How To Become a Venture Capitalist for $100

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How would you like to add “Venture Capitalist” to your social media profiles?

Indiegogo and Microventures have teamed up to offer equity stakes in startups to virtually anyone for as little as $100. Here is an Indiegogo blog post and a NY Times article covering the announcement. Previously, only accredited investors were allowed access in such markets, and that required an annual income of $200,000+ or a net worth of $1 million+.

This is different from Kickstarter crowdfunding where you put up monetary support and at most get an early product sample or some form of personal recognition. This is an actual investment with the opportunity to earn a significant return. (Or you might never see it again.)

I decided to look more closely at one of the available investments. Republic Restoratives is an urban, small batch distillery and craft cocktail bar in Washington, D.C. You can invest as little as $100, which will get you the perk of being “periodically invited to special parties, happy hours and previews”. If you invest at least $250, you’ll also get a founders signed bottle of CIVIC Vodka.

In terms of financial upside, you have to look closely at the investment terms:

Security Type: Secured Promissory Notes
Round Size: Min: $50,000; Max: $300,000
Interest Rate: Revenue sharing agreement which provides the investors 10% of the Company’s gross revenue, up to the repayment amount of 1.5x of their investment
Length of Term: Until the repayment amount of 1.5x investment is repaid
Conversion Provisions: None

In this case, you don’t actually get equity. You have a promissory note that says you have dibs on part of future gross revenue, but only up to 150% of your initial investment. For example, if they raise $100,000 and they manage to bring in $1,500,000 in gross revenue, they’ll pay out $150,000. If you invested $100, you’ll then get at most $150 back. Even if they take over the world and become the next Pappy Van Winkle brand, you’ll get the same amount back. Too bad, I’d rather be able to say that I am partial owner of a bar. 😉

A brief look at another investment option, BeatStars, shows that you have the possibility of owning preferred shares of the business if the note converts.

Bottom line. In financial terms, equity crowdfunding is very risky. The businesses available are unproven and have decided not to go the traditional VC route. To put it bluntly, you really shouldn’t expect to see your money again. In my opinion, the benefits are mostly psychological. You get to feel good about supporting a business you want to succeed. You may get personal recognition via your name on a wall or a signed bottle of vodka. I like the idea of telling people that I “provide venture capital to startups” instead of my real job.

Why Regular, Monthly Investments Are The Best Way To Build Wealth

automateHere’s another post on the topic of creating good habits

A common investing question is whether it is better to invest your money all at once (lump-sum) or gradually over time (dollar-cost averaging). The standard answer is that lump-sum is generally a better choice than dollar-cost averaging. This is mostly simple mathematics; If something goes up on average, then you’ll want your money in as early as possible.

However, in this Financial Planning magazine article Does investing monthly or annually beat a lump-sum portfolio? by Craig L. Israelsen, he argues that in the real world the best solution is regular, monthly investing. I recommend reading the original piece, but here is how I mentally broke down the concept:

  1. The most important thing to building wealth is saving a lot of money (savings rate).
  2. The best way to save a lot is to save often over time.
  3. The best way to save often is to develop a regular habit of it, so that it becomes effortless over the years.
  4. The hardest part about developing a habit is at the very beginning. You need an initial streak that is uninterrupted.
  5. The most likely thing to interrupt your streak is seeing a big drop when you look at your monthly account statements. That is scary. As humans, we like to focus on that number.
  6. With lump-sum contributions, you are much more likely to see a drop on a month-to-month basis. You have committed your money, and it is now subject to the market’s whims. You are also given a lot of time to think between actions, and you’ll have to muster up the motivation to make another lump-sum investment later.
  7. With regular, monthly contributions and a small portfolio size, you will hardly ever see an account balance drop.

Historical data from 1980-2015. Consider a diversified portfolio of stocks and bonds (details in the article). The following chart has three columns that compare overall market returns, an annual investment of $3,600 made each year on January 1st, and a monthly investment of $300 made at the start of each month.

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In the beginning, your account balance “feels” like it is always growing, even though the market itself may be flat or even dropping. This is the benefit of regular, monthly contributions. The positive reinforcement will hopefully let an investing habit form. As your portfolio gets bigger, the difference between dollar-cost averaging and lump-sum investing becomes relatively insignificant.

