Comments on: Investing with a Small Amount: Stocks or Mutual Funds?

By: Tom

Tom — Sat, 17 Jan 2009 17:43:56 +0000

Great advice. I opened up a Firstrade account a few years ago when I was about 18 or so. What I found out what was what you mentioned above. A lot of the good mutual funds required at least $500-$1000. Instead of gathering that up at the time being, I invested my money into some blue chip stocks.

By: Micahel

Micahel — Fri, 18 Jan 2008 16:45:00 +0000

i wonder how i missed this blog? The explanation is very illustrative and you have also given plenty of point to make difference which will be useful for investors.

By: Sun

Sun — Thu, 17 Jan 2008 03:03:09 +0000

If you have to pay a fee very time you make a purchase, whether it’s an index fund or a ETF, it may not be a good idea to do dollar cost averaging, especially when you only have a small amount to invest each time and the fees you pay could be a substantial amount comparing to the principal. If that’s the case, making a one-time purchase may be a better option.

Whether to buy an index fund or ETF depends on the cost of investing in them in addition to their respective performance. From what you said, you will pay roughly 1.36% to buy mutual fund each time. How much will
you pay to buy ETF? In my opinion, choosing the one with lower cost will do more good in the long term.

By: Allea

Allea — Tue, 15 Jan 2008 08:20:33 +0000

Thank You for your response.

FYI, i’m living outside US, and currently there’s only 1 Index funds and 2 ETF here. Not much of a choice. But the problem with this only 1 index funds is that there’s this 1% subscription fee everytime i wanted to add more units and 0,36% management fee, 0% redemption fee.

Does this makes ETF a better choice if i had my $2500 on march? Considering that ETF also have buy & sell fee, along with the broker commission fee?

I planned to hold it over long period of time for my retirement plan. I also planned to buy/add more units every month using dollar cost averaging after i make this first initial investment.

I really need some opinions here.
Thank you again!

By: Sun

Sun — Tue, 15 Jan 2008 02:49:00 +0000

Allea: Each ETF tracks an index and that makes ETFs cheap since there isn’t much reach to find which company to invest in. If you can find an index fund and a ETF that tracks the same index, it’s usually the case that ETF is cheaper to own as ETFs have lower expense ratio than their mutual fund counterparts. So over the long-term, ETFs are cheaper to own.

While ETFs’ expense ratios are relatively lower, you do have to pay commission to buy/sell ETFs as they are traded as stocks and most brokers charge commissions to trade ETFs. If you only have a small amount to invest each time, the commission could hurt you over time
though ETFs themselves are cheapter, unless you use broker like Zecco which doesn’t charge commission. Also you can buy ETF at any time you like, much more flexible than buying a mutual fund.

On the other hand, if you buy mutual funds from the fund company directly, there is usually no extra fees, though most fund companies do require a minimum initial investment. For ETFs, you can buy only 1 share

In my opinion, if you plan to invest $100 every month, an index fund is a better option. If you want to invest $1200 once every year, then ETF may be better, given you don’t pay too much commission.