Starting an automatic investment plan at Vanguard

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JSandler
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Joined: Tue Oct 19, 2010 1:15 am

Starting an automatic investment plan at Vanguard

Post by JSandler » Tue Oct 19, 2010 1:55 am

I'm a beginner investor with some questions on starting an automatic investment plan at vanguard. I've been investing $2k automatically every month in Vanguard ETFs through sharebuilder. I would like to buy directly from vanguard to cut down on commissions. But as you know, there is no automatic plan for ETFs. And the minimum investment is $3k for mutual funds.

So is there a way to start automatic investment at vanguard without having to invest $3k into each fund? I invest in 5 funds, which would mean I need $15k. If it makes a difference, I already have a tax-free muni fund worth $50k at vanguard, and about $50k of vanguard ETFs at sharebuilder.

Thanks for helping.

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nisiprius
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Re: Starting an automatic investment plan at Vanguard

Post by nisiprius » Tue Oct 19, 2010 5:52 am

JSandler wrote:I'm a beginner investor with some questions on starting an automatic investment plan at vanguard. I've been investing $2k automatically every month in Vanguard ETFs through sharebuilder. I would like to buy directly from vanguard to cut down on commissions. But as you know, there is no automatic plan for ETFs. And the minimum investment is $3k for mutual funds.

So is there a way to start automatic investment at vanguard without having to invest $3k into each fund? I invest in 5 funds, which would mean I need $15k. If it makes a difference, I already have a tax-free muni fund worth $50k at vanguard, and about $50k of vanguard ETFs at sharebuilder.
My very first thought is why not call Vanguard and lay out the whole situation with a rep and see what the rep suggests? A rep isn't going to give investment advice, but a rep can and should be willing to spend some time figuring out detailed how-to advice. Especially when it might mean you were going to add $50,000 to your Vanguard accounts now and $2K a month going forward. If you try this, come back and post how it went, I'm curious.

I don't know any way, but with $100K of Vanguard assets it does seem as if there are ways you could come close to what you want.

My first observation is that if you are investing $2K a month (good! Establishing the habit and saving enough is far more important than any other investment decision you make) you'll have $15K in less than a year, so be patient. There's no rush. You don't need to have all five funds from day one, honest. You can add one every time your cash balance gets over $3,000.

My second is: why don't you transfer the ETFs to Vanguard in kind? Without knowing the list of ETFs and the list of funds you want, I can't say anything, but, obviously, if you are investing in five ETFs and they all have corresponding funds, you could transfer them and then exchange them for mutual funds--that might have tax consequences if it's in taxable, not sure.

My third observation is that it's just not that important to be equally or evenly invested or perfectly match some desired asset allocation (AA) when you're getting started. You didn't list your funds or your desired AA, but depending on what you want you might be able to start out with less than five different funds by choosing a combination of some all-in-one fund, such as one of the Target Retirement funds that is close to what you want, and then add one or two other funds as outriggers to correct the biggest departures from what you want. For example (this is not to my taste but it's a popular opinion in the forum) if you felt that the Target Retirement funds would be just right if only they had more international, you might be able to get by with two funds, Target Retirement and Total International.

Finally, I am not not not recommending this, just mentioning it, it's gaming the system, better to wait. But there is one possibility. If you go this direction I would strongly suggest is talking to a representative and telling him or her frankly what you are planning to do and get their reaction. Be sure the rep knows that you have $50,000 total at Vanguard already.

It's this. See this thread I believe the minimum only applies when you make the initial purchase. That is, I think you can purchase a new fund for $3,000, then take some money out of it in order to scrape up the minimum to buy another fund, and nothing bad happens. If the rep says "don't do it," don't do it. But the rep might very well say something like "grumble, grumble, but we won't actually do anything." If someone's entire account at Vanguard consisted of one lone mutual fund sitting there for a year with $1621 I could imagine them getting annoyed, forcibly closing out the account and mailing a check. But I would hope they might cut some slack for a good-faith retirement saver with a total in the mid-six-figures and more coming in every month.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

dbltrbl
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Post by dbltrbl » Tue Oct 19, 2010 7:09 am

You do not need $3000.00 every month. Just to open an account in that fund. With new $ 10000 limit for admiral shares, difference in ER, less than commissions for ETF. If you insist, VG allows free ETF conversions. I invest only $ 200.00 per month automatically in a mutual fund with VG and no problems in 15 years. As was suggested, pick up your phone and talk to Vanguard.

Shaftie
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Post by Shaftie » Tue Oct 19, 2010 2:42 pm

As previously covered you can automatically invest less than the 1st 'required up front" purchase of the MF. I'm not certain but I believe most funds have a $100 requirement for automatic monthly investment thru VG. (This may very fund to fund)

The STAR fund (VGSTX) only requires 1k to get into if, for some unknown reason, the 3k is a barrier.

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JSandler
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Post by JSandler » Tue Oct 19, 2010 7:55 pm

Thanks all for the advice, especially nisiprius for your detailed response! I called Vanguard and was disappointed. As I feared, they wouldn't let me bypass the initial $3k investment. They suggested putting money in the prime market fund and then buying the mutual funds when it has enough cash.

I did ask about other options:
Converting existing ETF to mutual fund - Direct conversion is not allowed. The only way would be to sell existing ETFs and buy the mutual fund. Not preferred since this is a taxable account.

"Gaming" the system, ie buy $3k of one fund and then take some of the money out to buy another fund - Because I have voyager service, they would let my fund drop below the $3k requirement. But it makes tax reporting a bit complicated, so I would prefer not do this.

Given all this info, do you guys think I should remain with sharebuilder despite costing $12 per month? If I go the vanguard way it would take about a year before funds match my desired asset allocation. I'm 26 and I plan to continue investing for a long time. So maybe a year of pain is worth it? Or maybe I should rethink my asset allocation and come up with a simpler (better?) one.

DSInvestor
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Post by DSInvestor » Tue Oct 19, 2010 8:39 pm

What 5 funds are you investing in and do you have an asset allocation? If you have an asset allocation plan, you should have some target levels for each fund (i.e. fund 1 40% of portfolio, fund 2 20% portfolio etc). If there is one fund that is below target, why not make a $3000 initial purchase into that fund at Vanguard to start things rolling?

Maybe make the first 3K investment into the Prime MMF to open the account and then make 2K/month automatic purchases into Prime MMF going forward. As your Prime MMF balance exceeds 3K, you can use 3K to exchange into the fund that is under target. It's OK for Prime MMF to drop below 3K, besides your automatic purchases will replenish it each month. As the account builds up to 3+K again, exchange 3K into the next fund that is below target. Do not direct any new money into any funds that are above target. Once you get your fund positions open, you can make smaller purchases into each fund automatic exchanges or one time online exchanges. This way you would not be gaming the system. The only fund that may drop below 3K is Prime MMF and that's fine.

Vanguard has a feature to direct dividend and capital gains distributions to another fund. If you set your funds to direct distributions to the MMF, you'd have more cash available to make your purchases or rebalance.

If you're willing to share some details about yourself, your portfolio and your retirement plans available to you, you may get some better responses. See this thread for Asking Portfolio Questions:
http://www.bogleheads.org/forum/viewtopic.php?t=6212

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