Picking a Brokerage

I know a number of folks in the process of rolling old 401(k)s into IRAs or setting up brokerages for the first time. I have discussed the pros and cons of a few brokerages with a few folks, but the truth is, it is hard to compare because the offerings, fee structure, and resources available are very different from firm to firm and there is not a good website that I can find that really compares it all. That said, smartmoney.com has done a nice job of categorizing several brokerages and rating them. They do not explain every feature so you should do more research- but this is a good list of brokerages and summaries of who they might best serve.

I use etrade, because my original brokerage was bought by another brokerage that merged with another that was bought by etrade. This process has not been fun- especially given that my historical records have not been carried over from company to company.

Despite the fact that my experiences with etrade have mirrored those described in the article, I am not surprised that they rated etrade #2 under their premium brokerage category. I got a kick out of (but do not completely agree with) their summary concerning many of the etrade critics that- "...much of (their/our) griping may stem from resistance to change."

Given a plan like my hypothetical non-retirement portfolio of mutual funds that allow $100 monthly or quarterly contributions for NO fee- etrade seems like the best bet.

The bottom line is that when choosing a brokerage- you need to figure out what you want to do with it and how much help you will need doing it. If you are going to roll-over an IRA and invest it in a couple of funds and forget about it until you retire, you do not need a brokerage that offers a ton- just one with the lowest fees possible. If you want to invest actively and do not need help from your brokerage and are ok with really poor customer service, etrade may be your best bet. Smartmoney also mentions: "
Lilien, the firm's president, says E*Trade plans to spend an extra $42 million on customer service this year."

Motleyfool has another resource to help you pick a brokerage- I like the comparisons it makes and the info it looks at but it only reviews 4 companies.


Non-Ret: Large Cap Value

My Pick: American Beacon Large Cap Value Planahead AAGPX

Etrade's new and improved mutual fund screener pulled up several selections. One that is appealing based on performance and low expenses and turnover is ING Corporate Leaders Trust LEXCX. Upon further investigation I found that 18.57% of its assets are invested in Exxon. If I wanted that much invested in Exxon, I would buy its stock. For this portfolio, I am looking for funds that diversify in each sector they cover so I kept looking.

Another that has had strong returns is Mutual Beacon Z BEGRX. Fortunately I was researching this category before etrade replaced its S&P mutual fund reports with their own. The old reports showed historical and current investment styles- indicating if the fund invests and has invested in large cap value holdings exclusively or if it invests in small and large companies, value and growth oriented companies, etc. I emailed etrade customer service and they responded within 24 hours as promised that this information was no longer available. Etrade now offers re-hashed data available at Morningstar. You can see a little of what has happened with BEGRX by looking here. In 2004, this fund would not have come up in a value search at all, it was a 'blend' fund (both growth and value)- so its performance going back 3 years should not be compared to a straight value play over that period. Also, almost 1/3rd of the companies it invest in are mid cap companies or smaller and 1/3rd of its holdings are international companies. If you want a fund that is well-diversified in and of itself, this could be a good choice, but if you are looking for a large cap domestic value fund, this is not the droid you are looking for- despite its 'category.'

Compare that to the fund I choose. It has most of its money invested in large or gargantuan sized companies and has remained in the value category as far back as Morningstar lists. With a low 0.84% expense ratio and low 26% turnover, this suits my needs. the only consideration is that it has a lot- I mean a LOT of money (5.253 billion) under management. Since it invests in gargantuan sized companies, I am less concerned that it has gargantuan amounts of money to invest, but it is something to keep an eye on.


Wait to file your taxes if...

...you own a brokerage account.

I was jealous of a colleague who declared that he already had his tax refund on the way. I was even more jealous of the fact that his refund was small.

Why would I be jealous of a small refund?

In this case the government has been taking only as much money from my colleague over the course of the year as he ultimately would owe in taxes. Some people like getting big refunds, but that is a big interest free loan you are giving to the government... If you have enough income to do that, I've got a bridge for sale...

