I'm in the enviable position of assisting a young adult who is in his formative years who has a problem I can identify with: he's a small time investor. I say I can empathize because I only buy investments a mere few hundred dollars a month at a time myself. It's hard to do when one is a 29 year old graduate student. I however have the advantage of time and have built up a (still small but) large enough balance I can take advantage of easier and better investment vehicles with fewer fees associated with them.
For example I can use VTSMX for all my domestic equity holdings, but that's because I am fortunate enough to exceed the fee minimum of 3k. I'm also the kind of person who will sit and accumulate the 3k in cash even if it takes two or three years and then buy in if faced with such an option (I am patient I suppose). I also can tolerate a much higher level of counter party risk and complication than my charge. Like me, he has no problems with holding money electronically.
My protege is not so patient. I admit I can understand his thinking, these are lean times, and he's not very trustful of investment companies. Let's assume he has $100 a month to chip in each month but never more than $200.
I first prompted him to perhaps get $3300 together to buy into the minimum $3000 balance for PRPFX and then $300 in EDV, which I believe you could buy at Vanguard for no fees, and then you could just contribute $100 or so at a time. He doesn't like this for the same reason I don't: an objection to actively managed mutual funds. Also, he thinks it'd take too long to save up that much. I can understand both objections so I think the 4x25 route is better.
For cash I have sold him on the mighty I bond. The small denominations available and the security of Treasury Direct are to his satisfaction, plus it's essentially free (at least in the direct sense, you don't pay a commission to buy an I bond). Perfect solution.
The other components are problematic however.
My proposed solution is to invest $1000 at a time in his own TD account and an IRA at a discount brokerage. I think he can accumulate $1000 in 7 months for the purpose.
My reasoning is that it won't demolish his returns too badly if he only makes 3 trades at let's say 4 dollars each and uses low expense ratio ETFs in an account with no minimums. The I bonds don't cost anything to trade, so $12 in trading fees doesn't seem terribly bad considering the PP historically yields 8-10 percent as a rule of thumb. He's basically losing 1.2% of yield in the first year for each $1000. That's not good but it's not a death sentence either, lots of people have it worse. I think selecting very inexpensive ETFs will help recoup this over the long haul too. The account balance is small and the trades are infrequent, so buying what's lagging should work for re-balancing for some time.
So $250 would buy an I bond, $250 in VTI, $250 in TLT, and $250 in IAU, all selected for my belief that they're the lowest available funds that should work with the lowest possible expense ratios. Then each time he gets another $1000, he knows to invest it in such a way as to "Even them all out", as he puts it.
This is why I wish some ETF company could make a true PP ETF for us lazy people. It would help the broke too!
He's not likely to stay this way forever but he's the type who wants to get started quickly, and his mindset is actually ideal for the strategy as he likes simple and doesn't trust other people to manage money for him (I don't either really, in a sense). I think he'll like it and eventually his life situation will likely improve. Maybe once he gets a larger balance in 10 years or so he can do something better, it's not like he has to worry about taxable gains inside his IRA.
Any thoughts? Better ideas?
Implementing the PP on a Shoe String Budget
Moderator: Global Moderator