Investing Small Amounts Can Be Expensive

Scottrade ticked off a lot of people when they added a $17 fee for purchases of mutual funds that aren’t included in their No-Load, No-Transaction Fee (NTF) Fund List. There is a way around most of the $17 fee but it requires systematic purchases or redemptions of at least $100, for which Scottrade will charge $2 per transaction. At first glance, $2 doesn’t seem like that big of a deal. But, with a $100 investment, it represents a 2% front-end and back-end load.

Since the $2 is charged PER transaction, one route to go would be to simply save up the $100 per month and then invest $600 twice a year or $1,200 once a year. This would cut the fee percentage way down ($2 &#247 $600 = 0.33% compared to 2.00% for a $100 transaction). The problem with this strategy is that the money really isn’t working for you during the months while you are saving it up and it also defeats the purpose of dollar-cost-averaging, which is to invest consistent sums over long periods of time in order to decrease risk.

One way around this fee is to simply invest directly with the mutual fund company. You will give up some freedom of choice but most people’s needs could be easily met with a company like Vanguard or T. Rowe Price. Vanguard does have a $3,000 minimum initial investment for their IRAs, which may be a bit steep for someone just starting out. Vanguard also charges an account fee of $10 per fund for IRAs with balances of less than $5,000. Remember that fee is PER FUND, so if you have 2 funds (like the Vanguard Total Stock Market Index and the Vanguard Total International Stock Index Fund) inside your IRA and your account balance is under $5,000, you will be charged $20 per year. This might be a reason to stick with ONE fund until your account has reached $5,000. T. Rowe Price has a $1,000 minimum initial investment for IRAs. They also charge $10 per year PER FUND for IRAs with balances of less than $5,000, which is similar to Vanguard’s policy. Their mutual fund expenses are somewhat higher than Vanguard’s but still low compared to the average mutual fund. And, T. Rowe Price has an excellent reputation.

There are other choices out there and I’m not necessarily saying that you should go this route. No matter what you decide, the most important thing is to GET STARTED saving for retirement.

12 thoughts on “Investing Small Amounts Can Be Expensive”

  1. They get you coming – then they get you going…
    Other than my 401K and now a 529 plan, I have never invested in mutual funds. The primary reason was that I perceived that all those fees cost too much, as well as the minimums. Now that I see it explained a little bit more, I see that I was lucky(?) I’m investing in stocks.
    While I pay a $4 per transaction (would turn out to be 8% on a $100 purchase and sale), I never really flinch when I pay the $4. It could be that I’m just numb… I usually wait until I’ve got over $1000 to invest, so the percentage is way lower ($1000 at $4 = .4% or %8 round trip). Also – being a “buyer & holder,” I will probably wait until I need a large chunk of cash before I sell, making the percentage even lower.

  2. Investing small amounts can be expensive. However, not investing at all can be even more so.

    The investment world isn’t really set up to benefit the very small investor.

  3. Two years ago Vanguard only required $2000 to open a Roth IRA, but last year, when Roth contribution limits were raised to $4000, they raised it to $3000. Gotta love progress. Of course, once you’ve opened the account, you can regularly contribute smaller amounts. The problem is that a lot of people aren’t disciplined enough to scrape together the $3000 in the first place. How are those people, especially if they have a job where no 401(k) or 403(b) is offered, supposed to save for retirement?

  4. I’ll plug my low-cost broker, thinkorswim (http://www.thinkorswim.com/ ). Yes, they have a definite bent to trading options, which I do dabble in with some fun money – but their regular equity and fund trades aren’t bad, either.

    Equities from $0.015/share ($5 min), and mutual fund trades are FREE for up to 3 per month! If you’re consistently investing in mutual funds, but also want the flexibility of a brokerage – not a bad way to go. Oh, and their regular & Roth IRA’s are no-fee, too.

    And they cap it all off with OUTSTANDING customer service.

    Sincerely,

    A Satisfied Customer.

    🙂

  5. The $3000 hurdle to open an account at Vanguard is unfortunate; I really wish they would offer a “bare-bones” account, maybe with online statements only, or with a required monthly deposit, to help people get started.

    If you do stick with just one fund (like one of the target retirement funds), then the $10 annual fee isn’t too draconian; if you have a couple thousand dollars, that’s only 0.5% (which is 0.5% higher than one would like, but…). Just look at it as incentive to beef up your account balance!

    Look at it this way; Vanguard funds frequently have an expense ratio that’s more than 0.5% less than other competitive funds. So you may still be better off in a Vanguard fund paying the $10 than you would be at Fidelity or elsewhere.

    (Sorry, I’m a big Vanguard fan…)

  6. Actually, you can start an IRA at Vanguard with just $1000, as long as you use their STAR Fund (VGSTX).

  7. I’m a big fan of Fidelity. We’ve never been charged a fee on any of our accounts (two Roth IRAs, one Rollover IRA, one brokerage account). We typcially invest in either Fidelity funds or the Spartan funds. The Spartan funds have extremely low expense ratios.

  8. Just to confirm what Jason said, yes, you can start with Vanguard STAR fund for only $1,000.

    Although it’s not my favorite choice, it has a growth of 11.07% since 1985. That’s not too shabby. 🙂

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  10. I love the STAR fund. Its been an excellent choice for hassle free investment with above (8%) average gains. I m sure one could make more money playing the market, but for those in for the long haul without too much time and energy to work on a second job (read investing in stocks), this is an excellent choice.

  11. Vanguard Target Retirement 2035 is the sh– for my Roth….no hassle, set it on auto pilot to take $333.00 out of checking and into the fund same time every month…automatic diversification, automatic allocation of funds as I get older…..

    I can’t imagine why anyone would buy individual stocks for a Roth?….anyone?

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