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Author: draknor One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: What are your thoughts? Date: 8/14/2007 3:49 AM
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Here's a couple of my thoughts...

I have a regular account at Sharebuilder, but I opened my Roth IRA at Firstrade, because they don't have any maintenance fees, and all orders are only 6.95. The name of the game, especially at this early stage, is to get the most money possible working for you, which means:

1. Increase savings
2. Decrease expenses

So let's run some numbers....

It's August 2007, so you've got 4 full months left until the end of the year. If you put in $1000 into the Roth now, you could $750 in for the last 4 months and max out your 2007 contributions. With your $1500/mo, this is definitely the first course of action I would take.

With a Roth IRA, having 6 free trades/month really means nothing, because at this stage of the game, you don't want to be trading in and out of stocks. Maybe after you've got a couple of years of equities education (by reading TMF or other investment newsletters), and a little pool of money set aside for trading, that is only 5-15% of your total assets, then you may want to get into a more active role.


Everything I've read says asset allocation is key, so for the sake of argument we'll pretend you've decided this allocation would work for you (it may or may not - I'm just making this one up):

* 30% international
* 20% total market index
* 20% large cap value / S&P 500
* 20% small cap value
* 10% commodities (gold/silver/oil ETF)

For 2007's max contribution of $4000, that looks like this:
* $1200 - international
* $800 - total market
* $800 - large cap value
* $800 - small cap value
* $400 - commodities

Cost-wise, how do your options break down? (A good rule of thumb is to keep your expenses below 2%)

1. Standard plan @ Sharebuilder ($99 annual fee, 6 free automatic buys) -- you could contribute to all 5 ETFs every month (assuming Sharebuild allows partial share purchases), and you are paying 2.5% ($100/$4000 for 2007) in expenses. The risk of building up small positions over time is that eventually you need to cash out of a position, and if it hasn't grown substantially, you end up paying a much higher percentage fee. Ex. If you've only got $400 in your commodities ETF and you decide you don't like that asset in your portfolio, cashing out will cost you $14.95, which is an additional 3.7% expense ratio!

2. Basic plan @ Sharebuilder ($4 auto buys, $25 IRA fee) -- best case scenario is that you accumulate money in your account until you can afford 1 buy for each asset, and you've spent $20 in commissions (5 assets x $4) + $25 fee = 1.1% expense ratio. Worst case here is buying month -- $4 of $750 is 0.5%, and $4 of $250 is 1.6%, which doesn't include the $25 annual fee. And you still have the $15.95 commission for each position when you eventually sell.

3. Firstrade ($6.95 trades, no IRA fee) -- best case here again is accumulating money in your account until you can make 1 trade per asset, which is 5 assets x $6.95 = $34.75, or 0.87% expense ratio on $4000. Sells here are also $6.95, in case you needed to cash out of a position early.

So for me, I decided Firstrade made the most cost-effective sense. Now at Sharebuilder, if you expect to be using the remainder of your $1500/mo in building up a nice portfolio in a regular account with the standard plan, then your IRA waives the $25 fee and your automatic-buys are only $4, which is a great deal. But sells are still $15.95, so you really have to be committed to buy & hold or the commissions will eat you up.

Another thing to consider that I haven't seen mentioned yet -- it's really a good idea to have a nice cash "emergency fund" saved up; how much varies by person, but generally 3-6 months of living expenses, in a good savings account or CD yielding 4-5% (at current rates). Having this pool of cash gives you a lot of flexibility in case the unexpected happens -- your car dies, you get laid off from work, a medical emergency, etc. I would recommend building up your efund & Roth IRA first, and maybe other Fools will chime in with other retirement account options available to you.
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