YES OR NO? 'Freebies' or Dollar Cost Averaging?

[Swampy]

I'm in a quandary. I have a significant amount of cash in a savings account yielding 1%.

I've been intending to invest it in index funds/ETF's, but have been getting an education on do-it yourself indexing over the last few months.

There is a deal with a brokerage where I can get about $500 in freebies for the first year if I invest $100K (nonqualified funds).
Part of the deal is free trades for the first 60 days (otherwise $10-25 a trade). All I intend on doing is buying several index funds/ETF's and rebalancing once a year or so.

If I just add cash to this brokerage account in small monthly amounts, there are no freebies.

Would you bite the bullet and just drop in and invest the whole wad once or would you dollar cost average over 6-24 months? I'm concerned that the market has gotten rather 'heady' and may be due for a correction soon.

I'm the guy who would have put a pile into the funds at the market top and then been kicking myself every time it hit a new bottom from 2007-2009.

If I dollar cost average after putting money in with this brokerage to get the 'freebies' I lose the guaranteed 1% from the savings account by having cash in the brokerage MMF yielding .05% - so I potentially lose anything I gained in freebies.

I guess there are no 'freebies' in life, after all. Whatever choice I make - I'm sure I will make the wrong one.

Part of me says "Take the $500 freebies, invest it all now and don't look back."

The other part of me says "Forget the freebies, you're getting 1% while you can dollar cost average into another brokerage account that doesn't charge transaction fee's at all, and requires no minimums for the account.

Choice two (forgetting the freebies) sounds like the better option - long term. Do you agree?

[bertilak]

Several Issues here...

1. I would stay away from the broker who will (eventually) charge you a commission to trade, even if he gives you a few freebies up front (in the form of $500). It's like the old saying about drug dealers -- the FIRST dose is free! Simply open up a Vanguard account and use only standard funds and not ETFs. ETFs are good for two things: active trading or getting in with very low amounts of money. Neither seems to apply to you.
   
   
2. Your decision is complicated by your belief that DCA will somehow be of benefit. There are many threads about this. You could search for them. Better yet, start with the DCA Wiki Page. Note the key passage on that page:
   

   For a completely rational investor, lump sum investing will always produce a higher expected return, because it immediately moves your funds from asset classes with lower expected returns to ones with higher expected returns. Note that higher expected returns do not guarantee that your actual returns will be higher. According to an investopedia article, [6] studies indicate that lump sum investing has produced higher returns 66% of the time.

   (I would leave out the word "completely". It implies some sort of extremism.)
   
   Normally I would say that DCA is only a minor mistake, but doing so over 24 months with a "significant" amount of money is pushing it. That's a long time to leave a substantial part of your money on the sidelines. Think of as half the money for two years or all the money for one year.
   
   
3. If you think the market is currently over-priced adjust your AA to account for that and go all-in at that more conservative AA. It takes some time for most people to settle in on a comfortable AA anyway. If equities move against you, a conservative AA will let you rebalance into them at the lowered prices. Some would say this (and DCA also) is a form of market timing and therefore a no-no. Don't let that bother you. Adjusting your AA is a controlled way to deal with the situation.

[livesoft]

Find a broker that gives you the freebies and free-trades for as long as you want. One can buy a short-term "near-cash" equivalent without commission and DCA into other things if you like. You might ask, "Which broker?" I will tell you their initials: TDAmeritrade.

Full disclosure: We have been TDAmeritrade nee TDWaterhouse customers for almost 2 decades.

[jeffyscott]

I'm all for freebies (I'm going to put $10,000 in a chase savings account for 6 months to get $125, in the last 1.5 years we applied for 5 credit cards in order to earn 250,000 miles/points, etc.), but I'd not let a $500 bonus significantly change my plans for how to invest $100K.

If it were my money, I'd "dollar cost average over 6-24 months" (and I'd tend to go toward the longer end of that range), accelerating the plan should there be a drop in the stock market during that time.

While the expected return may be higher for lump summing, I wonder if the lump sum also has a much greater chance of a short-term significant loss than a short term significant gain? It seems more likely that over a period of 24 months we might see a sudden 50% decline, than a sudden 50% increase.

[nydad]

Vanguard brokerage charges $7 per trade, less once you get more - and vanguard etfs are free i think. 10-25/trade is a lot.

DCA is ultimately psychological. So if your mental state is improved by doing it, go for it- just accept that it may lower returns (or maybe not!)

[Swampy]

Over the long term, going with free Vanguard ETF's is (I think) the better way to go. I can also get some ETF trades for free with Ameritrade.
Fidelity had a deal whereby I could get frequent flier miles, but with charges for ETF trades.

Free frequent mile stuff appeals to me. By gaming the frequent flier system, I was able to obtain three free roundtrip tickets to Europe so far. These were through credit card offers, etc. At current airline prices, these offers are tempting. I used the cards for a while, then either close the account or stop using them.

I think that I had to re-adjust my thinking in that the 'cost' of getting these frequent flier miles outweighed the benefit with the Fidelity offer.

At this point, I'm likely to use the three fund portfolio - plus an extra 1-3 funds attempting to diversify into emerging markets, small/midcaps and natural resources/precious metals.

Looking at about 44% bonds and 56% equities split 1/2 US and 1/2 foreign.

My concern has been that the national media is playing up the runup in equities and how billions have been flowing into equity mutual funds. Historically, this usually preceded a market drop or correction. THAT is the main reason why I want to dollar cost average. I am OK with earning a little less because of missed opportunity over the next couple of years. I would feel like an absolute idiot to invest the entire amount and see it go down 10-20-30+%.

So, I guess I've answered my own question. Do I want a frequent flier deal that may end up costing me $10-20-30+ thousand in lost opportunity because I didn't dollar cost average?

Nah.

[Default User BR]

I'm a fan of the brokerage bonuses. As Livesoft mentioned, TDA is a good deal because of the on-going free ETF list. Note that for most of these, "free trades" are only equity trades, not mutual funds.


Brian

[livesoft]

I'm a fan of the brokerage bonuses. As Livesoft mentioned, TDA is a good deal because of the on-going free ETF list. Note that for most of these, "free trades" are only equity trades, not mutual funds.

But "equity trades" includes bond ETFs.

[sdrone]

I'm not sure if it's only for existing investors or new investors, but Sharebuilder is currently handing out $500 just for depositing that amount of money; there are smaller freebies for smaller deposits. Of course, I made my big deposit BEFORE that offer was available.

Once you're in Sharebuilder, weekly buys are only $4.

[Default User BR]

Note that for most of these, "free trades" are only equity trades, not mutual funds.

But "equity trades" includes bond ETFs.

Correct.


Brian

[Default User BR]

I'm not sure if it's only for existing investors or new investors, but Sharebuilder is currently handing out $500 just for depositing that amount of money

Contact Sharebuilder and tell them that there is a bonus offer to move. See if they will match it to keep you. As they haven't paid you a bonus yet, it might be worth it to them. Never hurts to ask.


Brian

[AgAuMoney]

I'm not sure if it's only for existing investors or new investors, but Sharebuilder is currently handing out $500 just for depositing that amount of money; there are smaller freebies for smaller deposits. Of course, I made my big deposit BEFORE that offer was available.

Once you're in Sharebuilder, weekly buys are only $4.

This "existing investor" received the $500 offer "if you deposit $10,000 into a new or existing account."

Also note, if you are a costco member then the weekly buys are only $2. Costco membership also discounts on other fees, from the subscription for free trades to margin rates.

Sharebuilder is now owned by CapitalOne.