So if you can only have what you will owe withheld (takes good planning), you get paid more throughout the year meaning you have more every two weeks to donate to charity, spend on bird seed, or spend at the movies.

Anyway- last year I got an amended tax statement from my brokerage and I was really glad I had not submitted my taxes, because I would have had to re-submit them with the new form if I had been more on the ball. This year, I have yet to receive my tax statement from etrade and when my colleague was like "I'm done with my taxes" I was all like- "what is up with my stuff?"

So I logged into my etrade account and found this buried in the page that allows you to view your tax forms:

"If you hold a mutual fund, REIT, or RIC, we may need to issue you an amended Form 1099. This may affect the date you will want to file your tax return. To minimize the possibility of multiple corrections, we will not be generating amended 1099s until late February 2007."

I didn't even know what a RIC was but I own Mutual Funds and a REIT (Boston Properties).

My initial reaction was- why can't etrade get this stuff right the first time? Then I read an article by Andrea Coombes that led me to believe that brokerages are required (perhaps by law?) to send tax info by Jan 31st, but that many mutual funds and REITS send updated info to brokerages after this date forcing brokerages to send multiple copies and forcing those of us who invest in Funds and REITs to wait to file our taxes or file multiple times. Andrea specifically notes that some Brokerages are seeking permission to wait to send their tax info to clients.

Since etrade bought my old brokerage, but the transfer did not happen until a couple of weeks into Jan. I wonder how may tax forms I will actually get...

etrade does have this message on my account home page:

"1099s Available by January 31st.
This year as part of your move to E*TRADE Financial, you may receive TWO tax statements for 2006. Your tax statement(s) will be mailed to you and made available online by January 31."

What this should say is that I may receive FOUR tax statements and should not even bother trying to figure out my taxes until the end of Feb.

But regardless, the confusion and how long it is taking for me to receive this info does not appear to be etrade's fault, but rather a result of changing and complicated regulations.


Tax day moved for everybody- not April 15th...

Taxes this year are due April 17th for everyone. Not the 15th, which is a Sunday. Not the 16th, even though your forms will most likely claim this. But Tuesday, the 17th.

Why? you might ask. I mentioned that us Massachusetts residents get until the 17th because of the timing of Patriot's Day. Of course the rest of the country is not patriotic and/or does not celebrate our football team (even in shameful defeat) with a day off, but our esteemed representatives in the District of Columbia are taking the day off to celebrate Emancipation Day so the entire country gets an extra day to pony up our taxes. Don't just take my word for it (ever)- check it out yourself.

I will post soon about why every extra day helps, even if you are getting a refund...


etrade updates its mutual fund screener

I have written about etrade and explained that I am using it to pick mutual funds for my hypothetical non-retirement portfolio. I have warned folks picking a brokerage to be wary of fees at any brokerage and decide how you want to use your brokerage account before opening a new account with any company.

I use etrade for my IRA and non-retirement savings and that is why I have access to their mutual fund screener which I have talked a little bit about.

So today, when I signed in to make my next pick, a Large Cap Value fund, I was surprised to see that they have upgraded their fund screener.

The old screener was more or less like what you can find on any financial news web site. But the new features will make it much easier to do what I have been doing: pick no-load funds by sector specifically looking for good non-retirement investments.

Some obvious improvements include being able to exclude closed funds and exclude funds that require huge amounts for initial investments. Even better, as I add criteria, I get a running tally of how many funds are available based on my choices so if I am too restrictive and only a few funds will show when I pull up the details, I can expand my search. The last major improvement is that I can save my criteria- so as I start each new search, all I have to change is the category I am looking at.

