Quinn’s Brain, aka QBrain

I will attempt to address this quite detailed comment.

You don’t mention index mutual funds. I think they are a great investment if you don’t have a lot to invest. They are not as liquid as ETFs but for long-term investments that shouldn’t matter. They do however have extremely low expense ratios. The Vanguard Total Market Index mutual fund has an expense ratio of 0.19%. And if you look at distributions they have not had a capital gains distribution in over 2 years, just dividend distributions. How do ETFs compare?

The expense ratio on iShares Total Market ETF (IYY) is 0.20%. At one time, I do believe that Vanguard’s expense ratios were superior to comparable ETFs, but the gap has shrunk considerably. Purchasing a no load fund is typically free when the order is placed directly with the mutual fund itself. ETF trades cost $7/trade through Scott Trade, but to trade a Mutual Fund through Scott Trade costs $14/trade. My preference is to consolidate my investment holdings, so a $7/trade for an ETF is a better deal to me than a $14/trade for a mutual fund. So depending on how you are willing to move money around, either side can come up on top for cost.

Let’s say you have $500 to invest every month. … Assuming really cheap commissions of $7/trade you would be paying 1.4% in commissions.

That makes a very good case for placing orders directly with the mutual fund, especially for small monthly transactions. At some point, the question becomes, do you have a latte this month or not.

From a more general point of view, trades cost money, so minimizing your trading costs affects the bottom line. I switched from 3 trades per month to 1 trade per month, round robining my primary investments. That saved $280/year in trading cost.

So another thing to consider is whether your employer will match contributions to your 401(k). If they do then it seems wise to at least put in enough to get the entire matching from them.

Agreed! Definitely don’t turn down free money. The point I was trying to make is that you should have savings outside of tax advantaged accounts. While it makes good tax sense to max out your 401k and IRAs if you have the funds to do so, I was trying to make a case that there might be a better choice. Tax wise, there will not be a better choice. Future wise, having ready access to a portion of your saving available keeps options open.

Posted on March 23rd, 2006 under Finance • RSS 2.0 feed • Leave a response, or trackback