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What lessons can you share when practicing dollar-cost averaging with a discount brokerage?

The goal is an inexpensive way to invest with every paycheck. With amounts that small, commissions have a large impact. So commissions are out, no-load funds are out and of course low expense ratios are desired.

It's easy to dollar-cost average within a company's own fund offerings. Whether index fund, no-load mutual fund, or ETF - a company typically offers its own family without a commission. Many brokerages offer No Transaction Fee (NTF) funds that are free to purchase. However, that freedom may come with higher expense ratios on the fund (that .40% charge is paid somehow). NTF agreements change and a nicely automated investing strategy can be ruined when a formerly NTF fund changes to a TF unannounced to you.

What investment vehicles are useful to consider? Any strategies? I'd appreciate particular brokerage thoughts as well. Vanguard has low costs. Fidelity and T. Rowe Price have many funds. TD Ameritrade looks enticing with access to Vanguard and iShares along with some others.

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  • Was hoping to generate a bit more activity with insights on multiple brokerages...
    – JCotton
    Commented Mar 29, 2011 at 6:34

3 Answers 3

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I'm only familiar with TD Ameritrade as a broker, but the others may have similar programs.

At any brokerage, I would be looking at buying low-cost index funds through an automatic / recurring investment program. I don't think TD has Vanguard on their NTF list, but you don't have to pay the fee with every paycheck -- and paying the fee one time up front isn't that expensive.

TD also has list of ETFs you can buy and sell with no commissions, but you'll get hit with a fee if you short-term trade (60 days?). They don't (as of early 2011) have a way of making automatic ETF investments. So if you want it to be automated you should look at index mutual funds. (TD does have a DRIP though, so dividends from your ETFs can be reinvested into the ETF automatically.)

You'll want to periodically rebalance to maintain your asset allocation, and that may incur fees too. If you're using index funds, I believe that you can exchange fund shares within the same family without a fee, but you'll want to double check this before opening an account somewhere.

If you're using ETFs on the free list, you won't have everything automated, so you can rebalance by putting new money into assets that are under their target allocation.

Lastly, you'll want to check that you can direct-deposit (or at least make some kind of automated transfer) into the account you're opening. Call and ask the brokerage you're going to use for details about how you can make deposits into the specific type of account you're opening. I have one retirement account that requires me to fill out a paper deposit slip and mail a check in order to make a deposit -- this is a hassle to be avoided if possible, especially if you're going to be doing it a couple of times a month.

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  • At the moment TD is offering 32 commission-free Vanguard ETFs. They don't have automated ETF investing - that's a good tip. I wonder if I could expect that from others?
    – JCotton
    Commented Mar 22, 2011 at 5:47
  • It is strange TD Ameritrade does not mention only needing to pay the mutual fund commission one time. The way their pricing page reads I had been thinking I would face the commission every contribution.
    – vossad01
    Commented Mar 22, 2015 at 21:12
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A lot has changed in the brokerage world since this question/answer were posted. For example, a lot more brokerages offer no-cost commission trades and have options for automated stock/ETF investing.

Recently I tested out Robinhood and M1 Finance for no-cost automated stock/ETF investing. M1 is a better fit for me to easily automate my simple, passive, dollar cost averaging investment strategy over time. The M1 “pie” concept combined with the excellent automation features and no-cost commission trades allowed me to simply set my target portfolio allocation, create recurring transfers, and then let M1 work its magic over time. To execute the same investment strategy with Robinhood either requires a lot more time and effort to maintain or results in portfolio style drift over time.

See my blog article for more details on the automated investing features of M1 and Robinhood.

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ShareBuilder provides cost averaging through its "automatic investing". They support periodic, cost based purchases and allows fractional shares.

BNY Mellon also has automatic investing and dividend reinvestment for a few stocks. Some of their offerings have transaction fees, others are do not.

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    One point to add about sharebuilder - compare the fees closely. While you can invest automatically for $4 a trade (or less if you get a plan), you will have to pay the commission on a real-time trade ($10) to sell any stock. If you are perusing a buy and hold strategy, this may not be a problem. But you should always think about the costs of getting your money back from an investment before you start putting money in.
    – trip0d199
    Commented Mar 22, 2011 at 12:38
  • That's true. It's still difficult to beat that deal, even with the commission.
    – James
    Commented Mar 22, 2011 at 14:02
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    It is trivial to get a better deal than $4/trade: if you invest in index mutual funds through an automatic program it will be completely free. (Whether it's directly through the company, e.g. Vanguard or through a broker, e.g. TD Ameritrade as mentioned in my answer.) That $4 is $104/year assuming one trade per biweekly paycheck. If you're putting in $200 per paycheck that's an immediate 2% loss -- worse if you're putting in less. As trip0d199 mentions, you have to pay $10 to sell, though if you're doing index ETFs long-term you probably won't sell frequently enough for it to matter.
    – bstpierre
    Commented Mar 22, 2011 at 19:23
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    You get 12 automatic investments for a flat $12/month fee, with additional automatic trades being $1. For the $200 per paycheck case, this probably doesn't make sense. However, for larger values over the long term, the $12 one-time fee is dwarfed by the cumulative fees of a mutual fund.
    – James
    Commented Mar 23, 2011 at 15:16
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    I'm speaking of a mix of things. A majority would be ETFs and a smaller amount would be speculative investments. I also have a TD account and have access to the free ETF trading. That being said, I find there is huge value to the hands-off, automatic approach. Also, it's hard to really cost average into instruments with a high share price without fractional shares. I recommend that you estimate expenses for your monthly allocation and investment timeframe. The resulting best choice depends on those two parameters.
    – James
    Commented Mar 23, 2011 at 16:49

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