Have $2500 to invest and have some questions

[WallStGolfer31]

Originally Posted by llamagatekeeper

Believe it or not, I too have recently been debating and talking with my father about the issue of where to invest my recently aquired funds from my measly 5.2% CD. I personally lean torwards ETFs like Dan, but my father insists that they cost too much and likes Index funds better. I tell him for my age that the one time brokerage fee is worth the intial cost and with me holding long term those costs will almost be null. While with the Index fund I would be losing a % each year due to maintance. I am in the same situation as Brian mentioned and am going to invest around $3000.


On another note, Dan is SPY the best ETF to follow the S&P 500 with or is there a better fund?

SPY is the best ETF for following the S&P 500 index. Believe it or not, it's hard to track an index, and SPY has done a fine job up till now.

I'm not sure what your dad is thinking about when he says and ETF is more expensive than a mutual fund, but SPY has a 0.08% fee (last I saw) which is way below the fees charged by mutual funds tracking an index.

[llamagatekeeper]

My dad sent me this article. Could you dissect it a little more for me as it seems it just touches the surface on a lot of aspects of the advantages. I believe you have to sign up for a free membership to morningstar.com , but they don't need any real information if you don't want. The article talks about 14 funds that are better than ETFs.

Morningstar.com Registration

[WallStGolfer31]

That article cites mostly tax advantages of the featured funds. I'm not a big expert on taxes, that's more of an accounting thing. I still like SPY over the featured funds, but if there is some kind of significant tax advantage, then go with it. If you're holding SPY in an IRA account though, it wouldn't matter anyways.

[llamagatekeeper]

Ok, thanks for all of the help Dan. No it won't be for my IRA my parents contribute to Vanguard Star fund for me, but possibly moving over to the Vanguard 500 this year as I make more and am able to contribute to that one.

[aquaswim47]

I'm an expert on taxes and the long-term tax implications are not that great for an ETF, index fund, or mutual fund as compared to the fees that you pay. The longer you hold it, the less is the net present value of the expense when you sell it. For example, if you paid $7 to sell 20 years from now, the net cost assuming an 8% earnings rate (very conservative rate) would be: $1.50 ($7/1.08^20). The total cost of holding SPY for 20 years is only .08% per year + $8.50, thus it's wise as a long-term investment.


I only suggested a mutual fund to gather the funds for the first year as if he bought the mutual fund monthly, he would be paying 2-3% to buy it, but if he bought a mutual fund for a year that had a 1% expense ratio and bought it than, his total expenses would be 1.434% ($8.50/2,400 + 1% + .08%). You would be pretty stupid to use mutual funds other than simply to hold funds beyond one year. Once you accumulate the $2,400 in your account, contribute to the ETF quarterly as the cost would be approximately ($34/(.08/2+1)) = $32.69 --> ($32.69/2,400 + .0008) = 1.44%. If you bought on an annual basis, the fee would be $8.50/2,400 + .0008 = .434%. Net present value is taken into consideration, here. I'm not sure if every unit you buy has to be sold separately or if you buy 12 units over the course of a year, if they count as 1 trade if you sell them all.

With ETFs, your cost varies based on how many times you buy it and the size of the transaction; mutual funds, you pay the same $7 commission no matter the size of the transaction; $7 to buy and $7 to sell, thus if you hold for 20 years, your total cost of each transaction is $8.50 ($7 + $7/1.08^20). A higher rate of return such as 12% would be under $0.726. If you have $1,000 or more each time you contribute, I suggest an ETF. With less than $500, I suggest a mutual fund. Anywhere inbetween, I suggest that it is your choice.

[aquaswim47]

Income Taxes don't typically cause a loss, they make a gain smaller. Fees can cause a loss and the percentage the fee is compared to the earnings can have a worse affect than taxes if the fee is high enough.

Taxes only become a problem if you sell the investments consistently under a year. Otherwise, the problem with taxes is miniscule. The longer you hold an investment, the greater the potential gains of the investment as taxes not only reduce current earnings, but future earnings as well. In fact, taxes are compounded year after year and this can take a bite out of a return.

An investment, like SPY, might be best held in a Roth or 401k account. This way you minimize taxes when the fund distributes its profits to shareholders.

[Wilks]

This is turning into a great thread!

Thanks for all the responses and input from everyone. This has given me a lot of information to help with my decision and really shows me that there is so much more that I need to learn. With a longer time frame I might go with something that has a little more risk for a greater reward such as DDM or SSO like aquaswim47 mentioned.

Thanks again to everyone and I can't wait to keep learning from all of you and hopefully I'll be able to contribute a little bit as well.

[aquaswim47]

I would let the Dow come in at this point. If you dollar-cost average over a very long period of time, the effect is minimized and the effect of buying now would be miniscule as an even sharp drop would allow you to buy stock at a much lower cost. There's always that chance that the Dow will continue to rise or stay the same, particularly if the Fed lowers rates. Most likely, I see a market ripple caused by the FED leaving rates as they are or increasing rates.

However, the fundamentals of the market are great. I've got to do research as to why I'm now breaking even with the JNJ stock I bought a couple months ago. I got to look at what caused its massive increase in price.