Author Topic: Cash Drag / Fidelity  (Read 1527 times)

uneven_cyclist

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Cash Drag / Fidelity
« on: March 21, 2018, 01:15:40 AM »
Hi All,
I am hoping to get a bit of advice in eliminating cash drag from my Fidelity portfolio.  I am using a dollar cost averaging strategy to invest money into a few different accounts each month (retirement, house down payment, etc.) and so far things are going fairly well.  However, I have noticed that each time I make a contribution to my accounts / each time I purchase shares, I am left with small remainders of cash in my accounts because there is always a little bit left over after I purchase my shares and because it is not possible to purchase fractional shares.

I have looked into a few solutions, but none seem ideal at this point.  This is what I have considered:
1) Move all of my money to M1 Finance or Betterment or Wealthfront so that I can purchase fractional shares and then be fully invested at all times.
2) Spend $2500 to open a mutual fund with Fidelity in one of my accounts and then dump the cash remainders into that account as often as I can and purchase fractional shares so I remain as fully invested as possible as often as possible.

...any other ideas that I'm not considering?  I am not really thrilled about either of these ideas, but it would certainly be great to solve the problem if there is a good way to do so.

Thanks for taking time to read this over.

mintleaf

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Re: Cash Drag / Fidelity
« Reply #1 on: March 21, 2018, 05:52:23 AM »
Are you sure you're optimizing the right thing? Suppose you have $10 left over after a trade. Even if you believe that "cash drag" is a thing, you're looking at maybe $10 of growth over a decade. Surely the energy you're putting into worrying about this could instead be used to simply save $10 somewhere else in your life during that decade.

2Birds1Stone

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Re: Cash Drag / Fidelity
« Reply #2 on: March 21, 2018, 06:21:03 AM »
I think you're splitting hairs.

You should focus on expenses/fee drag more than cash drag. Use the lowest cost index funds possible to maintain your desires AA.

Aunt Petunia

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Re: Cash Drag / Fidelity
« Reply #3 on: March 21, 2018, 07:25:47 AM »
Dollar cost averaging is a bigger source of cash drag than having remainders in your account. Opening the mutual fund is not a bad idea though. You can automatically reinvest your dividends so you don't have to manually buy the fractional shares.

toganet

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Re: Cash Drag / Fidelity
« Reply #4 on: March 21, 2018, 07:42:26 AM »
I had the same thought a while back, and went the mutual fund route.  That has worked well for me, psychologically at least.  Even though the small amount of cash (always less than the price of one ETF share) isn't going to accelerate FIRE or anything, I do feel better "putting every dollar to work."

appleshampooid

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Re: Cash Drag / Fidelity
« Reply #5 on: March 21, 2018, 08:09:52 AM »
I had the same thought a while back, and went the mutual fund route.  That has worked well for me, psychologically at least.  Even though the small amount of cash (always less than the price of one ETF share) isn't going to accelerate FIRE or anything, I do feel better "putting every dollar to work."
When I implemented my AA with ETFs, I had a similar problem and I went the route of holding one mutual fund in each account, e.g. I would use ETFs for 5/6 asset classes, and for the 6th I would use a mutual fund. This was at Schwab, where you can buy their branded funds for as little as $1 with no transaction fees. It worked well for me.

I tend to agree with the other posters that it's not much worth worrying about, but I totally understand the psychological perspective of seeing those dollars uninvested! I would say as long as the mutual fund you are considering is a low-cost index fund that fits in to your overall investment strategy, there's no harm in it.

NoStacheOhio

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Re: Cash Drag / Fidelity
« Reply #6 on: March 21, 2018, 08:40:08 AM »
We had probably $15 in cash across three retirement accounts for most of 2017. It's fine. The lower ERs on the ETF vs. the MF share classes we would be buying are worth it right now.

uneven_cyclist

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Re: Cash Drag / Fidelity
« Reply #7 on: March 22, 2018, 12:13:34 AM »
Thanks all for the responses.

One thing that I should have mentioned about my process as well is that I have been making separate transfers from my credit union to each individual Fidelity account and then purchasing shares within the individual Fidelity accounts.  I have discovered that Fidelity allows trading to happen (i.e. purchasing shares) the moment these transfers take place even though cash has not settled.  It does not, however, allow for unsettled cash to be transferred between accounts.  In other words, it is not possible to consolidate my cash remainders and then purchase one or two more ETF shares.  This is part of why I have been dealing with remainders.

Therefore, one takeaway is that it would probably help to make single transfer each month to a single Fidelity account, as opposed to multiple transfers to multiple accounts.  The best way to do it will be to purchase all shares in a single account and then organize them into different labeled accounts *afterward* in order to minimize the size of my cash remainder each month.

The other take-away from peoples' responses is that, while it might not hurt to go the mutual fund route, it probably would not make a huge difference in the long run, and, in fact, it might even negatively affect my returns if I were to end up putting my money into a fund with a higher expense ratio than my ETFs.

And...while I would probably save a couple/few hundred dollars from cash drag expenses over the long haul by switching to a service like M1, Betterment, or Wealthfront, it does not seem worth the hassle because Fidelity offers so many other valuable features that will help me to make money -- e.g. 24 hour phone support, credit card, branches, etc.

I'll stick with ETFs through Fidelity for now and just try to minimize the size of the remainders each month.

Thanks all for the feedback and responses.
« Last Edit: March 22, 2018, 12:16:45 AM by evenstevo »

MustacheAndaHalf

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Re: Cash Drag / Fidelity
« Reply #8 on: March 22, 2018, 11:40:30 AM »
When I first read "cash drag / Fidelity", I thought you knew that some Fidelity funds seem to hold too much in cash.  For example, FUSEX and VTI using data from morningstar.com:
FUSEX holds 0.41% cash, or $41 out of every $10,000 invested.
VTI holds 0.02% cash, or $2 out of every $10,000 invested.

My apologizes for giving you something else to worry about, but I think your focus should be on the funds / ETFs you select, not the few dollars sitting idle.  Let's say over 30 years your money will grow 4x over inflation.  That means $50 idle turns into $200 real dollars.  If your retirement depends on that $200, you're not ready to retire.  Retirement will depend on where you invest $10,000 per year, not $10 per year.