So... Specifically I am screening out funds that:
  • are available through etrade
  • are no-load, no-fee funds
  • are available to new investors
  • have 3-5 stars from morningstar (some index funds end up with 3 stars)
  • have below $5000 initial investment (I wish it let me set this at $2500 because that is my actual cut-off for this project
  • have an expense ratio below 1.5 (different categories have different averages on this and turnover so this will be a setting I tweak)
  • have a low turnover
Here is what the fund screener looks like:

I am poking around a bit and it looks like they have replaced the Standard and Poors report they used to link to each fund with an in-house etrade report. The new report and new detail screens look nice and are easier to navigate through. The one piece missing is the style composition box- which I actually used a good bit. I'll email etrade and ask about it which will also give me a chance to see, anecdotally, if their customer service has improved at all.


Market Timing and Mutual Funds

Many financial analysts and advisor types claim market timing is a bad idea... I agree that if you look at an individual company that is performing well and is valued cheaply, buying it regardless of market trends, as a long term investment makes sense, but this does not necessarily apply to decisions about when to invest in mutual funds that focus on specific market sectors. If the fund broadly covers companies in a sector and growth in that sector slows or the sector goes out of favor with institutional investors, the stocks of those companies could decline and the fund could lose money.

International markets have done really well recently, but is that any reason to not invest in them? Will emerging and international markets continue to trounce US markets?

Beats me- I'll leave that to the experts. But moringstar has a nice summary of performance by category and if I were choosing a category (sector), I would take a look at how it has done and consider the likelihood of that trend continuing.

I would not recommend basing an investment decision on this alone, but investing in a sector that has had a strong run does not make as much sense as investing in one that has not gained much over the last few years.

Which does make me rethink my IRA strategy.

Should I invest in sectors that are not as represented in my portfolio to diversify and balance, even if those sectors have had a good run for a long time? I'll have to think about that one...


IRA investing for 2006

When it comes to investing in my IRA every year, I procrastinate. So I am in the process of contributing for tax year 2006- you can contribute to an IRA up until tax day for that year- so I can contribute up to $4000 anytime before April 15th. Actually in Massachusetts, I have until the 17th because of the timing of patriots day. I am not sure how this works exactly- does your brokerage have to receive the deposit before the 15th/17th? Or does the deposit need to be initiated? Will my brokerage accept a deposit on Patriots Day? I am a procrastinator, but I am also too lazy to figure out the details so I will not wait until the last minute, I will contribute now and not worry about it.

And while I procrastinate about pulling together the money to put into an IRA account, I do not put off investing the contribution since I am never going to build a sweet retirement for myself with all my retirement funds sitting in cash.

Also, several people have asked me recently what I recommend investing in. I do not feel comfortable recommending specific investments for specific moments in time. So instead, I will share what I am planning to do. I do not recommend buying the same things I plan to buy since I am buying them specifically to balance against what I already own. But I feel good about all the holdings I am hanging on to after I rebalance and am happy to share my choices if it helps others learn about some of the options out there...

I have more than one IRA and when I contribute each year, I try to look at them all at once to see what I am invested in and what to change to keep a diverse balance. I do this by copying all the holdings from each IRA into a spreadsheet and look up the current category for each holding on Morningstar, Here are the combined investments, organized by category and listing each specific holding and the overall percentage each holding represents:

Three things stand out right away:
  • Almost half of the investments are in large domestic companies
  • There is very little invested in foreign companies
  • I have several very small positions in a number of Janus mutual funds.
I also notice that most of my large domestic investments are in index tracking securities and everything outside of this category is in funds with managers trying to beat their respective indexes.