Bottom line. Building the habit is the most important thing. If at all possible, you should make automatic, monthly investments. When your account is small, systematic investments make it more likely that the number on your monthly statement keeps rising every month. By the time that your portfolio starts to get big enough that it doesn’t help anymore, you’ll have already built the habit and be on the path to solid wealth. By the way, if you invest as soon as you have the money available (i.e. when you get your paycheck) then you already are getting your money in the market as soon as possible.

This Simple Game Helps Explain Stock Market Investing

quarterHere’s a very simple game that does a great job of illustrating the pitfalls of investing, despite the long-term odds being in your favor.

  • Imagine that you are given $25 that you can bet on a coin toss for 30 minutes.
  • You know that the coin will come up heads 60% of the time, and tails 40% of the time.
  • You can bet as little or as much of your available cash on each flip. You double your wager if you are correct. You lose all of your wager if you are wrong.

There are many ways you could play this game. You could bet your entire $25 at once since you have an edge. But then there is a 40% chance you’d be instantly broke. You could bet nothing, as that would guarantee yourself $25 at the end of the session. You could vary your bets according to instinct. You could use mathematical theory to form an optimal solution.

Stock market investing works in a similar manner. People invest because the long-term odds are in our favor. Things look good over the long run, but there is volatility in the short run. Some people instead choose to take zero risk, but their money stagnates. Some people trade based on their intuition. Some people trade based on pre-set strategies.

The ideal result? If everyone bet optimally, they would have had a 95% chance of reaching 1000% of their initial wager (real-world maximum payout of $250). A mathematical formula called the Kelly Criterion tells you to bet a constant 20% of your bankroll every time. This is the optimal balance between the reward upside and keeping enough padding to avoid bankruptcy.

The actual results? The average ending balance was only $75. 33% of the participants actually lost money. 28% went completely broke! This comes from a research paper draft authored by Victor Haghani and Richard Dewey, who conducted this experiment on 61 “quantitatively trained test subjects” (appears to be finance workers that showed up for a hedge panel talk). Here’s a quote from the paper:

Given that many of our subjects received formal training in finance, we were surprised that the Kelly Criterion was virtually unknown and that they didn?t seem to possess the analytical tool-kit to lead them to constant proportion betting as an intuitively appealing heuristic. Without a Kelly-like framework to rely upon, we found that our subjects exhibited a menu of widely documented behavioral biases such as illusion of control, anchoring, over-betting, sunk- cost bias, and gambler?s fallacy.

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That certainly sounds like real-world investing to me. Even in a situation with a clear advantage, people still mess it up all the time due to behaviorial and cognitive biases. People can argue whether volatility is a good proxy for risk, but the bottom line is that volatility in this game directly causes bad behavior. Big drops are always scary.

John Rekenthaler of Morningstar argues that the results of this experiment support the idea of auto-pilot investing.

My takeaways? Like this game, long-term investing is simple but not easy. You need to risk enough of your portfolio in order to expose yourself to the upside potential. However, you also need to keep enough safe such that you won’t flame out during a losing streak. I think that auto-pilot might work well in many situations, but people can also turn off autopilot in times of crisis if they don’t understand what’s “inside the box”. It’s best to calmly figure out an investment plan based on both market history and your personal situation, and then stick with it. Just winging it usually turns out poorly.

Morningstar Top 529 College Savings Plan Rankings 2016

mstarlogoInvestment research firm Morningstar has released their annual 529 College Savings Plans Research Paper and Industry Survey. While the full survey appears restricted to paid premium members, they did release their top-rated plans for 2016. This is still useful as while there are currently 84 different 529 plan options nationwide, the majority are mediocre and can quickly be dismissed.

Remember to first consider your state-specific tax benefits that may outweigh other factors. If you don’t have anything compelling available, you can open a 529 plan from any state (although I would only pick from the ones listed below). Also, if you grab some tax benefits now but they are discontinued later, you can roll over your funds into another 529 from any state.

