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Vanguard or E*trade for IRA and more?


Guest Peregrino

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Guest Peregrino

I am 31 years old and quickly realizing that I need to start saving for retirement. I checked 5 books out of the public library and have come to a few conclusions.

1) I want to open a Roth IRA

2) I want to invest my money initially in an index fund

3) Fees are the enemy

After looking over reviews of online discount brokerages I have decided that I would like to invest with either Vanguard or E*trade. I like Vanguard because of the low fees and commissions and choices, especially on index funds. What I do not like are the $10/year they will charge until I have $5000 in my IRA and $10000 in an index fund. I like e*trade because of the lower still comission on some index funds, the lack of maitenance fees, and the ease of having money market accounts and checking accounts all at one stop. I not like the lack of choices, especially with respect to index funds (only 4 no transaction fee options!).

I was wondering if anyone could give me a pointer that would lean me one way or the other. I'm the kind of person that needs to research everything beforehand, but I feel that I need to start investing now.

Thanks in advance.

Peregrino

PS - One bonus question. If I pay a transaction fee to buy shares in an index fund, do I have to pay that fee _every time_ I purchase more shares?

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I would not open an E*TRADE account to buy an index fund. You can't beat the cost structure of going directly to a Vanguard or Fidelity if that's all you plan to invest in. Then again, maybe you have bigger plans for stock investing in the future? And seriously, I wouldn't bat an eye at Vanguard's $10/year maintenance fee. If it gives you some incentive to get your balance higher, great, but on a $4,000 Roth contribution this would be a quarter of a percent--the market may have moved that much in the time it takes you to read this reply. After another year's contribution you'd be above the minimum.

Hope this helps,

ty

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  • 2 weeks later...

$10 a year is very low, only a few companies offer the zero option like etrade. I would not make an investment decision based upon the difference between zero and $10. In a few years, your IRA is likely to exceed the minimum threshold for account fees (5 and 10k are common break points). Also, some mutual funds waive some/all fees if you adopt a monthly automatice contribution from your checking account.

You appear to be placing to big an issue on fees - I would think a lot more on what investment works best for you.

Unless you plan to hold a variety of mutual funds or buy and sell stocks, working directly with Vanguard may be best if you are only selecting a single index fund. Remember, a few years down the road you may want to do something else and you can either switch among options at your custodian, or more your funds.

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  • 1 year later...

Wow, this echoes my situation exactly. I am trying to decide between a discount broker and a mutual fund company as well. Broker commissions is what I am trying to figure out right now. I can't really tell if I have to pay these if I buy an index fund directly from a mutual fund company such as Vanguard or Fidelity. Their listed commissions are higher than my current discount broker. What I can't figure out is whether they apply when I purchase index fund shares directly from the mutual fund company. That is, does Vanguard charge $35 commission on your monthly $200 transfers to your Roth IRA account, invested in a Vanguard index fund?

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Well, you could just call Vanguard and ask them ! I believe you are looking at the commission schedule for stock purchases rather than mutual fund purchases.

Let's clear up some things.

With IRAs/Roths, FEES generally refer to annual custodial maintenance fees. These vary from ZERO to nominal amounts like $10-20. Fees can be waived if you just ask, and asking is pretty painless. They may be waived if you sign up for electronic statements and confirmations. They are often waived when your assets grow beyond a certain threshold. A few years ago, 20-25K was often the cited threshold, but competition is driving that much lower. I think a few brokerages/fund families have reduced that to $5,000. Sometimes non-IRA/Roth assets at the firm may count towards that threshold. You'll have to ask.

NO LOAD Funds means no front end or exit commisions. So the no load fund is not dinging you for transaction fees.

Transaction fees: almost all brokerages offer a bevy of mutual fund choices. Some of these are loaded (have imbedded commisions on in or out) - - boo, hiss. But, no load fund families have marketing relationships with brokerages so that you can acquire mutual funds without transaction fees. When there is no relationship, then the brokerage may charge some kind of transaction fees. When you contact a brokerage, ask about how many no-load funds have zero transaction fees. Bear in mind that you probably are not going to have very many mutual fund "trades". Generally you hold funds for many years. You won't find every fund available at every brokerage, but with over 8,000 mutual funds I suspect you will have ample choices that will get the job done.

PS: If you think fees are the biggest issue, wait until you find out about how a lack of investing knowledge can cost you! Congrats on getting some books and boning up on investing.

