Gold only with high commission in 401k - what to do???

[Sam Brazil]

In my 401k account there is no gold available commission free. The only option is to pay $7.95 each trade for IAU, SGOL or whatever through the brokerage window.

My yearly total 401k contribution is $18,000. If I did that biweekly that's $7.95*12*2 = $190.8/year in fees = 1%. Ouch! I could cut it in half by having my bi-weekly paycheck contributions sit in the MM sweep account, and then once/month manually trade...but then I'm still paying 0.50% in fees, just for gold, on top of the .15% or so in other fees for the rest of the PP in the account. That just seems way too high!

I could treat my taxable PP and my 401k PP as one big PP, and buy SGOL from Schwab commission free in my taxable account, but that makes me nervous about rebalancing...it's not like I can add more to my 401k from my taxable, if that situation occurs. That seems to make the "one big PP" strategy a non-starter.

So what the heck do I do? Just pay the high fees to buy IAU once per month in the 401k? Is there some trick I'm missing?

[rickb]

If you put your new contributions in cash, how often will you hit your rebalance band?  If it's 35%, I'd think not that often (unless you've just started out).  To reduce your rebalance events, and since you know more contributions are coming, you could rebalance cash low (like maybe 20% or 15%).

Another possibility (not sure I like this very much) is distribute your new contributions between your 3 free-trade assets, and then rebalance when gold hits your lower rebalance band.  In this case, since you know more contributions are coming, you could rebalance gold a little high (say, 30% rather than 25%).

If you regularly contribute to cash, then as your balance builds up your rebalance events will become less and less frequent (and if you choose to rebalance cash low or gold high, eventually stop doing this).

[Sam Brazil]

If you put your new contributions in cash, how often will you hit your rebalance band?  If it's 35%, I'd think not that often (unless you've just started out).  To reduce your rebalance events, and since you know more contributions are coming, you could rebalance cash low (like maybe 20% or 15%).

To make sure I understand you correctly, you're saying treat my taxable PP and 401k PP as one big PP, and then only use my 401k PP for my 25% cash bucket, while the taxable PP has the other 75%?

Even if the 401k cash bucket didn't hit 35% that often, what am I supposed to do when it does? I can't take cash out of the 401k PP cash bucket and reallocate to my taxable PP's other buckets.

[rickb]

If you put your new contributions in cash, how often will you hit your rebalance band?  If it's 35%, I'd think not that often (unless you've just started out).  To reduce your rebalance events, and since you know more contributions are coming, you could rebalance cash low (like maybe 20% or 15%).

To make sure I understand you correctly, you're saying treat my taxable PP and 401k PP as one big PP, and then only use my 401k PP for my 25% cash bucket, while the taxable PP has the other 75%?

Even if the 401k cash bucket didn't hit 35% that often, what am I supposed to do when it does? I can't take cash out of the 401k PP cash bucket and reallocate to my taxable PP's other buckets.

You seem to want to treat your taxable and 401K PP's separately, so I was talking about your 401K PP.  However much you contribute to this PP, contribute to cash - and rebalance when the cash portion (of this PP) hits the upper rebalance band.  For example, if you have $18,000 in this account now and you're contributing $1500/month, you'll probably exceed 35% cash in 2 months (the first time) at which point you'll have about $21000.  If you rebalance to 25% each, then you probably won't hit 35% again until 3 months later.  If you rebalance cash low (to, say, 20%), you won't hit 35% cash again until 4 months later.  If you do it this way, over the course of a year you'll probably only have 3 rebalance events.

If you're starting from 0, you might just contribute to only cash until you have $10,000 or so, and then rebalance.  Then do this again (contribute to cash) until your total is $20,000 and then rebalance.  And then start rebalancing based on cash hitting the upper band.

[Sam Brazil]

You seem to want to treat your taxable and 401K PP's separately, so I was talking about your 401K PP.  However much you contribute to this PP, contribute to cash - and rebalance when the cash portion (of this PP) hits the upper rebalance band.  For example, if you have $18,000 in this account now and you're contributing $1500/month, you'll probably exceed 35% cash in 2 months (the first time) at which point you'll have about $21000.  If you rebalance to 25% each, then you probably won't hit 35% again until 3 months later.  If you rebalance cash low (to, say, 20%), you won't hit 35% cash again until 4 months later.  If you do it this way, over the course of a year you'll probably only have 3 rebalance events.

Ahhh, now I get it! Thanks much for your help!

Yes, I actually have $36,000 in there now and my monthly contribution is $840, so assuming I'm starting out with a perfectly balanced $36,000, then the $840/mo is only 2.3% of the total...so I'll only hit the 35% band every 7 months. Cool!