So as I decide what to invest my 2006 contribution in, I aim to:
  • Reduce my percentage investment in large US companies
  • Increase my investments in overseas companies
  • Clean up some of the clutter
  • Diversify between index tracking securities and actively managed funds across more categories
This may sound complicated and expensive, but it really isn’t. Here is exactly what I aim to do:
  • Sell my positions in JAGLX, JAGTX, JAMRX, and JAWWX (which has lagged its peers) to clean up the clutter.
  • Add to my investment in JAGIX to add a little more active management to the investments in large US companies.
  • Invest in VWO, EFA, and EFV all foreign index funds both increasing my international exposure and balancing against the actively managed foreign fund I already own.
  • Invest in MIDSX to slightly increase my specialty interests.
  • Invest in VBK, VB and VOE to increase my smaller company investments and again balance against the actively managed funds I already own.
Here is what my new IRA portfolio will look like:

Now I have more coverage of mid/small sized companies. I have managed funds and index funds, across many categories, No individual investment is smaller than 2% and the largest single position I have is 13% down from 15%. And I have more international and specialty coverage offering more diversity from the large US focus I had before.

Also I am more diversified across fund companies. I think this is important because even when different funds at the same company focus on different sectors, it is often the same pool of analysts or same analyst strategy that is informing the various fund managers. Also, as companies struggle or do evil things, using a variety of companies reduces risk from these things as well.

So now I have holdings from Janus, Vanguard, Fidelity, Artisan, T Rowe Price, iShares, Columbia, State Street Bank (they manage SPY), American Century, Wells Fargo, and Stratton and Boston Properties.

All this diversity- across sectors (company size and growth vs value), strategies (index vs managed), and companies should mean that I am exposed to less risk in general but am still positioned to make gains if any for these sectors due well.

So how much will it cost? All my IRAs are with etrade and have no account fees. All the mutual funds I am buying and selling are no-load, no-fee funds so no costs there either. My pricing for buying ETFs through etrade is $7.99 per transaction so the grand total I will pay is $47.94. I will post when I actually execute this plan.


Saving for retirement vs saving for pre-retirement

Walter Updegrave at cnnmoney posted an excellent explanation of a good strategy for how to approach where to put your savings for retirement. And for those of us who work for non-profits, 403(b)s should be approached like he recommends approaching 401(k)s: contribute enough to earn your full employer's match (if any), fund a Roth IRA if you are eligible, then ad more to your 403(b).

Combining this with the typical financial planning advice- "Pay off your credit card debt first" one can come up with a guide for how to manage one's finances, but it gets a little more complicated when faced with decisions about and how much to save in non-retirement accounts. (Not to mention what debt to pay off- Credit Card debt is obvious because the interest is usually high but College debt and Mortgages are worth exploring, but not in this post.)

Walter says max out both your IRA and 401/3/k/b- and then contribute to a non-retirement account. To do this, however, you must be saving over $19,500 ($15,500+$4000). And he was addressing this to a married couple so they would have to save $39,000 a year before funding a non-retirement account. I do not believe Walter is really recommending this- he is trying to explain a way to think about retirement accounts that I agree with completely- Match your 401/3, then fund a Roth. But after that- at what point should you start saving for retirement?

Let's face it, most of us want some wealth before we reach our 60s and I am betting that by the time I reach 60 the retirement age for social security at least, will be higher than it is now.

So does it make sense to invest in a non-retirement account before maxing out your 401(k)? One thing to think about is how much retirement savings you have already and how much you are on track to have when you reach your 60s but lets look at the numbers. Say your employer matches 3% and you make around $40,000. That would mean you employer would match up to $1200 so you need to contribute that much to get the match. The maximum for an IRA is $4000, so you need to save $5200 to end up with $6400 in retirement savings for the year.

Using CNN's savings calculator which uses a high rate of return at 9%- if you are 30 and save this much until 65, you will end up with $1,380,548.83. Before you get too excited, adjusted for an assumed 3% rate of inflation, that is only equal to $475,403.62 in today's dollars- hardly enough to cover 35 years of wild and crazy retirement adventures.

But, if you contribute more each year, as you earn more and your employer matches more and IRA limits increase, you can make headway. (Notice I don't bother to include Social Security estimates- I'm a bit of a pessimist about that one). Regardless, you can use a simple calculator like this to put in your actual age and actual income and adjust the numbers to figure out how much you want to and can contribute to your retirement savings.