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Guest shaselai

Try this nice tool i used:

http://www.kiplinger.com/tools/online_brokers/

It works for mutual funds too but basically it asks you 7 questions and it will give you a list of mutual funds/brokers depending on the results. If you want "no fees" then maybe First Trade can work for you. I looked at it briefly and its 6.95 per stock, mutual fund transactions FREE as long as you put in 500 minimum and it needs to be there for 180 days or they charge you 19.95. Since mutual funds usually stays for a while the only thing you need to worry about is if Firsttrade got the funds you want and if its load/no load.

I am also a beginner and have not picked my company yet.... still split between Scottrade, firsttrade, vanguard and few others. Vanguard seems to charge a lot more though. I need to investigate what funds i want to buy- and i found the following:

PRGFX, MGRIX,LMOPX,DODEX, BRAIX, VEINX. They might be good starts for me... any comments from others on these funds?

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Just to clear up one point that I think is hidden within some posts on this thread, and I'm not sure all are on board. As John G pointed out, there might be confusion about brokerage fees with regard to buying stocks or mutual funds. If you contact Vanguard and want to invest in one of their mutual funds, there is no brokerage fee. If you contact Vanguard and want to use their brokerage services to buy individual stocks, their brokerage fee will apply, and as someone else pointed out, their brokerage fees are not the lowest in the industry. If you go to an on-line broker (e-trade, etc.) you have broker fees whenever you buy individual stocks. You may or may not have any broker fees if you use an on-line broker to access a fund from a mutual fund company, however. You will have to check the fee structure of that particular on-line broker. Understand that on-line brokers and mutual fund companies are two different things. You can buy directly from no-load mutual fund companies, and use and pay for their brokerage services to purchase individual stocks if you want. You use on-line brokers to buy individual stocks, and you can use them to access an array of mutual funds from many mutual fund families (most, if not all, of which you could go directly to instead). Again, going directly to Vanguard to invest on one of their mutual funds, either by one lump-sum or by monthly deductions from your checking/savings account, will not have any broker fees.

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Good post papogi. I concur.

Fidelity is the only major firm I can think of that has online discount brokerage AND a mutual fund family. Perhaps a few discount brokerages (Schwab is an example) have added a token number of mutual funds (like the Schwab 1000) to their account options.

Further clarifications:

As noted above, you can either eliminate or minimize annual custodian charges and transaction fees. You can completely avoid fund commissions by never buying a LOADED fund.

But, the story does not end there. You still have imbedded annual expenses within the fund. These are published in the prospectus and can be found on "report cards" or "fund profiles" on Yahoo Finance, the fund family websites, and through the online brokerages. The range of annual expenses runs from around 0.10% for a few index (also some "Admiral" or "Spartan") funds to around 2.5% for very specialized niche, sector, or international funds. Caveate emptor!

What is the impact of imbedded annual expenses? This comes right off the top. Your annual performance is reduced by these expenses.

While its nice to be at the low end, sometimes I find a fund has been a great performer or has a style (small cap, value, sector, country specific) that I hope will do well in the coming year. If the annual expenses are way under the average for this class of fund (another statistic often shown is industry avg expense percent for the type of fund)... typically under 1%, I will consider the fund.

Beginners should be selecting a broad based NO LOAD fund that has below average expenses. Since this fund will hold dozens or even hundreds of equities (aka stocks), the novice Roth owner gets substantial diversification right out of the shute. The simplest way to do this is to start with an INDEX fund, a fund that uses a computer to buy stocks from a list (like the Standard and Poors 500 larger firms) with ultra low annual expenses. But, there are also plenty of good general purpose funds that will also work.

The goal is not to pick "THE BEST" fund, that's an impossible task. You don't even need to select a fund in the top 10%, again an impossible task. The idea is to get on base every year, by bunt, single or double. Forget the homeruns... you will reach your long term goals if you consistently get reasonable results.

Shaselai:

I like the web reference, but asking beginners if you have more than 50k or 500k is a problem. The seven questions seem more aimed at brokerages rather than mutual funds.

I don't think anyone at this site should be promoting a specific stock or fund. Partly because it is impossible to predict which funds will do best next year, and chasing historic performance can suck you into buying high only to see market sentiment move away from that funds style. The picking part is your job. However, if you have a specific question, email me and I will try to answer it, time permitting.

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