But that worries me -- that means I'll have my capital tied up in cash for 7 month periods before it's put to work in the non-cash PP buckets. Is that ultimately worse over the long term than paying 0.5% per year in fees? I could see that missing out on 7/12 months every year could easily cost the portfolio more than 0.5%/year.

I wonder if there's a way around this without going into backtesting hell...

[Sam Brazil]

You know, actually, with 36,000 in there now, contributing 840/mo, and paying $7.95/mo, it's actually not that bad of an expense ratio...plus the expense ratio will go down ever year. I guess that'll have to do

[rickb]

But that worries me -- that means I'll have my capital tied up in cash for 7 month periods before it's put to work in the non-cash PP buckets. Is that ultimately worse over the long term than paying 0.5% per year in fees? I could see that missing out on 7/12 months every year could easily cost the portfolio more than 0.5%/year.

I wonder if there's a way around this without going into backtesting hell...

There are a bunch of threads here about new contribution disciplines.  In this one Sophie shares the results of some backtesting she did (coincidentally including a $7.95 fee for buying gold).  Her results (with monthly contributions) show buying an equal amount of each of the 4 assets and paying the fee ends up better.  I think it would still be better even at 2 contributions a month (paying an additional $600 in transaction fees over her test interval).

[sophie]

In my 401k account there is no gold available commission free. The only option is to pay $7.95 each trade for IAU, SGOL or whatever through the brokerage window.

My yearly total 401k contribution is $18,000....

I'm INSANELY jealous!

If my math is correct, the trading fee for IAU would be 4.6% of your bimonthly contribution, which is admittedly quite steep.  For my back tests, I assumed that contributions were monthly so things weren't quite that bad.  Why don't you try a hybrid solution, contributing 50% to cash, 25% to stocks, and 25% to bonds?  You could then either check in once per quarter and make your gold purchases then, or just wait for a rebalancing event.

With so much flexibility in your 401K, you could also consider supplementing with taxable savings that you earmark for either physical gold purchases or emergency fund savings.  If that's the case, you'd reduce the cash contribution in the 401K accordingly.  You could then use the once per quarter gold-buying method, or wait until rebalance time.

[KevinW]

IMO: KISS, put all contributions into cash, and rebalance as needed according to the usual rules. That's what I do. It seems like a big opportunity cost in the first year, but after a couple years, new contributions are small relative to the entire portfolio, so it doesn't really matter that much how they are handled. There is a big psychological benefit to leaving your portfolio untouched for long periods.

Per "Rule #1: Your career provides your wealth," generally people with sub-million dollar portfolios are better off investing time and energy into earning money, cutting expenses, or pursuing other goals, than they are fine tuning their portfolio.

Also, per "Rule #4: No one can predict the future," I wouldn't be so quick to assume that cash is a waste. In 2013 it was the second-best PP asset, and historically there have been many years like that.

[KevinW]

That's a good idea.

[buddtholomew]

I have never encountered a 401K brokerage window that charges for periodic investments. Did I understand you correctly?

[Sam Brazil]

I have never encountered a 401K brokerage window that charges for periodic investments. Did I understand you correctly?

That is correct. It's called Fidelity BrokerageLink.

[Sam Brazil]

Per "Rule #1: Your career provides your wealth," generally people with sub-million dollar portfolios are better off investing time and energy into earning money, cutting expenses, or pursuing other goals, than they are fine tuning their portfolio.

I'm torn on this point. A part of me thinks, hey, I can gain a few hundred thousand in retirement if I optimize my portofolio now...even if I spend 100 hours on that, that's a pretty darn good return for my time, and it'd be pretty anti-frugal to throw that away.

On the other hand, I'm feeling a time crunch lately to do my best at work, so I'm thinking I could make way way more than a few hundred thousand (over the course of a career) by focusing at work.

[Sam Brazil]

In my 401k account there is no gold available commission free. The only option is to pay $7.95 each trade for IAU, SGOL or whatever through the brokerage window.

My yearly total 401k contribution is $18,000....

Why don't you try a hybrid solution, contributing 50% to cash, 25% to stocks, and 25% to bonds?  You could then either check in once per quarter and make your gold purchases then, or just wait for a rebalancing event.

With so much flexibility in your 401K, you could also consider supplementing with taxable savings that you earmark for either physical gold purchases or emergency fund savings.  If that's the case, you'd reduce the cash contribution in the 401K accordingly.  You could then use the once per quarter gold-buying method, or wait until rebalance time.

Nice! Thanks for the idea!