Lets assume for our example $5200 is enough and do-able. This comes out to about $433 per month. If you can save an additional $300 per month then you could buy three mutual funds and contribute $100 to each, every month and build up a nice non-retirement fund. Of course you will need to save up the initial minimum for each fun which for the funds we are looking at here range from $0 to $2500.

If the market does well and your Non-Retirment portfolio swells, you can tap into it to buy a home, a trip to Iceland, a diamond studded cell phone, start a charity, etc. before you turn 65. Maybe another way to think about it is: are the things you want to buy with your savings worth what you would need to do now to save that much... Saving $733 a month ends up being about $212 dollars per week.. Cancel cable, make your lunches at home and see if you can pull it off (or not if you decide you do not need that diamond studded cell phone after all).


Where are the charts?

A friend and faithful Wylie Money reader asked me- "Where are your charts? Your Graphs? The track record of your hypothetical portfolio as it takes the S&P 500 and thrashes it soundly, beating it into the ground?"

I started on a long post about how there is no free portfolio tracking tool that automatically re-invests dividends and capital gains pay-outs especially from a historical date and I have not found a good tool to allow me to do this manually for the 20 funds I plan to track...

Then I started thinking about my friend and his question and I got bitter and decided that he just wanted charts because his brain has frozen solid and gone numb because of all the snow he has suffered through recently (he lives in Denver).

Then I realized, yea... I need some charts. But it could be a bit tedious to manage so here is my plan:

I will chart the investment of $2500 per fund in each fund with $100 additional contributions on specific days I will pick each month (more about this process later). I am starting with a minimum of $2500 because several of the funds I have picked so far require this much and none of the funds I have picked (or will pick) require more than this- so one could actually follow this plan. Same reasoning behind the subsequent $100 additions.

I will do this one of 2 ways. I will pick about 20 funds total and either:

a) One of you can give me $50,000 and $2000 per month- which is the cost of investing in this entire portfolio and I will invest it and etrade can re-invest the distributions and capital gains!!!!!


b) I will set up a hypothetical portfolio- in Morningstar but please post a comment if you know of an easier to use free portfolio tool. And I will try and keep track of reinvesting dividends, etc. manually which will be tedious and make me sad.


c) I will just set up a portfolio to track daily NAV (prices) which will give a general sense of earnings and be less tedious.

Final note- until I pick all 20 funds, I will not set this up because going back and trying to get historical info and tracking the funds and picking new ones all at once would require more time spent on this that I am willing to commit.


Social Security

In response to this article about the US going bankrupt, I commented on Social Security including crazy ideas like rolling back the retirement age and giving all my 'projected' payments away.

I was discussing this with a friend over a frosty pint later on and he almost took his empty glass and wacked me over the head with it in a well-meaning attempt to knock some sense into me.

Anybody else want to buy me a pint o' cider and discuss?


Non-Ret: Specialty Real Estate

My Pick: SSgA Tuckerman Active REIT Fund SSREX

These days may be the worst possible time to invest in Real Estate in general as prices have run up tremendously over the last few years. That said- Office Real Estate has still been rising- Boston Properties for example (Stock symbol: BXP) has been doing well- even as residential real estate has struggled.

Etrade's funds screener does not distinguish between funds that focus on commercial vs Residential Real Estate sectors- or a combination, etc. so it will be difficult to focus on a sub-sector using this research tool. This is OK as I do not want to try and chase market trends- I want to pick a good fund I can contribute to over time. Regardless, I picked the order of categories to diversify according to a progression and if I wanted to build a portfolio of 9 funds, Specialty Real Estate would be the category I would pick from next.

The best performing No-Load fund Etrade offers requires an initial $15,000 investment so I am not picking it. It also lists a turnover ratio of 1411%. This goes to show you that some managers can make big profits buying and selling constantly, but I would hate to get the tax bill for profits earned this way!

