Ashburton Global 1200. This means I lost out on another R1 240, bringing the total to R3 250.
Don’t try to be smart with your money. For a little bit of extra growth, I was willing to risk a lot of capital and it did not pay off. It wasn’t the most money anyone has ever lost doing stupid shit but it did teach me a lesson. Ultimately the best strategy will always be to invest your money and leave it alone until you retire. There is a reason every finance expert out there is echoing this message. It protects you from yourself and helps you sleep at night.
If you made any stupid investment mistakes with your money and think we can learn something from this, don’t hesitate to share your story in the comments.
Be safe out there,
Quote of the weekI never make the same mistake twice. I make it five or six times, just to be sure. Click To Tweet
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