Having followed the previous steps and set-up a brokerage account, funded your Child Millionaire account and selected a single exchange traded fund (ETF), you are now ready to make your first purchase.
To spread the cost of the commission payable to the brokerage when you purchase the ETF, you will want to make purchases of at least £500 / $700 at a time. So assuming you are finding the account with a child benefit of £87.97 / $140 per month [£1056 / $1680 per annum], semi-annual purchases would be sensible once half the annual contribution has accumulated in your brokerage account from automatic transfers from your bank account.
So let’s assume you will make your first purchase today 29 January 2013 and you have £528 / $840 in cash in your brokerage account. Six months from now on 29 July 2013 you will again have accumulated £528 / $840 in the account and be ready for the second annual purchase.
Different brokerages have slightly different interfaces but they all have more or less the same features. Using TD Direct Investing (www.tddirectinvesting.co.uk) as an example, to make your first ETF purchase follow these steps:
1) Login to your brokerage account.
2) Verify your cash balance of £528 / $840 by looking at your portfolio holdings.
3) Select ‘place an order,’ which might be under a dropdown menu titled ‘trading’ or something similar.
4) In the ‘place an order’ dialogue box, fill in the boxes. Select the relevant market, in my case it would be ‘UK Equities’ and enter the ‘stock symbol’ (also called the ‘ticker symbol’) for the ETF you have chosen. In my case I’m purchasing the iShares UK Dividend Plus ETF for my Child Millionaire portfolio so the ticker symbol is IUKD. Click on ‘buy’ and the system will retrieve the current market price of the ETF shares, which in this case is 803 pence per share. Select ‘amount in currency’ and fill in £528. The ‘order type’ is ‘market’ which means the current market price and then click on ‘preview order’. You may have to tick a box verifying that you have read the fund prospectus [you will want to do this as part of the process of selecting your ETF, see Step 3]. In the preview box I see that I’ll be able to purchase 64 shares at a market price of £8.04125 costing £514.64. The commission will be £12.50 so the total cost is £527.14 of the £528 in the account. The spare £0.86 will remain in my account until my next purchase. Click on ‘place order’ and the order will be instantly executed. I now own 64 shares of IUKD.
Depending on the ETF, dividends will be automatically paid into your brokerage account on a monthly, quarterly or semi-annual basis. In the case of IUKD the dividend distributions are paid quarterly.
To automate the Child Millionaire portfolio there are two more steps.
1) Set-up automatic share purchases.
If your brokerage account allows (TD Direct Investing does not) set-up another identical purchase to happen for £528 / $840 six months into the future on 29 July 2013, and every six month thereafter. Otherwise put a reminder in your diary, phone etc. to make another purchase every six months from your first purchase date, moving any weekend dates to Fridays or Mondays. It will take all of five minutes to do this.
2) Automate the dividend reinvestment.
This step is absolutely vital to the long term compounding effect necessary to create a Child Millionaire. You must reinvest all dividends paid by the ETF into your brokerage account into further shares in the ETF.
If you chose an ETF that automatically reinvests dividends then you don’t need to do anything.
If you have an ETF that distributes dividends as cash then you will need to reinvest the dividends yourself. To do this, find the tab in your brokerage account for ‘dividend reinvestment’ and select ‘reinvest dividends.’ With some brokerages this service is free, with others there is a small commission charge, perhaps £1.50 / $2. Some brokerages require you to phone and set this up so do this immediately.
If for some reason you can’t set-up automatic dividend reinvestment for an ETF then you will have to reinvest the dividends manually. You can do this by simply investing the full cash balance of your account every six months as any dividends will be accumulating in the account as cash.
In the early days when the portfolio is tiny the dividends might not be sufficient to automatically purchase additional units or the small commission charge might eat up all of your dividends. In this case manually investing the dividends as part of your semi-annual ETF purchase will do the job for you.
That’s it. Simply make two purchases a year taking 10 minutes, let the dividends accumulate and be reinvested automatically or manually every six months, ignore what the market does, and forget about it. There is absolutely nothing else to do.
Congratulations on minting a Child Millionaire!
1) Make your first ETF purchase.
2) If possible automate the semi-annual purchase and dividend reinvestment.
How much will my Child Millionaire portfolio be worth in the future?