Here are the Gold-rated plans for 2016 (no particular order). Morningstar uses a Gold, Silver, or Bronze rating scale for the top plans and Neutral or Negative for the rest.

Newcomer Virginia529 inVEST was upgraded from Silver to Gold, helped by a recent management fee reduction. Missing from last year are the T. Rowe Price College Savings Plan of Alaska and the Maryland College Investment Plan (T. Rowe Price), which were downgraded from Gold to Silver. Reasons for this include fees staying average when the competition overall got cheaper, while at the same time some of the underlying actively-managed funds received lower Morningstar fund ratings.

Here are the consistently top-rated plans from 2010-2016. This means they were rated either Gold or Silver (or equivalent) for every year the rankings were done from 2010 through 2016.

  • T. Rowe Price College Savings Plan, Alaska
  • Maryland College Investment Plan
  • Vanguard 529 College Savings Plan, Nevada
  • CollegeAdvantage 529 Savings Plan, Ohio
  • CollegeAmerica Plan, Virginia (Advisor-sold)

The trend here is consistency. There was no change in either of the lists above as compared to last year. Utah only missed on out the consistent list because they weren’t top-ranked in 2010.

The “Five P” criteria.

  • People. Who’s behind the plans? Who are the investment consultants picking the underlying investments? Who are the mutual fund managers?
  • Process. Are the asset-allocation glide paths and funds chosen for the age-based options based on solid research? Whether active or passive, how is it implemented?
  • Parent. How is the quality of the program manager (often an asset-management company or board of trustees which has a main role in the investment choices and pricing)? Also refers to state officials and their policies.
  • Performance. Has the plan delivered strong risk-adjusted performance, both during the recent volatility and in the long-term? Is it judged likely to continue?
  • Price. Includes factors like asset-weighted expense ratios and in-state tax benefits.

A broad recommendation is to simply stick with one of the plans listed above unless your in-state plan is offering significant tax breaks. Many other state plans may have specific investments that will work just fine as well. Here are my personal favorites, and why:

  • The Nevada 529 Plan for its low costs, variety of Vanguard investment options, and long-term commitment to consistently lowering costs as their assets grow. The Vanguard co-branding is also a sign of positive stewardship.
  • The Utah 529 plan has low costs, includes a nice selection of Vanguard and DFA funds, and is highly customizable for DIY investors. Over the last few years, the Utah plan has also shown a history of passing on future cost savings to clients.

I feel that a consistent history of consumer-first practices is important as the quality of all 529 plans can change with time. Sure, you can move your funds if needed, but wouldn’t you rather watch your current plan just keep getting better every year?

Free Collection of Investing Books by Meb Faber

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Promotion has ended. Asset manager and author Meb Faber is celebrating his 10th blogiversary by making all of his self-published books free in Kindle format for a limited time (promotion has now ended). Below are direct links to each book. Check first that the Kindle price is $0 (“0.00 to Buy”). Then buy it to own permanently, don’t click “Read for Free”. Grab them now while they are free, and read later. You can read Kindle eBooks on smartphones or on any computer via web browser.

I enjoy reading about these back-tested strategies that worked well in the past. However, before you put your hard-earned money at risk, please realize that even if they continue to work (which is in no way guaranteed), they will still be hard to stick to in real life. At some time, you will underperform other strategies for an extended period of time. You must ride out those low periods in order to achieve any sort of market-beating returns.

His company now offers a software-based portfolio management “robo-advisor” called Cambria Digital Advisor.

LendingClub United Miles Promotion (Both New and Existing Investors)

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LendingClub (LC) is a marketplace lender that offers unsecured personal loans and then sells investment notes backed by those loans. After defaults and fees, they advertise historical returns between 5% and 8%. As an incentive, LC recently started offering up to 100,000 United MileagePlus award miles to investors that bring in at least $2,500 in new money. Here I offer a quick analysis of the investor offer and point out that it is actually available to both new and existing investors, even though that may not be obvious from the website.

Highlights.

