Last min advice, getting ready to pull the trigger on $7k VTSMX

[Russell]

My funds transfer showed up in my Scottrade brokerage account and I'm getting ready to buy $7k worth of VTSMX.

As for the usual info: This is my first purchase outside of my retirement accounts. My 401k is fully funded and I don't qualify for ROTH. My goal is not set on long or short term but instead I want to take advantage of the market right now. Since everything is down I might as well take advantage and make some money as the market recovers. I won't miss the $7k short or long term if needed but I'm hoping I can sell it once it's appreciated back up to $30/share level.

Should I put in a market order or limit? should I buy today or end of the week? Right now it's at $16.20/share and it's the lowest it's been in 5 years. Should I consider VTI? or VTGSX as well?

[Broken Arrow]

There's something about this premise that makes me uneasy....

Perhaps it's the fact that there is no specified goal, which means no thesis, no entry and exit strategy, no consideration for asset allocation, no time horizon, and that it might be trying to time the market....

I don't mean to be critical or anything. It's just that, because I don't know the basic premise of this buy, I'm not sure how one should approach it either.... Could you please provide a bit more detail?

You probably already know this, but VTSMX is the mutual fund whereas VTI is the ETF.

[noppenbd]

Originally Posted by Russell

My funds transfer showed up in my Scottrade brokerage account and I'm getting ready to buy $7k worth of VTSMX.

As for the usual info: This is my first purchase outside of my retirement accounts. My 401k is fully funded and I don't qualify for ROTH. My goal is not set on long or short term but instead I want to take advantage of the market right now. Since everything is down I might as well take advantage and make some money as the market recovers. I won't miss the $7k short or long term if needed but I'm hoping I can sell it once it's appreciated back up to $30/share level.

Should I put in a market order or limit? should I buy today or end of the week? Right now it's at $16.20/share and it's the lowest it's been in 5 years. Should I consider VTI? or VTGSX as well?

If this is truly play money, with a one-time purchase I would go for VTI over VTSMX (identical holdings, but VTI's expenses are lower). Just make sure you can have dividends reinvested on the ETF without a commission (some brokerages allow this).

[Russell]

I beat you guys by 10 mins. I placed the order and the deed is done.

I did end up with VTSMX. Since it's a mutual fund I wasn't allowed to buy it as a limit order, I'll get it for the price that it's selling for. Furthermore Scottrade charged $17 for the transaction, so much for their $7/trade mantra.

I chose to take a deposit for the dividends and capital gains. Since it's outside retirement I'll have to pay taxes on it either way.

BA, the exit strategy is the share price of $25-$30/share. The premise of the purchase was that the money sitting in my savings account earning less than 1% was not giving me the returns I want. I felt that I could use part of it to buy stocks and as the market recovers I can make a few bucks off it. I think that's the plan that most buyers have right now. I chose to go with the market tracking index mutual fund as opposed to a few stocks to lower the risk of losing money.

I considered VTI but from what I read that the commission is higher on the VTI...though in retrospect it wouldn't have mattered much since I paid commission on VTSMX too (bought it through scottrade instead of vanguard) and it's not like I plan to do a lot of trading. Oh well...live and learn.

[Broken Arrow]

As you say, the deed is done, and generally speaking, it's not really a bad buy anyways. Plenty of people out there have done much worse with their money than what you have done with yours.

Yeah, Scottrade's $7 trading fee are basically only for stocks. Mutual funds are typically more, but interestingly enough, bonds don't cost anything. However, they do require a $10k minimum before they will buy it for you, and you can only buy in $1k increments after that....

[noppenbd]

It doesn't make much difference now, but for future reference, you should look at the management fees in addition to the commission. In some cases there will be a tradeoff (lower or no commission on a mutual fund vs higher ongoing management expenses).

Not a big deal with Vanguard because both the MFs and the ETFs are very low cost. VTI has expense ratio of .07%, VTSMX is .15%. So the difference over a one year-period on a $7K investment is $5.60. Obviously not a big difference but it will add up over time.

[Russell]

Thanks guys, so other than VTI being a smarter choice of the two in this case how would you have spent your $7k if you were in my shoes?

[Broken Arrow]

Originally Posted by Russell

Thanks guys, so other than VTI being a smarter choice of the two in this case how would you have spent your $7k if you were in my shoes?

WELL, I wouldn't say that ETFs are always the smarter choice. In this case, you are making one lump-sum buy with a balance big enough to offset the % cost in trade commission, but if these and other variables were changed, then perhaps the ETF would not be ideal....

What I would do with the money depends on my overall financial picture, and how this piece would best fit into that picture. In my own case, I would probably split it between replenishing my EF and contributing to my Roth. But YMMV of course.

