I'm sure we've heard it all before, but I wanna retire early!!!! I've maxed out my 401k at work (pretax) and get close to maxing out a Roth IRA through my bank. I have only student loans as debt (which could be paid off if I weren't such a wimp about taking large sums out of my bank account, an issue perhaps best left for another question). On top of that, I've got a little over 6 months salary sitting in the bank account so I'd like to do some other things with it. Been (mostly) burned before buying individual stocks (again through my bank) and decided to give ETFs a try.

One assumption I had was purchasing an ETF through a broker (not part of an IRA or 401k plan) is totally fine as far as IRS tax contribution limits (like purchasing stock). Is this correct?

Also, I've read about advice to continuously purchase shares to dollar cost average, which makes sense but if I'm doing purchases on my one I would think I'd get slammed with the broker fee each transaction (I suppose the frequency of purchasing and the amount invested could counter this, but I don't think I have THAT much money to play with). Are ETFs worth purchasing if I can not dollar cost average? (I purchased roughly $1000 worth if that helps). Or is there a way to actually dollar cost average outside of a retirement account?

Also the Certificate of Deposit rates seems to be terrible at my bank, but is that a better investment for extra money laying around? (say purchase a 1, 2, and 3 year and just let it keep rolling).

Sorry for so many questions at once, and I know there are a TON of "what should I do with my money" type questions, but I couldn't find any quite related.

  • Do not invest through a bank. Move your Roth IRA elsewhere. (For ideas about how to go about doing this, read this answer). Don't open a brokerage account, and don't buy an ETF; many index mutual funds that are nearly the same as an ETF, and have far fewer headaches. Read the question First time investor wanting to invest in mutual funds and the answer to it. – Dilip Sarwate Jun 4 '15 at 22:18
  • I'll admit (as you have probably guessed) I chose to invest through my bank out of convenience, not sure how their rates/fees compare to others. Are you saying to avoid ETFs all together (at least when investing with spare money)? – PawnInGameOfLife Jun 4 '15 at 23:38
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    When you are starting out, avoid ETFs. With a mutual fund you can invest in fractions of a (mutual fund) share. ETFs are like stocks and a brokerage might well insist on trading in round lots of ETF shares, and allow you to buy 32 shares of an ETF only for a much larger fee than they charge for 100 shares. The expense ratio for a good index fund is only very slightly larger than for a ETF, not enough to matter for small accounts. When you reach higher levels, you will know more and be able to handle ETFs. Don't mess with them as a beginner. – Dilip Sarwate Jun 5 '15 at 2:47

Most ETFs are index funds, meaning you get built in diversification so that any one stock going down won't hurt the overall performance much. You can also get essentially the same index funds by directly purchasing them from the mutual fund company. To buy an ETF you need a brokerage account and have to pay a transaction fee. Buying only $1000 at a time the broker transaction fee will eat too much of your money. You want to keep such fees way down below 0.1%. Pay attention to transaction fees and fund expense ratios.

Or buy an equivalent index fund directly from the mutual fund company. This generally costs nothing in transaction fees if you have at least the minimum account value built up.

If you buy every month or two you are dollar cost averaging, no matter what kind of account you are using. Keep doing that, even if the market values are going down. (Especially if the market values are going down!) If you can keep doing this then forget about certificates of deposit. At current rates you cannot build wealth with CDs.

  • Thank you Scott. It sounds like your advice mirrors Dilips comment about avoiding a brokerage account. I wasn't aware about purchasing directly from a mutual fund company. I pay into my IRA weekly (again through my bank, sounds like I should consider changing that) so I do indeed try to dollar cost average when I can. Is getting an index fund worth getting in addition to a Roth IRA, or should my Roth IRA invest in an index fund (assuming that is possible). – PawnInGameOfLife Jun 5 '15 at 2:40
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    @PawnInGameOfLife Your Roth IRA can be invested in a mutual fund, but for heaven's sake, don't invest it in a mutual fund offered through your bank. Go to the Vanguard funds website (for example) and open a Roth IRA account with them. They will be glad to take $20 or $50 or whatever you choose out of your bank account each week and put into your Roth IRA account. – Dilip Sarwate Jun 5 '15 at 2:51
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    You can buy index funds in any kind of account. The type of account is unrelated to the type of investments you make within that account. Funds invested in a Roth IRA should be for long term retirement savings (there are penalties for withdrawing before retirement). You can also invest in a taxable account, which allows withdrawals without penalty. – ScottMcP-MVP Jun 5 '15 at 15:48
  • Thank you ScottMcP-MVP (and you too @Dilip Sarwate). Looks like I've got some work to do... – PawnInGameOfLife Jun 6 '15 at 16:49

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