  • Offer only valid for taxable Lending Club accounts. (IRAs are not eligible.)
  • Only deposited and invested dollars are eligible for award miles.
  • Lending Club Investor must have UA MileagePlus account activated before investing to qualify. New investors can link online. Existing investors must call or e-mail to manually link your accounts (see below).
  • For existing investors to receive miles, an investor must transfer at least $2,500 of New Funds into an active eligible taxable account and invest the New Funds through the Lending Club platform within 90 days of the commencement of the then-current offer (each, an “Existing Investor Offer Period”).
  • Offer is valid from October 1, 2016 to December 31, 2016 and Mileage Plus miles will only be awarded on new funds transferred and invested through Lending Club during this time period.

Selected quoted text from the landing page:

We’re excited to announce our partnership with United Airlines! Investing on Lending Club just got more rewarding. Right now, receive one United MileagePlus® award mile for every two dollars you invest through Lending Club up to 100,000 miles!

[…] Upon the transfer and investment of the first $2,500 of New Funds, a new investor will qualify to receive 1,250 miles. For every dollar of New Funds transferred and invested in excess of $2,500, a new investor will qualify to receive .5 miles, up to a maximum aggregate bonus of 100,000 miles per calendar year.

The maths. A minimum deposit of $2,500 earns 1,250 United miles. Every dollar above that $2,500 will earn 0.5 miles up to the 100,000 mile limit. If you value United miles at range of 1 cent to 2 cents a mile, 1,250 miles is worth $12.50 to $25. Thus, the bonus value ranges from a 0.5% to 1% bonus on top of the interest you’d already receive.

Existing investors participation details. I confirmed with two different LendingClub representatives that this offer is also available to previous/existing investors. You must first link your United MileagePlus account number with your account. You can contact them via e-mail at EarnMiles@lendingclub.com or phone at 888-596-3159 (7:00am–5:00pm PST, M–F). Provide them with your LC account ID and your UA MileagepPlus Number.

Bottom line. The bonus itself is not big enough to encourage you to invest if you weren’t otherwise interested. However, if you have already decided to invest with LendingClub, definitely don’t miss out on these free miles to boost your overall return. The value is roughly 0.5% to 1% to your investment amount, assuming you bring in at least $2,500 of new money. Link your accounts first before moving over the new money.

As an existing investor myself, I’ve written my share of opinions on LendingClub. I’ll just say two things: Have realistic expectations and diversify. Their advertised historical returns of between 5% and 8% are more realistic than you may have seen elsewhere. As they also note, 99.8% of investors who invest in 100+ Notes of relatively equal size have seen positive returns. It is not coincidence that 100 notes x $25 each = $2,500.

Which Asset Classes Offer True Diversification in Bear Markets?

The financial gurus are always looking for a new “alternative” asset class that both reduces the risk in your portfolio and increases returns. Longboard Funds looked at data from the past 15 years and examined what happened when you added 20% of various asset classes to a traditional 60/40 stock/bond portfolio. Below is a chart of the results based on two factors:

  • Did the asset class have a lower or higher correlation in declining markets? This reduces maximum drawdown.
  • Did the asset class improve overall historical return?

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The 6 asset classes that both lowered max drawdown and increased overall return were:

  • Trend Following (SG Trend Index)
  • U.S. Treasuries (Barclays 1-3 Yr US Treasury TR Index)
  • MLPs (Alerian MLP TR Index)
  • Municipal bonds (Barclays Municipal TR Index)
  • Gold (S&P GSCI Gold Index)
  • TIPS (Barclays Gbl Infl Linked US TIPS TR Index)

I would add that your next consideration should be to research each asset class and determine which ones you have strong faith in over the long term. As diversifiers, these asset classes will have long periods of poor performance during bull markets. You must be able to hold onto these asset classes so that they can eventually help you in a bear market.

Personally, I do not have faith in trend-following, I don’t understand the fundamentals of gold (seems heavily based on speculation), and I don’t like the various complexities of Master Limited Partnerships. You may feel differently. That leaves me with the classic high-quality bonds: US Treasury bonds, Municipal bonds, and TIPS (also backed by US Treasury). Munis seem to be the best relative deal right now depending on tax bracket (and perhaps also I Savings Bonds?). None of these offer a ton of yield, but most importantly I’m okay holding them through these lean times.