My pick is SSgA Tuckerman Active REIT Fund SSREX. It has a $1000 minimum initial purchase and lower than average expenses 1.00% and turnover 35%. The average for Real Estate Funds is expenses 1.48% and turnover 81.98%. It does make you wonder why Active is in the title since the turnover is only 35% but what are you gonna do?


Online Banking

A friend recently asked me what I think about ING's new online checking account. I did not know much about it so I checked out Bank Deal's site and found a nice post.

The savings rate is ok for balances under $50k. If you have more than $50K in cash, it seems silly to keep it in a checking account. They do not issue check books and you cannot use all ATMs for free. I actually have an online bank account with Citi. I signed up during the height of the dot.com foolishness because they were giving out free Palm Pilots. I still keep the account but I have very little cash in it because the interest rates are sad. I keep it because I can use any ATM with no fee from Citi and complete reimbursement of fees from any other ATM up to a monthly limit which I never go over.

I actually use my etrade brokerage as a savings account as I have a tax free money fund (which helps since I live in Mass.). And I can transfer funds back and forth from etrade to Citi whenever I need to. I use Yodlee to keep track of all the accounts side by side and to keep track of the log-in info.

etrade actually has ATM cards and check books for their brokerage and I know someone who was trying to use their brokerage as a checking and savings account all in one. I will try and see how it is working for them...

If I were to open any new bank account I would choose eloan as they seem to have the highest rates on savings accounts among the better known online banks- but they do have a $5000 minimum...


Living below your means

Food and Drink
Health and Fitness
Managing Money
Art and Entertainment
Pet Ownership
Do you have suggestions? Leave a comment or email me at wyliemoney at gmail dot com and I will add your suggestions to the list.


This site is intended to Entertain, Educate and Enlighten. It is not intended to Advise, Authorize or Admonish.

I perform wacky financial experiments, share my convoluted experiences, and ramble on a good bit. Some of the investment ideas I explore involve hypothetical portfolios I track. Other ideas I dive into reference my own experiences. Just because something has worked for me in the past does not mean it will work for you or me in the future.

I am not a financial planner certified or otherwise.

My hope is that by exploring topics regarding saving, investing and managing money, you and I can both learn a little more than we knew before. I am by no means an expert and anything you read about on this site (or any other for that matter!), you would do well to confirm on your own before assuming, I got it right!

You and only you can make decisions, financial or otherwise, that are right for you.

I wish you all the best investing and managing your finances!


Non-Ret: Large Cap Blend

My Pick: American Century Income & Growth/Inv BIGRX

So by now- you know my approach to picking each fund. I select the category in etrade'e mutual fund screener, sort by 3 year performance, cut and paste the performance, expenses, turnover ratio and a few other details into a spreadsheet, sort out the high expenses and high turnover from the top performers and look for a reason to choose a single fund from whatever is left over.

You can read some of the posts about the first seven funds I picked for this hypothetical portfolio so see the process in detail.

For Large Cap Blend funds, I did this and the T Rowe Price Retirement 2040 Fund/Adv PARDX stood out with a very low 0.25% expenses and 11% turnover ratio. But when looking at this in greater detail, I see that this fund invests in a 'bucket' of T Rowe Price funds each of which has its own expenses and turnover. This looks like a fund that attempts to do something similar to what I am doing with this hypothetical portfolio. This could be a decent fund to buy
if you wanted to invest in only one fund but since it holds funds that invest in various other categories I already have funds invested in, it does not make sense to buy it as a 'Large Cap Blend' fund.'

This leaves me with two choices:

Janus Fundamental Equity Fund JAEIX has done better than American Century Income & Growth/Inv BIGRX over a 3 year period but has trailed it recently. More relevant is that BIGRX has lower expenses, lower turnover and is more of a Large Cap blend- it is about half Large Cap Growth and Large Cap Value. JAEIX has a large Mid Cap Growth weight. It may out perform BIGRX if growth takes of soon as many predict, but this plan has a formula and is not trying to time the market so BIGRX is my pick.