[Russell]

Originally Posted by Broken Arrow

WELL, I wouldn't say that ETFs are always the smarter choice. In this case, you are making one lump-sum buy with a balance big enough to offset the % cost in trade commission, but if these and other variables were changed, then perhaps the ETF would not be ideal....

What I would do with the money depends on my overall financial picture, and how this piece would best fit into that picture. In my own case, I would probably split it between replenishing my EF and contributing to my Roth. But YMMV of course.

OK I feel better now. When you said that other people have spent their money much worse than me I thought I'd made a big mistake somehow like VTSMX was the poorest of the funds to buy or something. As I said I don't qualify for ROTH and my EF (I just have savings, they're not ear marked as EF, travel, entertainment etc) are already enough that they won't miss the $7k.

I agree about the ETF vs. Mutual fund, it does depend on how you buy it and if it's a taxable account or not etc. I hear that ETFs are 'generally' tax friendly usually when you rebalance. I appreciate your guys input, thanks!

[Broken Arrow]

Oh! I'm sorry if I gave the impression that you somehow made a big mistake. I didn't mean that at all, and I'd also like to emphasize that I did say, "Generally speaking, it's not really a bad buy anyways."

Given the right context, VTSMX is an excellent core fund in my opinion.

[noppenbd]

One other thing to consider. Next year, in 2010, the income limit on Roth conversions is scheduled to go away. Therefore, one plan would be to put $5K in a Nondeductible IRA now, then convert it to a Roth next year. You will not owe any taxes on the conversion and you would never have to pay taxes again on the gains.

One catch to this plan is if you have existing pre-tax IRAs monies. Then the conversion becomes more complicated, and may not be a good idea (the IRS considers all IRA monies as one IRA).

[Russell]

Wow, I didn't know about the income limits for ROTH is going away, thank you! I do have money in ROTH and rollover IRA from previous years. I think this year our income will be low enough that we might be able to invest in ROTH anyway.

In regard to my VTSMX purchase, I'm assuming I'll be taxed when I sell the shares but as long as I hold them the only thing taxable will be the dividends and capital gains? and both cases Scottrade will send me a 1099-MISC or something so I know what I have to report on my taxes?

[noppenbd]

To clarify, the income limits for Roth contributions are NOT going away, just for Roth conversions, and only for 2010 (my understanding at least).

If you decide to do the conversion in 2010, the IRS considers all your IRA monies as one chunk. If you have pretax and after-tax money in the IRA, you cannot selectively convert just the after-tax part. Any conversion is considered part pretax and part after-tax on a pro-rata basis.

Until you sell the VTSMX, the tax reporting will be pretty minimal. As you said, Scottrade should send you a consolidated statement with 1099-DIV and 1099-INT information. When you sell you will have to report the gains or losses as short or long-term.

[Russell]

Cool thanks.

Another question. I checked my account on scottrade just now (market's closed) and here's what I see:

Symbol Description Acct Type Qty Price Market Value Today's Change(s)*$
VTSMX Vanguard 419.963 17.49 7,345.1529 445.1608(6.45%)

How can the today's change value be +6.45% at $17.49/share when at the time of purchase the value was $16.60 and right now the finance sites are showing it at $16.43/share? In other words I should've seen a drop in the value not an increase. I'm not sure where that $17.49 is coming from.

[srblanco7]

$17.49 is today's close. Yesterday's close must have been $16.43. That's a 6.45% increase - which is what is shown as today's return.

[Russell]

That makes sense but I'm trying to figure out what price I purchased it at since it's not showing that under my "confirmations" so I was trying to figure it out from the account balance which is shown above.

[srblanco7]

Ok - I'm speculating here.

Invested 7000 - $17 transaction fee = $6983 net investment
You bought 419.963 shares
Therefore, share price at time of purchase was $16.63 (unless there was another fee somewhere in the transaction process).

Price then dropped to $16.43 yesterday and then increased to today's close of $17.49.

[Russell]

I think you're right srblanco7.

So due to the unexpected rally my short term gain is sitting at about $400. I think the stock market will go back down soon so should I sell it tomorrow and cash out or is it too short sighted of me?

[KTP]

I bought 5000 shares of Citibank friday at a buck and sold it yesterday for $1.41. I got nervous even though I have a sneaking feeling there will be some change in rules that will cause it to shoot up to $3 or $4. Still, booking the nice $2000 profit was sweet and helps offset the $4k loss in my spiders purchased since jan

lesson: don't be too greedy

[Bernz]

Originally Posted by KTP

I bought 5000 shares of Citibank friday at a buck and sold it yesterday for $1.41. I got nervous even though I have a sneaking feeling there will be some change in rules that will cause it to shoot up to $3 or $4. Still, booking the nice $2000 profit was sweet and helps offset the $4k loss in my spiders purchased since jan

lesson: don't be too greedy

That a nice quick profit there....I probably should have done the same but just could not pull the trigger.