How To Read Market Commentary and Stay The Course

forecastcloudEvery day, new articles are published telling you to buy this! Sell that! Hedge against this other thing! One of the most underrated skills in investing is the ability to stick to your plan and do nothing.

Some folks argue that that solution is to never listen to any market commentary (or “noise”). Keep your head down, plow your money into index funds and don’t look up until you’re ready to retire. Well, if you can do that, more power to you. However, I’ve been getting more e-mails from people scared to invest due to reports of high stock market valuations and rising interest rates. Here’s an example of how I read market commentary and keep on truckin’ ahead.

The Blackrock Investment Institute recently released their Q4 2016 Global Investment Outlook, which has a lot of carefully-considered statistics, charts, and predictions. The chart below compares the current yields of various asset classes as compared to their pre-crisis averages (2003-2008):

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Blackrock’s analysis:

High valuations versus history point to more muted returns across asset classes in the long run. Yet slowing nominal GDP growth and aging populations argue for lower bond yields than in the past — and sustained demand for high-quality bonds. This structural shift changes the prism of assessing today’s valuations. It makes risk assets such as equities, credit, local EM bonds and selected alternatives look attractive on a relative basis.

I choose to take my risk and upside potential with stocks. While stocks have lower earnings yields (higher P/E) than pre-2008, they are still more attractive than high-quality bonds on a long-term basis. They are certainly more attractive than cash. US, European, Japan, Emerging Markets, nothing looks horrible.

I only invest in high-quality bonds because I want bonds to serve as portfolio ballast and help keep the ship steady. Risky bonds are more correlated with stocks, meaning if stocks go down then they are more likely to go down as well. I simply don’t want to own those types of bonds, even if they yield a bit more. Thus, I ignore any recommendation to buy high-yield corporate bonds, high-yield municipal bonds, and emerging markets bonds.

You can see that the high-quality bond yields are all significantly lower in the current environment. This second chart below looks more closely at the current bond picture. If you are in a high tax bracket, you should consider investment-grade municipal bond funds due to their high effective yields. Otherwise, a broad US Corporate bond fund (Investment Grade) is still a pretty good choice, and a a broad Total US Bond fund (US Aggregate) is in the “okay” zone.

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If you’re doing the sensible index fund thing, perhaps via Vanguard Target Retirement fund, then I see nothing wrong with staying the course. Nobody knows what will happen in the next 1, 3, or 12 months. Stocks could drop. Rates could rise. But stocks could also keep going up. Rates could also stay flat for a decade. Investing for the long-term requires perseverance. Stocks are still compensating investors for taking risk and are more attractive than bonds in the long-term. I would still add some high-quality bonds to smooth out the ride.

Finally, keep on saving. As Jack Bogle says, “If we’re going to have lower returns, well, the worst thing you can do is reach for more yield. You just have to save more.”

iShares Core ETF Expense Ratios vs. Vanguard ETF Comparison (Updated 2016)

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Updated 10/12/16. 18 iShares Core ETFs now trade commission-free at Fidelity. Blackrock announced price cuts to 15 out of its 22 iShares Core ETFs last week. The iShares Core series is their low-cost, index ETF line-up targeted towards buy-and-hold investors. Here are the updated expense ratios, alongside the expense ratios of the closest equivalent ETF from Vanguard for comparison. (Can you tell what their benchmark was?) Numbers are taken from the respective official websites as of 10/8/16.

