Investing small amounts at a time in S&P index fund

[Scott927]

Hello,

This is probably a pretty basic question, but I'm 35 and just started a Roth IRA last year which I maxed out. I earn some monthly income from advertising that runs on a website I own, and I'd like to funnel this money into my Roth IRA. That'll cover about $3,600 a year of my max investment for my IRA.

RIght now, I've got everything invested in VFINX (Vanguard S&P 500 index fund), which I like. I'd like to add to this in small amounts, but there's a $19.99 commission fee for every trade. I get about $300/month so if I invested that every month, I'd be eating about 6.6% of my money right off the bat. Doesn't seem like a very good idea to me.

I recall reading somewhere that as a baseline, you don't want to pay more than "X" percent of your investment in commissions/fees, I just can't recall what that percentage is. Obviously there's some common sense that applies that says "as low as possible". However, if I wait say, 4 months to have $1,200 and bring my percentage down to around 1.6%, I lose out on 4 months of investing while it sits in cash. That doesn't seem like a good idea either.

Anyways, I like the index funds because I don't have to think too much about it to get a little diversification. I have a 401k that I max out also (up to my company match limit) that is almost all in T. Rowe Price's 2040 Target Retirement Fund. I just started the 401k this month so I don't have a lot of experience with that fund.

So my question boils down to this...I have $300/month being deposited into my Roth IRA account. I like the index funds (and maybe the 2040 retirement fund) because I don't have to have a lot of experience or research to get some diversification (I know very little about picking investments). What's a good way to invest that $300/month as soon as possible without paying too much in commission?

[nisiprius]

You should either find another brokerage to hold your Roth IRA or find another S&P 500 fund to invest in. You should pay zero fees.

One obvious suggestion would be to move your Roth IRA to Vanguard, and I think that would be a very reasonable idea. Furthermore, if it's a Roth IRA and the only holding is VFINX, I THINK that an "ACAT transfer" will go quickly and smoothly. If you want to move an account, always call and talk to the brokerage you're moving TO, they are the one motivated to help you out.

If your brokerage is associated with a mutual fund company--for example, if it is Fidelity or Schwab--then you will probably find that the associated mutual fund company has an S&P 500 fund and that you can buy it without any transaction fee. I personally have all my holdings at Vanguard, like Vanguard, have brand loyalty to Vanguard, like being able to get Admiral shares for a $10,000 minimum etc. etc. etc. but it's not a big deal. There are other perfectly good S&P 500 funds out there.

Although I personally find ETFs to be a royal PITA, you should also look into the fee structure for ETFs at your brokerage. They probably have a set of no-commission ETFs, or a generous allowance of "free trades," that allow you to buy ETFs for no fee. Problem is, you can't do it automatically.

Just to go off on a tangent, the usual reason for wanting to hold an S&P 500 fund is "I don't want to pick stocks, I want to hold the whole market." A decade ago, that usually meant an S&P 500 fund, and S&P 500 funds like VFINX are often praised in books, articles, etc. But these days, I feel that S&P 500 funds have been superseded by "total market" or "broad market" funds that try to hold the entire market--large-cap, mid-cap, and small-cap--not just the S&P 500. It's easy to make too much of this--it's amazing how little difference it actually made in the past--but as long as you're tinkering, you should at least consider using a total market index fund or ETF instead of an S&P 500 fund, unless there's some specific reason not to.

[hoppy08520]

Why don't you transfer your account directly to Vanguard? Advantages:

• No trade fees for deposits to IRAs
• Once your balance hits $10,000, you can get cheaper Admiral shares

[tyrion]

Where is your Roth IRA held? If you move it to Vanguard, you will avoid those hefty commission fees. If you don't feel like moving it, figure out which ETFs or funds you can buy without a commision.

[Scott927]

Sounds like everyone recommends moving to Vanguard. Right now my Roth IRA account is at E-Trade.

[nisiprius]

Just to be clear. I think Vanguard is pretty obviously the best place for

--a retirement saver, as opposed to a trader
--who wants to set up automatic investments
--who prefers mutual funds to ETFs
--who like Vanguard's mutual funds and intends to make them their core or only holdings.

If you meet those four conditions, then, yes, consider moving to Vanguard.

[Scott927]

Just to be clear. I think Vanguard is pretty obviously the best place for

--a retirement saver, as opposed to a trader
--who wants to set up automatic investments
--who prefers mutual funds to ETFs
--who like Vanguard's mutual funds and intends to make them their core or only holdings.

If you meet those four conditions, then, yes, consider moving to Vanguard.

Thanks for the informative posts. I appreciate you taking the time to give me a hand on this. I actually do meet all four of those so I'll look into moving to Vanguard this afternoon.

Now, to derail my own thread, you mentioned total market funds...something like VTSMX? Average annual performance looks pretty damn close to VFINX. Keeping in mind I'm a beginner at a lot of this, what would be a good reason to consider switching my investments to something like VTSMX from VFINX? Just more diversification? Over the last 20 years (according to Vanguard's performance charts), it doesn't seem like it's made much of a difference, which you did point out in your original reply. Just curious (trying to learn). Thanks!

[JW Nearly Retired]

Hello,
RIght now, I've got everything invested in VFINX (Vanguard S&P 500 index fund), which I like. I'd like to add to this in small amounts, but there's a $19.99 commission fee for every trade. I get about $300/month so if I invested that every month, I'd be eating about 6.6% of my money right off the bat. Doesn't seem like a very good idea to me.

Yep, like paying a delivery service a 6.6% commission to walk your monthly deposits to the corner bank. Who would do such a thing?

Just move the account to Vanguard and save yourself a ton of money.
JW
ps: VTSMX is just more diversified.... it's all of the total US stock market instead of just the 500 largest stocks, which are roughly 80% of the total.

[Mill]

Just to be clear. I think Vanguard is pretty obviously the best place for

--a retirement saver, as opposed to a trader
--who wants to set up automatic investments
--who prefers mutual funds to ETFs
--who like Vanguard's mutual funds and intends to make them their core or only holdings.

If you meet those four conditions, then, yes, consider moving to Vanguard.

Thanks for the informative posts. I appreciate you taking the time to give me a hand on this. I actually do meet all four of those so I'll look into moving to Vanguard this afternoon.

Now, to derail my own thread, you mentioned total market funds...something like VTSMX? Average annual performance looks pretty damn close to VFINX. Keeping in mind I'm a beginner at a lot of this, what would be a good reason to consider switching my investments to something like VTSMX from VFINX? Just more diversification? Over the last 20 years (according to Vanguard's performance charts), it doesn't seem like it's made much of a difference, which you did point out in your original reply. Just curious (trying to learn). Thanks!

You got it. More diversification.