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 Post subject: Anyone use Etrade? Is another service better?
PostPosted: Thu Jun 07, 2007 4:15 pm 

Joined: Wed Jun 06, 2007 6:23 pm
Posts: 14
Hi. I have a savings account with etrade. I'm thinking about opening an investment account with them. Are they good/the best? Is there a better service? I suppose I'd mostly be investing in index funds, preferably frequently to take advantage of dollar cost averaging. Do fees kill you? Advice?

Thanks.


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 Post subject: Re: Anyone use Etrade? Is another service better?
PostPosted: Thu Jun 07, 2007 4:17 pm 
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Joined: Wed May 30, 2007 11:23 am
Posts: 859
Location: Portland, OR
DocHolliday wrote:
Hi. I have a savings account with etrade. I'm thinking about opening an investment account with them. Are they good/the best? Is there a better service? I suppose I'd mostly be investing in index funds, preferably frequently to take advantage of dollar cost averaging. Do fees kill you? Advice?

Thanks.


Unless you're investing large chunks frequently the fees will kill you. If you're going to do index funds why not just buy from the source? My preference is Vanguard but I also like Fidelity. If you do choose to go with a broker, make sure you read their DRIP policy. They don't all allow it and most index funds will pay out divis so you'll have to work that into your plan.


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PostPosted: Thu Jun 07, 2007 5:17 pm 
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My cousin has an e*trade account and he loves it. He makes frequent trades, and I've never heard him complain about the fees. On the other hand, he does have a lot of money in there, so maybe he's got some special deal. I'll ask him his opinion when I see him next.


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PostPosted: Thu Jun 07, 2007 6:01 pm 
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jdroth wrote:
My cousin has an e*trade account and he loves it. He makes frequent trades, and I've never heard him complain about the fees. On the other hand, he does have a lot of money in there, so maybe he's got some special deal. I'll ask him his opinion when I see him next.


The thing I've found is that the fees don't look that high and a lot of people don't take the time to figure out what they are as a portion of the investment. So people don't complain about the fees mostly because they don't count them.

I had a client who came to me for budget help. We talked about just about everything but he said he had investing nailed and that he'd been making over 30%/year by trading. Ever hopeful but suspicious I asked him if I could look at his trades. He sent me his spreadsheet with all these pretty charts and graps and all kinds of bells and whistles. I sent it back to him with what his ACTUAL return was after fees and taxes. He return went from 30% to 5% after fees and taxes because he'd been trading small amounts on a frequent basis so most of his gains were eaten up in fees and then he had to pay STCGs on top of it. I did a side-by-side for him on what he would have made had he invested in a Target Fund, VTSMX and a couple ETFs and it would have been more than double (and in some cases triple) what he made - mostly because he wouldn't have been paying fees.

$7 doesn't seem like a lot...until you add it up. Lets compare a $333/month DCA into SPY and VFINX:

At the end of the year, you would have invested $4k into each.
The annual expenses for VFINX are: .18%
The annual expenses on SPY are: .08%
to DCA into SPY you also paid $84 in transaction fees (assuming $7/trade for 12 months) which is 2.1%.

So, in reality your 1 year expenses are:
VFINX: .18%
SPY: 2.18%

You'll have to hold each purchase at least 20 years, depending on what your returns are, in order for it to have made more sense to purchase SPY than to purchase VFINX. And that doesn't include any extra fees you pay for selling or for reinvesting dividends and cap gains distributions - both of which happen frequently and are free with funds. When you include that it's closer to a 30 year hold.

Now I know we all say we're going to hold our investments for 20, 30, whatever long period of time, but what really are the chances that you will keep the same account and never sell/rebalance/transfer brokers/etc.? Any of those things cost even more money which means you have to hold even longer just to break even.

So this is why I'm not a fan of using anything other than funds for small amounts. The impact is just too big and lasts too long. It doesn't sound like a lot, but if you invested that $84/year for the next 30 years and got an 8% return you'd have an extra $11k in your account.

My rule of thumb and what I teach in my classes is that if the expenses for your purchase are more than 1% of the purchase price then you should stick to funds (so that's a minimum of $700-1000/transaction, depending on the broker). Ideally, you should be averaging less than the annual expense for a Vanguard Index Fund before you start paying to invest.

Now, I'm the first to admit that I'm fee sensitive, but I just dont see the need to spend money when you can get something for free.


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PostPosted: Thu Jun 07, 2007 7:17 pm 

Joined: Wed Apr 04, 2007 9:50 pm
Posts: 752
Location: Vancouver, Canada
My discount broker (one of the cheapest in Canada) charges $25 a trade. However, I just wait till they're doing a promotion and transfer in the requisite amount...then trade for free. Thus, I have not paid any fees since opening my account.