Category Fund Name Expense Ratio Vanguard Expense Ratio
US Equity iShares Core S&P 500 ETF (IVV) 0.04% 0.05% (VOO)
iShares Core S&P Total U.S. Stock Market ETF (ITOT) 0.03% 0.05% (VTI)
iShares Core S&P Mid-Cap ETF (IJH) 0.07% 0.08% (VO)
iShares Core S&P Small-Cap ETF (IJR) 0.07% 0.08% (VB)
iShares Core Russell U.S. Growth ETF (IUSG) 0.07% 0.08% (VUG)
iShares Core Russell U.S. Value ETF (IUSV) 0.07% 0.08% (VTV)
iShares Core High Dividend ETF (HDV) 0.08% 0.09% (VYM)
iShares Core Dividend Growth ETF (DGRO) 0.08% 0.09% (VIG)
International
Equity
iShares Core MSCI Total International Stock ETF (IXUS) 0.11% 0.13% (VXUS)
iShares Core MSCI EAFE ETF (IEFA) 0.08% 0.09% (VEA)
iShares Core MSCI Emerging Markets ETF (IEMG) 0.14% 0.15% (VWO)
iShares Core MSCI Europe ETF (IEUR) 0.10% 0.12% (VGK)
iShares Core MSCI Pacific ETF (IPAC) 0.10% 0.12% (VPL)
US Bonds iShares Core U.S. Aggregate Bond ETF (AGG) 0.05% 0.06% (BND)
iShares Core Total USD Bond Market ETF (IUSB) 0.08% 0.09% (BIV)
iShares Core 1-5 Year USD Bond ETF (ISTB) 0.08% 0.09% (BSV)
iShares Core 10+ Year USD Bond ETF (ILTB) 0.08% 0.09% (BLV)
iShares Core International Aggregate Bond ETF (IAGG) 0.11% 0.15% (BNDX)
Asset Allocation ETFs iShares Core Conservative Allocation ETF (AOK) 0.24% n/a
iShares Core Moderate Allocation ETF (AOM) 0.23% n/a
iShares Core Growth Allocation ETF (AOR) 0.22% n/a
iShares Core Aggressive Allocation ETF (AOA) 0.20% n/a

* Note: Vanguard does not have ETF versions of their “all-in-one” asset allocation mutual funds.

Commission-free ETF trades. As of 10/12/2016, all 18 of the primary iShares Core ETFs can be traded commission-free in a Fidelity brokerage account (only the 4 Asset Allocation ETFs are excluded out of the 22 total). Here is the full Fidelity commission-free iShares ETFs list. Fidelity also has their own line-up of index fund options. You can trade all 4 of the iShares Asset Allocation ETFs plus 4 other iShares ETFs for free at TD Ameritrade.

You can also use a broker with free trades overall like the Robinhood app (review) and Merrill Edge which gives you 30 free trades per month with $50,000 in assets across your Bank of America and Merrill Edge accounts.

Bottom line. The demand for low-cost, well-run, index ETFs continues to grow. This move by Blackrock is more about professional money managers, as they’ll feel less pressure to move elsewhere due to higher costs due to fiduciary rules. The competition between iShares/Fidelity, Vanguard, and Schwab is making better products at lower prices for consumers. (Side bet: Blackrock will buy Fidelity in the next 5 years.) My personal investments (and lots of unrealized capital gains) are with Vanguard, but new DIY investors can now open an account at any of these three and build their own diversified, low-cost portfolio with no trade commissions.

See also: Schwab Index ETF Expense Ratios vs. Vanguard ETF Comparison

Schwab Index ETF Expense Ratios vs. Vanguard ETF Comparison (Updated 2016)

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Schwab also had some reactionary price cuts to some of their Schwab Index ETFs last week. Here are the updated expense ratios, alongside the expense ratios of the closest equivalent ETF from Vanguard. In cases where both Vanguard and iShares compete, Schwab is now 2 basis points cheaper than Vanguard. This is because iShares recently dropped to mostly 1 basis point cheaper than Vanguard, and Schwab wants to keep the title of “cheapest”.

But let’s be clear, Vanguard’s success and mere presence (the “Vanguard effect“) is why these low-cost ETFs exist in the first place. Numbers are taken from the respective official websites as of 10/8/16.

