here is my problem. i have around 20k that most likely will get put in some index fund. i could try to figure out (aka guess) when stocks are undervalued and jump in with all 20k then. but i'd rather set up an automatic purchase of say 1k/month for 20 months. unfortunately the fund i want has a fee of $25 fee each time i buy it. well, at least through etrade it does. that's 2.5% on a 1k monthly purchase.
any ideas?
Dollar cost averaging of a lump sum is an inferior strategy, as I explained in a recent thread "dollar cost average effect", which you can find (along with dissenting replies) using Google.
Dollar averaging only works when the instruments is down and then up. Otherwise you will be the loser.
Personally I also feel 2.5% transaction cost is a bit too much for an index fund (much more than the fund expense, I guess). If you really up to this route, I would like increase the monthly amount.
Find a better fund that does not charge you as much? That sounds like the thing to do. Otherwise, the idea to time the market in this manner is not very productive, as thiis is highly difficult to do successfully.
iThere are numerous places, such as Fidelity and Vanguard, that don't charge for adding money. You can open a Money Market account with the $20k and move into the index funds at say $6k lumps over several months. I would distribute the money among large cap, mid cap and small cap index funds.
Frank
cporro wrote:
cporro,
Just a warning... You open a can of worms around here by mentioning DCA.
The other posters are correct that DCA may lead to lower returns. However, the world is not made up of only returns! Your original concerns are valid. IF you mistime the market you can do substantial damage to your portfolio early on.
DCA is a risk/return trade-off, not a return maximizing strategy. People tend to forget that. If you would sleep better knowing that you have taken on less risk then by all means use DCA.
However, if your investment period is long enough to ride out any early downturns you may still be better off using lump sum. Even if there is an immediate drop, don't sweat it. You'll be around long enough to recover.
Yes - go to Vanguard index funds- no fee - initial investment is 3K.
BeachBum
Maybe instead of buying this index fund from within your brokerage (etrade) account... buy it directly from the fund family itself. That should eliminate the "fee" which I believe in your case is not so much a fund fee as it is an E-Trade Mutual fund commission.
Just my 2 cents, Shhhh
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