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Andrea Coutu
Consultant Journal
www.consultantjournal.com


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PostPosted: Thu Jun 07, 2007 7:26 pm 

Joined: Wed Jun 06, 2007 5:09 pm
Posts: 6
Location: Austin, TX
I have checking, savings, and an old (no longer contributing) Roth IRA with e-trade and I am happy with it (on checking - no ATM withdrawal fees making it awesome for international use, and savings - really good 5.05% interest rate).

I plan on opening a Traditional IRA in the next few months and too have been wondering if e-trade is the place to do it. While I understand there is $7 transaction fee, they do advertise they have 1000+ no transaction fee (NTF) funds.

The things to consider as I see it are -

How does the $7 fee (for individual stocks, and ETF's) compare to other brokers?

How good are the NTF fund options compared to other brokers' NTF selections?

I don't know the answer to these questions...


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PostPosted: Thu Jun 07, 2007 9:48 pm 
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Joined: Sun Apr 15, 2007 1:45 pm
Posts: 84
Location: New Jersey
I have accounts at both E*Trade and TD Ameritrade. I ended up with the E*Trade account because my company uses them for our employee stock option grants. (Now that the dot-com thing is over, those are worthless and always will be, but they're still sitting there. :) ) (The smartest financial decision I've ever made was selling all of my vested options on the first day we were allowed to -- in early 2000. It seemed a bad idea to have so many of my eggs in the same proverbial basket as my salary, and wow, was I right about that.)

But anyway, this means I can compare the two directly, and I use TD Ameritrade (formerly Ameritrade, formerly Datek) for my trading. I find the interface better, and their trade execution is top-notch, though if you don't really understand the nitty-gritty of trade execution (and you certainly don't have to, if you're looking at normal index fund investment) that may not mean much to you. But I think they are far superior.

Having said that, if you're planning to do dollar-cost-averaging with relatively small amounts of money, look at mutual funds instead, at Vanguard for example. Doing trades for less than, say, $1500 a pop, the commissions are going to be too big a hit.


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PostPosted: Fri Jun 08, 2007 9:00 am 
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Posts: 336
Location: Houston, TX
In all fairness to E*Trade regarding pf101's client, active trading is a bad idea no matter WHICH brokerage you use, and that includes Zecco's $40/year unlimited trades deal. It's not just about the fees. There are enough studies on returns to indicate that active trading yields lower returns over time. It may a hard lesson to learn, but you cannot time the market.

Thus, I'm not in favor of dollar cost averaging, assuming you have all the funds. If you're dollar cost averaging because you think the price is going down, you're assuming that you know the price is going down so why not wait until it hits bottom? If you're dollar cost averaging because you think the price is going up, why would you wait and buy later? No, buy in and stay in.

Disclaimer: As I've said elsewhere, I'm a satisfied E*Trade client. I have enough funds on deposit with them to avoid most of their fees and I am NOT an active trader. (I used to be a TDA client, but they shut down the banking on me and I like having an integrated solution.)

_________________
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PostPosted: Sat Jun 09, 2007 1:08 pm 

Joined: Sat Jun 09, 2007 12:45 pm
Posts: 45
pf101 wrote:
The thing I've found is that the fees don't look that high and a lot of people don't take the time to figure out what they are as a portion of the investment. So people don't complain about the fees mostly because they don't count them.

I had a client who came to me for budget help. We talked about just about everything but he said he had investing nailed and that he'd been making over 30%/year by trading. Ever hopeful but suspicious I asked him if I could look at his trades. He sent me his spreadsheet with all these pretty charts and graps and all kinds of bells and whistles. I sent it back to him with what his ACTUAL return was after fees and taxes. He return went from 30% to 5% after fees and taxes because he'd been trading small amounts on a frequent basis so most of his gains were eaten up in fees and then he had to pay STCGs on top of it. I did a side-by-side for him on what he would have made had he invested in a Target Fund, VTSMX and a couple ETFs and it would have been more than double (and in some cases triple) what he made - mostly because he wouldn't have been paying fees.

$7 doesn't seem like a lot...until you add it up. Lets compare a $333/month DCA into SPY and VFINX:

At the end of the year, you would have invested $4k into each.
The annual expenses for VFINX are: .18%
The annual expenses on SPY are: .08%
to DCA into SPY you also paid $84 in transaction fees (assuming $7/trade for 12 months) which is 2.1%.