Category Fund Name Expense Ratio Vanguard Expense Ratio
US Equity Schwab US Broad Market ETF (SCHB) 0.03% 0.05% (VTI)
Schwab US Large-Cap ETF (SCHX) 0.03% 0.08% (VV)
Schwab US Mid Cap ETF (SCHM)* 0.06% 0.08% (VO)
Schwab US Small-Cap ETF (SCHA)* 0.06% 0.08% (VB)
Schwab US Large-Cap Growth ETF (SCHG) 0.06% 0.08% (VUG)
Schwab US Large-Cap Value ETF (SCHV) 0.06% 0.08% (VTV)
Schwab U.S. Dividend Equity ETF (SCHD) 0.07% 0.09% (VYM)
Schwab U.S. REIT ETF (SCHH) 0.07% 0.12% (VNQ)
International
Equity
Schwab International Equity ETF (SCHF)* 0.07% 0.09% (VEA)
Schwab International Small-Cap Equity ETF (SCHC) 0.16% 0.17% (VSS)
Schwab Emerging Markets Equity ETF (SCHE)* 0.13% 0.15% (VWO)
US Bonds Schwab U.S. Aggregate Bond ETF (SCHZ)* 0.04% 0.06% (BND)
Schwab U.S. TIPS ETF (SCHP) 0.07% 0.08% (VTIP)
Schwab Short-Term U.S. Treasury ETF (SCHO) 0.08% n/a
Schwab Intermediate-Term U.S. Treasury ETF (SCHR) 0.08% n/a

* indicates ETFs that had a price cut 10/7/16.

Where should self-directed investors buy these ETFs? You can trade all Schwab Index ETFs commission-free in a Schwab brokerage account. Here is the full of over 200 commission-free ETFs at Schwab OneSource.

You can also use a broker with free trades like the Robinhood app (review) and Merrill Edge which gives you 30 free trades per month with $50,000 in assets across your Bank of America and Merrill Edge accounts.

Bottom line. Schwab has shown a willingness to sacrifice profits in the short-term in order to keep the title of “cheapest index funds”. I think this is brave move with long-term vision, and hopefully they can keep it up. The competition between iShares/Fidelity, Vanguard, and Schwab continues to lead to better products at lower prices for consumers. My personal investments (and lots of unrealized capital gains) are with Vanguard, but new DIY investors can now open an account at any of these three and build their own diversified, low-cost portfolio with no trade commissions.

See also: iShares Core ETF Expense Ratios vs. Vanguard ETF Comparison

More Charts: Withdrawal Rates and Portfolio Longevity

Here’s another pair of tidy charts about safe withdrawal rates, or the amount you can safely withdraw from your retirement portfolio without running out. They are taken from this Blackrock page, specifically their “one-pager” 2-page PDF.

First up, this chart shows how a $1 million portfolio would have done over a 30-year period, given withdrawal rates between 4% and 8%. They specifically chose a start date of December 31, 1972 because it was right before a large drop in the stock market. Click to enlarge.

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No matter what the withdrawal rate, the total balance dropped from $1,000,000 down to roughly $600,000 in the first three years. The hypothetical portfolio was 50% stocks and 50% bonds. That must have been quite stressful. The chart gives you a feel of how a lower withdrawal rate can extend the longevity of your portfolio.

The second chart uses Monte Carlo probabilistic modeling to show you the percent chance that your assets will last for retirement, given several variables. You can adjust the time period (20 to 30 years), the portfolio asset allocation (from 20% to 100% stocks) and your withdrawal rate (1% to 10%). Click to enlarge.

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I wouldn’t use these as definitive numbers, and there are other similar scenario generators out there. Just consider them another data point to add to the collection. Note that all the scenarios above assumed a fixed withdrawal strategy as opposed to a more flexible dynamic withdrawal strategy.

Robinhood Gold Review: $10 a Month For Extended Trading and Interest-Free Margin

rhgold0The Robinhood app became well-known for their free stock trades and sleek app-only interface. People wondered, how will they make money? Well, they just announced one way – Robinhood Gold, a premium plan starting at $10 per month with the following highlights.

  • Extended hours trading. In addition to standard trading hours, you can start trading a half-hour earlier (pre-market) and two hours later (after-market).
  • Additional buying power. The equivalent of a margin account, or a line of credit for the stock market. You get up to 2x your buying power so you can invest more, and keep any profits. You pay no interest, just the flat monthly fee.
  • Bigger instant deposits. Instant Reinvesting lets you access proceeds from a stock sale immediately, instead of having to wait for it to settle. Instant Deposit eliminates the three-day wait period for funds to transfer from your bank into Robinhood.

