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Is DCA into SPY a good idea if?
Old 11-28-2008, 07:24 AM   #1
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Is DCA into SPY a good idea if?

Hi, I was wondering If DCA into SPY was a good idea for my roth if:

a. I use sharebuilder at $4/ transaction

b. I Set the option to only make a purchase when the account balance reaches $1000 ($96 weekly pay decuction x 11[weeks])

(Investing more frequently than 13 weeks to get the dividend.)

c. max out my roth like this each year.

My other option was just doing a fund through T Rowe. like TRRNX.
As I am just starting "the accumulation phase" (read this somewhere). I figure that even though the effective expense ratio I will be paying will be similar, the overall lower annual expense ratio on SPY will win long term because gains - .08% annually > gains -.7 % annaully, even if I pay more of a transaction fee ($20) per year. Is this a good plan. I will have the funds in one of the sharebuilder Reserve money market funds prior to the purchases.


d. My other, bad option is to leave the so called plan I have in place now.
PRNEX $100 / MO
PRMSX $100/ MO

after reading this forum for a bit I consider the exp on PRMSX, way too high, AND now the turnover ratio on PRNEX seem too high for my tastes even in a qualified account. ( I mean what percentage would PRNEX have to beat SPY by over 30 years to compensate for the expense difference of .60 %.

(I found historical data on Yahoo but I am a few months away from being able to link returns together.)

Any thoughts would be appreciated.
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Old 11-28-2008, 08:14 AM   #2
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I suspect you will be better off buying smaller amounts of index mutual funds directly from the mutual fund company. I'm really only familiar with Vanguard so I don't know how their cost compares with T Row Price.

I have found that ETFs can be a pain if you want to reinvest the dividends into the same shares. You find yourself wanting to buy a few shares every quarter or sitting on your dividend for a year or more before it amounts to a cost effective buy.
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Sharebuilder throug ING does not charge for reinvesting dividends Yah!
Old 11-28-2008, 08:27 AM   #3
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Sharebuilder throug ING does not charge for reinvesting dividends Yah!

Sharebuilder throug ING does not charge for reinvesting dividends Yah!
So with this in tote, is this a decent plan of action. My girlfriend does not like the fees per transaction but I'm trying to show her that this will be better in the long term (until I can open a Wells Fargo with 25k and get trades free (-:
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Old 11-28-2008, 08:29 AM   #4
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Another option, albeit with a higher bar to entry, is using Vanguard or Fidelity. I'm not as familiar with Fidelity; VG requires a $3000 minimum intial investment, but thereafter there are no fees to invest, other than fund expenses and/or loads. Most VG funds have no purchase or redemption fees, though a few do... Also, there is a $20/yr fee for all accounts under $10k.

Other considerations are:

- Do you have an emergency fund for "emergencies", like lay-off or medical issues?

- Does your company have a 401k, and do they match? My former employer matched 6% of my income, assuming I invested at least 4%. Be sure to take any free money...

- Have you minimized or eliminated debt, especially high-interest credit card debt? The object is to get people to pay YOU to use YOUR money, not pay THEM to use THEIR money...
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Old 11-28-2008, 08:42 AM   #5
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Quote:
Originally Posted by 2B View Post
I have found that ETFs can be a pain if you want to reinvest the dividends into the same shares. You find yourself wanting to buy a few shares every quarter or sitting on your dividend for a year or more before it amounts to a cost effective buy.
I'm not sure what you mean here. ETFs are just like stocks if you set them up for div reinvestment (no cost or effort required). If anything, ETFs make investing less complicated (compared to mutual funds).
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Old 11-28-2008, 09:00 AM   #6
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The better way is to avoid sharebuilder and its high fees. Using the automatic investment program at TRowePrice is the way to go for folks who cannot meet the initial minimums at Vanguard.

Another possibility (if you have $1000) is to start with the Vanguard STAR fund which only has a $1000 minimum. When you get to $3000, then you can exchange to Vanguard total stock market index. If you agree to online-only statements, there is no $20 annual charge. Also their statements are gonna be much easier to read and use come tax-time than something from a broker.

While you may be enamored with ETFs, you have to realize that they have other costs associated with them. I use ETFs extensively, but I do not pay commissions to buy/sell them. I do have to watch out for the bid/ask spread. Also ETFs do have expense ratios just like regular mutual funds. I do not wish to have my ETF dividends re-invested, although my broker will do that for me for free.

So all-in-all, for a beginner, a standard passively-managed, no-load, low-expense-ratio mutual fund is the best way to start investing. Forget about sharebuilder.
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