So, in reality your 1 year expenses are:
VFINX: .18%
SPY: 2.18%

You'll have to hold each purchase at least 20 years, depending on what your returns are, in order for it to have made more sense to purchase SPY than to purchase VFINX. And that doesn't include any extra fees you pay for selling or for reinvesting dividends and cap gains distributions - both of which happen frequently and are free with funds. When you include that it's closer to a 30 year hold.

Now I know we all say we're going to hold our investments for 20, 30, whatever long period of time, but what really are the chances that you will keep the same account and never sell/rebalance/transfer brokers/etc.? Any of those things cost even more money which means you have to hold even longer just to break even.

So this is why I'm not a fan of using anything other than funds for small amounts. The impact is just too big and lasts too long. It doesn't sound like a lot, but if you invested that $84/year for the next 30 years and got an 8% return you'd have an extra $11k in your account.

My rule of thumb and what I teach in my classes is that if the expenses for your purchase are more than 1% of the purchase price then you should stick to funds (so that's a minimum of $700-1000/transaction, depending on the broker). Ideally, you should be averaging less than the annual expense for a Vanguard Index Fund before you start paying to invest.

Now, I'm the first to admit that I'm fee sensitive, but I just dont see the need to spend money when you can get something for free.


Please forgive such a basic question, but when you say a person should stick to funds, are you referring to Index Funds since you mentioned Vanguard Index Funds in the next sentence. Or are you referring to Mutual Funds? What is the difference between the two?

Korey :D


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PostPosted: Sat Jun 09, 2007 1:27 pm 
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Location: Portland, OR
koreys wrote:
pf101 wrote:
The thing I've found is that the fees don't look that high and a lot of people don't take the time to figure out what they are as a portion of the investment. So people don't complain about the fees mostly because they don't count them.

I had a client who came to me for budget help. We talked about just about everything but he said he had investing nailed and that he'd been making over 30%/year by trading. Ever hopeful but suspicious I asked him if I could look at his trades. He sent me his spreadsheet with all these pretty charts and graps and all kinds of bells and whistles. I sent it back to him with what his ACTUAL return was after fees and taxes. He return went from 30% to 5% after fees and taxes because he'd been trading small amounts on a frequent basis so most of his gains were eaten up in fees and then he had to pay STCGs on top of it. I did a side-by-side for him on what he would have made had he invested in a Target Fund, VTSMX and a couple ETFs and it would have been more than double (and in some cases triple) what he made - mostly because he wouldn't have been paying fees.

$7 doesn't seem like a lot...until you add it up. Lets compare a $333/month DCA into SPY and VFINX:

At the end of the year, you would have invested $4k into each.
The annual expenses for VFINX are: .18%
The annual expenses on SPY are: .08%
to DCA into SPY you also paid $84 in transaction fees (assuming $7/trade for 12 months) which is 2.1%.

So, in reality your 1 year expenses are:
VFINX: .18%
SPY: 2.18%

You'll have to hold each purchase at least 20 years, depending on what your returns are, in order for it to have made more sense to purchase SPY than to purchase VFINX. And that doesn't include any extra fees you pay for selling or for reinvesting dividends and cap gains distributions - both of which happen frequently and are free with funds. When you include that it's closer to a 30 year hold.

Now I know we all say we're going to hold our investments for 20, 30, whatever long period of time, but what really are the chances that you will keep the same account and never sell/rebalance/transfer brokers/etc.? Any of those things cost even more money which means you have to hold even longer just to break even.

So this is why I'm not a fan of using anything other than funds for small amounts. The impact is just too big and lasts too long. It doesn't sound like a lot, but if you invested that $84/year for the next 30 years and got an 8% return you'd have an extra $11k in your account.

My rule of thumb and what I teach in my classes is that if the expenses for your purchase are more than 1% of the purchase price then you should stick to funds (so that's a minimum of $700-1000/transaction, depending on the broker). Ideally, you should be averaging less than the annual expense for a Vanguard Index Fund before you start paying to invest.

Now, I'm the first to admit that I'm fee sensitive, but I just dont see the need to spend money when you can get something for free.


Please forgive such a basic question, but when you say a person should stick to funds, are you referring to Index Funds since you mentioned Vanguard Index Funds in the next sentence. Or are you referring to Mutual Funds? What is the difference between the two?

Korey :D


Either. I tend to use funds intechangably though there are some differences. The differences are basically that index funds are just that. They're based on the holdings in a specific index, no more and no less. They tend to be cheaper because they require fewer people to run since there is no research involved.

Mutual funds are managed by a person. Many of them are also tagged to an index of some sort, but they have a human touch - someone who is evaluating and buying stocks based on the goal of the fund. It would be like a LC Index fund vs. a LC Growth fund. Many times they would have substantially the same assets but in some markets the Growth fund would change while the Index fund would stay the same. Mutual Funds (aka Managed Funds) tend to be more expensive since there is more overhead to cover.