Let’s look at these features more closely.

Extended hours trading.. Traditionally, the markets are open from 9:30 am EST to 4:00 am EST during normal business days. With extended hours trading, every market day you’ll be able to trade an extra two and a half hours:

Pre-Market opens 30 minutes earlier starting at 9:00 am EST
After-Hours continues for 120 minutes (2 hours) until 6:00 am EST

Do you really need these hours? If you don’t have a specific reason, then you may want to steer clear. Liquidity is limited, price volatility is high, and you’ll be trading against mostly professionals and/or computers. It’s also not that special… Most other brokerage firms also allow extended hours trading.

Additional buying power. Robinhood Gold upgrades you to a “full” margin account. For one, this means that you can get immediate access to funds after selling stock. That means you can reinvest those funds without waiting three days for settlement. This also means that they are required by law to have a minimum balance of $2,000.

Margin is essentially borrowing money from Robinhood and using your cash and stocks as collateral. The amount of extra “Gold Buying Power” you get is based on how much you pay, up to 2X your normal buying power. If you invest in high volatility stocks like penny stocks or leveraged ETFs, they may also limit your buying power to less than 2X.

  • $2,000 of extra buying power is $10 a month, with 0% interest
  • $4,000 of extra buying power is $20 a month, with 0% interest
  • $6,000 of extra buying power is $30 a month, with 0% interest
  • $10,000 of extra buying power is $50 a month, with 0% interest
  • Additional buying power over $50,000.00 has a yearly interest rate of 5.0%.

For example, if you have $2000 in your account, you can get at most $2000 in Gold Buying Power. But if you increase your account value to $3000 by depositing $1000, you can get at most $3000 in Gold Buying Power (if you are on the appropriate tier).

Now, if you really cared about margin, you’d probably use a broker with cheap margin rates like Interactive Brokers. IB’s current margin rates for a $2,000 balance is 1.9%, which would amount to $38 a year in interest if you carried a $2,000 balance for an entire year. (IB also requires you to spend at least $10 a month in commissions and fees if you hold less than $100,000 in assets.) On the other hand, TD Ameritrade will charge you 9.25% on a $2,000 balance, or $185 a year. Compare with Robinhood Gold at $10 a month would be $120 a year.

Bigger instant deposits. Another way that Robinhood lets you borrow some short-term money is with Instant Deposits. When you initiate an ACH deposit at most brokerages, you have to wait 3 business days for the money to actually show up. With Instant Deposits, you can use the money to buy stocks instantly. Your maximum instant deposit amount is the same as your extra buying power tier above ($2,000 for $10/month, $4,000 for $20/month) etc.

Instant deposits let you act on a stock idea quickly without having a bunch of idle cash sitting around all the time. You can keep it in an online savings account earning 1% instead of nothing at Robinhood.

What about Robinhood Instant? Robinhood Instant is a free middle tier that has been around for a while. Priority access is given based on the number of referrals you send to them. Your mileage may vary, but I referred two other people to Robinhood and was given access to Robinhood Instant. There is no hard number, that’s just my data point. This is a “limited” margin account that has the following features:

  • Get immediate access to funds from selling stock. That means you can reinvest those funds without waiting three days for settlement. (Again, any brokerage margin account offers this.)
  • Limited instant deposits. Use up to $1,000 of your pending bank deposits right away.

How do I get Robinhood Gold? They are rolling it out gradually. Preferred clients, including those that have referred other new users, will have priority. They will e-mail you, or you can see it in your app. Some people got access to it immediately upon launch.

Bottom line. Robinhood has been doing a nice job of meeting their basic promise of free stock trades. Robinhood Instant is a useful upgrade, although you’ll have to convince a couple friends to join. At the same time, they don’t let you use leverage, which magnifies both gains and losses.

Robinhood Gold takes off the training wheels and gives you a full margin account, for a fee. You are moving from credit as a temporary convenience to enabling riskier trading with long-term leverage and extended trading hours. This may be appealing to a newer trader that eventually wants a bit more buying flexibility. For a serious trader that uses a lot of margin, it may be cheaper to go with another broker with low margin rates.