Investing small amounts at regular intervals while minimizing fees?

Question

My daughter is about to turn one year old and I'd like to start some sort of investment account for her. The purpose would be to invest her birthday and gift money into the stock market each year. I'd like to use this account to teach her how compounding and saving over time has benefited her once she gets older.

My challenge right now is the fees. Basically, let's say she gets a total of $100.00 on her birthday. The online brokerages I'm looking at charge $10 per transaction. That's a 10% hit right off the top. I think it would be a bad lesson.

Are there any "micro"-investing sites or tools or kinds of investments that could help minimize my up-front costs but still permit investing on regular intervals?

Thank you so much.

Answer 1

It is difficult to find investment banks that offer both low fees and low minimum investments.

If you google around for "no-fee low-minimum mutual funds" you can find various articles with recommendations, such as this one. One fund they mention that looks promising is the Schwab Total Stock Market Index Fund, which apparently has a minimum investment of only $100 and an expense ratio of 0.09%. (I've never heard of this fund before, so I'm just repeating the info from the site. Be sure to look into it more thoroughly to see if there are any hidden costs here. I'm not recommending this fund, just mentioning it as an example of what you may be able to find.)

Another possibility is to make use of funds in an existing brokerage account that you use for yourself. This could allow you to make use of Craig W.'s suggestion about ETFs. For instance, if you already have a brokerage account at Vanguard or another firm, you could add $100 to the account and buy some particular fund, mentally earmarking it as your daughter's.

Answer 2

You can open a 529 plan for your child. The minimum contribution for my state is only $25. You can setup automatic deposits, or deposit money only a few times a year; or both.

You can save money on state taxes, and the money grows tax free if the money is used for educational expenses.

They generally have age based portfolios, but some also let you pick from a variety of portfolios.

Answer 3

I was going to comment on the commission-free ETF answer, which I agree with, but I don't have enough reputation. TD Ameritrade has a list of commission-free ETFs and has no minimum deposit required to open an account.

Another idea is to keep gifts in cash until a certain threshold is reached. For instance, $100 for birthday, $100 for Christmas, $100 for next birthday, $100 for next Christmas, now execute the trade. Sharebuilder has $4 scheduled trades, so you'd be at about 1% overhead for that. If other people give money, you'll reach the threshold faster of course.

For what it's worth, I do something similar for my 2 nieces. I combined their account and prepay Christmas plus birthday, so I do 1 trade a year. I have my account at Sharebuilder because my idea predated the commission-free ETFs that are now pretty popular. I should really transfer the account... hm.

Answer 4

I think your best bet would be commission-free ETFs, which have no minimum and many have a share price under $100. Most online brokerages have these now, e.g. Vanguard, Fidelity, etc. Just have to watch out for any non-trading fees brokerages may charge with a low balance.

Answer 5

5 years later there are now several brokerage apps that have zero fees on stock purchases. I believe Robinhood is the most popular.

Answer 6

For a more recent and relevant option, Robinhood (No trading commissions. Period.) is an excellent choice for stocks, options and even cryptocurrency. I personally have used Robinhood and I even transferred my portfolio from Schwab to Robinhood for free.

As one advances and wants to do after hour trading, derivatives or options, Robinhood also offers a profile upgrade starting at $10 a month (Robinhood Gold, which I have used as well and now downgraded because I don't trade as much). This option may not be applicable any time soon for someone starting out but it is good to know that there is an option to upgrade one's profile and continue using the platform.

Some other options include - Acorns, Stockpile which may not be about stocks but they are about investing.

Answer 7

You could just commingle your funds. That way, she also learns how to keep track of things and how to figure things out, rather just learning to have the guy at the brokerage hand her an account statement which she blindly accepts.

It might cause some tax problems though if the money grows to be substantial.

Answer 8

Keep it simple: mutual funds (preferably index, low fee or ETF linked funds) do make a nice start for your little princess college fund. You dont need a real fortune to offset the trading cost of an online broker but if your really going to take advantage of dollar cost averaging, you might want to invest into a trusted fund company. Do your research, it is worth it. Ignore what the investment salesman is saying, he works for his wealth, not yours. A good DIY strategy, either joint with your own retirement account agregate or on a low cost index fund will make wonders. Keep in mind to be resilient: you will cash out when the princess will be in college in 20 yerars. Make sure to make proper time horizon investment and allocation. Cheers, All the best. Feel free to edit

Answer 9

I am not sure whether this hold in all countries, but at least in the Netherlands my bank allows for investment in funds without charging transaction costs.

The downside is that these funds charge an annual fee of about 1%, but for the amounts you are talking about this definitely sounds more attractive than the alternative.

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As an alternative, you could ofcourse just take care of the transaction costs. That way your child can see their funds develop as you put it into different stocks without being distracted by the details. Of course you feel the 'pain' but I believe the main lesson stands out most this way.