One of my favorite types of investments has a dirty little secret

Written by
Peter Dunn

72 hours after I got married, I found myself at a high-end buffet in the Bahamas. I was already sunburned, yet I was the happiest man on the planet. As I walked into the restaurant with my beautiful bride, I thought to myself "I'm pretty sure I won life." Things soured.

This wasn't your ordinary buffet. It was legendary. I'm talking shellfishes no one has even heard of. I don't quite remember the per person cost, but for a 22 year old kid that had been working for two months, it seemed like $3 million per person. I had tapered. I was ready to eat. My new bride? Well, I assumed the same. We sat down, acted as though we weren't going to bum rush the buffet, and then we bum rushed the buffet. I started with sushi. Then I hit the raw bar. And eventually made my way around the buffet. I more or less ate Tom Cruise's weight in food, roughly 67 lbs. My wife had a salad. A SALAD!!! I paid $40 million for a stinking salad. I lost.

Even the greatest deal in the world is crap, if you play your cards wrong. One of my favorite investments in all the world is an Exchange Traded Fund (ETF). It is efficient, inexpensive, and nimble. I almost use them exclusively for my investing needs. They are similar to mutual funds, but aren't as expensive, if you play your cards right. Yes, in order for you to buy ETFs on the cheap, you have to know what the hell you are doing.

ETFs trade like stocks. That means you pay trading costs for ETFs, not expense ratios. If you have an E*Trade account or a TD Ameritrade account or a account, then you will pay about $7 per ETF buy transaction. Here's the problem. If you don't buy enough, you are paying too much. Huh? Yeah, I gotta explain this.

No matter how much you buy during an ETF purchase, you'll pay $7. And no matter how little you buy during an ETF purchase, you'll pay $7. So, if you bought $10,000 worth of your favorite EFT all at once, it would cost you $7. In other words, the transaction would cost you .07% of the purchase price. However, if you bought $100 of your favorite ETF, you would be charged 7% of the purchase price, or $7. Investing monthly is a very healthy thing to do. In fact, I love investing monthly. But if you are investing lower dollar amounts into ETFs, or any stock or bond, for that matter, you are killing yourself with fees. Why would you pay an upfront fee of 7% of every dollar invested? You shouldn't. Invest more money and you can lower your fee percentage.

And that's the dirty little secret of ETFs. If you don't buy enough, you will pay way too much.

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