Comments on: A Great Example Of Why “Better Returns” Are Often Not All They’re Cracked Up To Be

By: Jon

Jon — Mon, 27 Aug 2007 16:44:44 +0000

I like the Vanguard idea because there are no transaction fees and investing in an index fund requires a lot less research than individual stocks.

That said, for those who do want individual stocks there are at least two decent options. First, with Sharebuilder, you simply queue a few months’ worth of contributions, letting them earn 4% in Sharebuilder’s money market. That way you end up buying in larger amounts so the transaction fee is not too bad (20% is ridiculous, 5% less so).

Second, open an account at Zecco instead. There are no commissions. However, I’m not sure if they allow purchase of fractional shares, so with $20 you’d be limited in what stocks you can buy.

By: Dominic

Dominic — Tue, 07 Aug 2007 14:37:58 +0000

The commenter mentioned that he was doing $20/month, whereas you use $20/week in your example.

By: Toby

Toby — Tue, 07 Aug 2007 03:03:44 +0000

A good guideline for considering brokerage fees (what I would call frictional costs) is to keep them below 1-2% of the principal being invested. 20% is outrageous! To meet the 2% guideline, he’d have to invest $200 at a time with $4 commissions.

This is why so many financial writers recommend against investing in individual stocks when you only have a small amount of capital. The brokerage fees really kill your returns when you are dropping $100 here and $100 there.

I prefer to keep my fees to fractions of a percent. When your trades fall into the $5-$10k range, your frictional costs grow very small.

It takes patience to grow a sizable bank roll. Kick back, send the money to an index fund regularly, study investing principles, run a virtual portfolio, etc. while you build that bankroll. You’ll be much better prepared to invest them money.

By: ben

ben — Mon, 06 Aug 2007 21:14:43 +0000

Why not put the 20 a month in a savings account and then every 3 months (or 6 or 12) put combined sum into the custodial account? If it really is for the long term, (ie 10-20 years) then dollar cost averaging isn’t an issue. Also the deposit into the savings account can be automatic so force savings benefit is also fulfilled.

By: Colin

Colin — Mon, 06 Aug 2007 20:44:26 +0000

Can you explain how you will only need 7.8% return to offset the cost, when 20% of your investment is lost right off the bat? It seems to me that you would need a return of greater than 25% to justify using the brokerage account.

By: Vin

Vin — Mon, 06 Aug 2007 18:59:08 +0000

Can you even open a custodial account with major banks that offer good interest rates? Most offer like less than 2% for custodial accounts.
Opening it on your own name on behalf of your minor will lead you to pay higher rates on taxable income.
Am I correct with this, or wrong?

By: Danny at Money Socket

Danny at Money Socket — Mon, 06 Aug 2007 17:40:33 +0000

That is definitely not worth it since the investment is only $20 a month and the $4 fee is fixed. I would go with the index fund as well if I were him, the most passive stock investment available with low fees. It’s not worth the potentially higher returns, which isn’t guaranteed, while the $4/trade cost is guaranteed.

Personally I’m invested in Etrade’s SP500 index fund, to my knowledge it has the lowest expenses of them all.

By: Jim Lippard

Jim Lippard — Mon, 06 Aug 2007 17:32:36 +0000

$4/trade is not bad for an individual stock investment–in fact, it’s quite good. But it’s not good for an automated monthly investment of a small amount of money. That should either go into a money market sweep account which you use less frequently for stock trades, into savings, or into automatic no-load mutual fund investment (and again, you should be looking for low management fees–e.g., my S&P index fund expense ratio is 0.19%, and if I had $100,000 for an S&P index fund, I could get an expense ratio of 0.09%).