Here is a good article about "Closet Index Funds" which are Managed Funds which hold substantially the same as an index fund but charge you a lot more for it. http://financialjungle.com/2007/05/27/investing/the-dirty-secret-behind-closet-index-funds/ This is one reason it's important to look at the holdings in your funds, particularly if you're buying more than just index funds. There can be a LOT of overlap which means you aren't as diversifed as you think. I see this a lot with people buying both a Total Stock Market Index fund and a S&P 500 index fund. EVERY stock in the S&P is going to be in the TSMI fund so there is no reason to hold both.

Morningstar has a good program for this - portfolio x-ray - but I think you have to be a paid member to use it.


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PostPosted: Sat Jun 09, 2007 5:33 pm 

Joined: Sat Apr 07, 2007 2:03 am
Posts: 872
Location: Taishan, Guangdong, China
There's nothing wrong with E-trade but there's nothing special about it either. If you can get lower fees (or no fees) from someone else, go for it. Using Zecco to buy Vanguard ETFs would be the cheapest option available and also eliminate the minimum balance requirements at Vanguard. 1 Share of VTI for $150, 3 shares of VEU for $50 each -- $300 lets you buy a portfolio that covers the entire world.


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PostPosted: Mon Jun 11, 2007 1:02 pm 
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Posts: 336
Location: Houston, TX
pf101 wrote:
They're based on the holdings in a specific index, no more and no less.

Koreys- This should tip you off, if you were not already aware, that there are many indices, not just the ones you hear about on TV. Thus, an investor can (and we believe, should) build a portoflio of diversified index funds, by choosing diverse indices.

_________________
Read my 'fiscal fitness' financial disclosures here.


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PostPosted: Tue Jun 12, 2007 5:53 am 

Joined: Sat Jun 09, 2007 12:45 pm
Posts: 45
tinyhands wrote:
pf101 wrote:
They're based on the holdings in a specific index, no more and no less.

Koreys- This should tip you off, if you were not already aware, that there are many indices, not just the ones you hear about on TV. Thus, an investor can (and we believe, should) build a portoflio of diversified index funds, by choosing diverse indices.


Thank you for that tip of advice. While I am new to investing, I understand the concept of diversification, however, when it comes to index funds, I don't know that much about them and so that is why I was asking about them.


Korey


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PostPosted: Tue Jun 12, 2007 7:32 am 
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Location: Houston, TX
I can't say that I've seen too many articles written about indexing, other than "index funds are good" and "a diversified portfolio is good" which might leave some readers scratching their heads mumbling something about mutual exclusivity.

Whether there is a fund (mutual or exchange-traded) that allows you to invest in it, there is an index for just about everything. The big three are reported on most nightly newscasts: The S&P 500 (an index of the 500 biggest US companies), the Dow Jones Industrial Average (and index of the 30 biggest companies), and the Nasdaq Composite (an index companies traded on that particular exchange, which contains a larger number of 'tech' companies).

Another "chunk" of indices cover particular sectors of the economy: Healthcare index, High-Tech index, Banking/Financial Services index, Real-estate index. You may find a little variation in the funds that track these indices, as there is a little bit of leeway for managers to determine cut-offs for inclusion. Instead of trying to decide whether to invest in Merck or Lily, you might choose to buy a pharmaceuticals index.

There are also indices that cover international stocks and/or emerging markets. There are Brazil-only funds, Asia-Pacific (excluding Japan), Japan-only, and Taiwan-only, to name but a few. Thus, instead of buying only China Steel, you might buy a fund that invests in a broad-range of Chinese manufacturing firms.

The last major group (in my mind) of indices and funds that track them are similar to the big three in that they determine inclusion by the size or strength of the company. There are small-cap indices (small capitalization means 'not a lot of money'), mid-cap, and large-cap. Within these groups you'll find growth, income, and a balance of the two. There are some specific indices in this group, like the Russell 2000 or the Wilshire 5000.

So you can easily see how building a diversified portfolio of index funds can give you enormous flexibility to avoid the pitfalls of choosing individual companies.

_________________
Read my 'fiscal fitness' financial disclosures here.


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PostPosted: Wed Jun 13, 2007 4:57 am 

Joined: Sat Jun 09, 2007 12:45 pm
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Ok, everything you said was understandable. One last question when it comes to purchasing individual stocks. I understand what you are saying about avoiding pitfalls by choosing individual stocks that may not perform so well over time. What if the stock is that of a company you work for and they have had a past performance that has been good over time and the company offers a good purchase/match plan?

Korey


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