US Treasury Bonds Negative Correlation with Stocks

Here is an interesting chart comparing the correlation of various asset classes to the S&P 500 over the last 5 years. Chart is from Richard Bernstein Advisors, found via The Reformed Broker.


A negative correlation between two asset classes means that they tend to move in opposite directions. While long-term US Treasury bonds have been the most strongly uncorrelated, it is also worth noting that intermediate-term US Treasuries (5-7 years) were nearly as uncorrelated. Of course, this is the past and correlations can and will change.

Still, this would seem like good news for people who hold a “total” bond fund like the Vanguard Total Bond Market Index Fund (VBMFX, BND) or iShares Barclays Aggregate Bond Fund (AGG) as these contain ~70% US government bonds and have an intermediate average maturity. You want your bonds to serve as a hedge against stock movements, and they did over the past 5 years while still maintaining positive returns (~4% annualized for AGG, ~15% annualized for S&P 500).

Robinhood App Review: What’s The Catch Behind Free Stock Trades?

robin0Finance start-up Robinhood promises to “democratize the financial markets” by creating a mobile-first brokerage that offers unlimited free trades with no minimum balance requirement. That is a pretty bold move, and I was skeptical when they started getting noticed in late 2013.

A year later, they’ve gathered $16M in venture capital and last week publicly launched their iPhone app (no Android yet). I’ve already been a beta user of their app for ~5 months (thanks to you guys) and here’s my review.

Application process. You must provide your personal information including Social Security number, net worth, income, investing experience, etc. This is the same as any other brokerage firm, but this may also be the first such account for many users. Everything was done online; there were no paper documents that required mailing or faxing.

Core features. Yes, the app gives me $0 commission trades with no minimum balance requirement. That means you could open account, put in five bucks, and buy a single share of Zynga (ZNGA) if you wanted to. You can make market or limit orders. You can open a cash or margin account. Along with all the other legit brokerage firms, Robinhood Financial is a member of the SIPC which protects the securities in your account up to $500,000. Data is encrypted with SSL. Apex is their clearing firm.

Funds transfers. You can link any bank account with your routing number and account number, but you can also directly use your username and password at these 9 banks: Bank of America, Wells Fargo, Chase, Citibank, US Bank, USAA, Fidelity, Charles Schwab, and Capital One 360. Such ACH transfers are free.

What’s missing? Getting free trades is great, but I think it’s also important to know what you won’t get, at least right now:

  • You must access your account via your iPhone, iPad, or iPod Touch. Android and web interface are “coming in 2015″.
  • There is no phone number for customer support, at least that I can find. All their contact links direct you to compose an e-mail to I’d feel more comfortable with a phone number, but customer service agents cost money.
  • No advanced order types like trailing stop-loss or trailing stop-limit.
  • According to their fee schedule, broker-assisted phone trades are $10 each. But again, I can’t even find a phone number to reach a broker.
  • Electronic statements are the default. I don’t even see an option to enable paper statements in the app, but according to their fee schedule paper statements cost $5 a pop.
  • Currently, they do not support ACAT transfers, so you can’t move over your existing assets from an outside brokerage. (Or move out your assets via ACAT either, I’m guessing.)

How do they make money? For now, Robinhood will make money the same way other brokers do: collect interest on your idle cash, charge you interest for margin loans, and sell order flow. The most innovative prospect is to the plan to sell API access to other financial apps.

User interface. Over the last 10 years, I’ve opened an account at the majority of the “discount” brokerage firms. I’ve had $0 trades before, along with $2 trades, $2.50 trades, $4.95 trades and so on. What makes Robinhood special is their modern, app-centric approach. I agree with this quote from Wired:

But the app’s simplicity is meant to be about more than style. Ease of access and understanding is meant to make Robinhood compulsively engaging for a new generation of investors that don’t find the stock market very accessible from the mobile screens at the center of their lives.

Even though I don’t trade frequently and I only hold one ETF in this account, I still check the app all the time. That’s more often than my primary Vanguard account. Why? Because it’s so easy. It takes only 5 taps. One tap on the Robinhood app logo, and four quick taps to type in my PIN. If I had a more recent iPhone, I could use Touch ID and get in with a tap and a thumbprint. I know, security, but I just won’t type in a 16-character password on a tiny keyboard just to check a balance.


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Recap. Robinhood delivers on their free stock trades with no minimum balance promise. The app-only user interface is clean and intuitive, if a bit minimalist on features like order types. You do give up some traditional brokerage features like phone customer service and paper statements. I’m still skeptical about whether they can make the economics work over the long run, but they do appear to be streamlining wherever they can.

More: Fee Schedule, Official FAQ, Techcrunch, Buzzfeed

Note: If you’re still on the waiting list, they state plans to onboard you within the first two months of 2015. If you’re signing up now, you can set up a stock watchlist on the app, but don’t expect to open an account for a couple of months.

LendingClub IPO for P2P Loan Investors: First Day of Trading Over

(Updated. Lending Club ended their first day of trading at $23.43 a share, up 57% from their IPO price. With roughly 361 million outstanding shares, LC is roughly a $8.5 billion dollar company! I have updated the post to include the rest of the IPO documents and process. I ended up selling my 100 shares for roughly a $800 gain during the first day of trading. Details and rationale below.)

LendingClub connects individual borrowers with individual lenders, and I’ve been writing about them since 2007. They successfully had their IPO on Thursday, December 11th, 2014 and they actually set aside a few shares for individual investors. Usually you’d either need serious cash or insider access. If you were an investor at LC by 9/30/14 you should have gotten an e-mail asking if you were interested.

I participated in this IPO for a few reasons:

  • I’ve been a lender on LendingClub since 2007 and have been following their progress since.
  • I have never participated in an IPO before, and am curious about the process.
  • I view this investment as purely speculative. It is not an investment, it is a gamble!
  • I can commit as little as $250 and up to about $5,000 (details below). I can choose a number that will keep my interest but it won’t break the bank either way.

I’ve documented the process below:

11/17/2014. I got an e-mail with the subject “Lending Club IPO – Directed Share Program (DSP)” telling me that I was eligible to participate and that I had to opt-in to sharing my information with Fidelity Investments. Here is a screenshot:


I clicked, and then was instructed to wait. (More below)

[Read more...]

Bogle Interview: Why You Don’t Need International Stocks, Why To Hire An Advisor

Whenever Vanguard founder Jack Bogle speaks, I listen. He has spent more time thinking about how to help the average investor than I have been alive. I found this recent Bloomberg interview covered a lot of topics regarding portfolio construction. Here are my notes, I have paraphrased what is not in quotes:

  • “The best thing you can do for yourself is to make your choice [of a long-term strategy], keep it simple and stick with it.”
  • The traditional 60/40* balanced fund is still a fine, simple choice for a portfolio. He prefers that over a target-date fund. (*60% stocks, 40% bonds)
  • For the stocks portion, a traditional total US stock market fund is fine. You can add a little international stock exposure, but you don’t need it. The long-term returns for foreign companies will likely be similar but with increased currency risk.
  • For the bond portion, a traditional total bond fund is fine. Higher yield won’t come without higher risks.
  • Even if valuations are currently high on a relative basis, you should take the long-term view and invest now.
  • “Financial planners and advisers need to sell their value as keeping their clients from doing the wrong thing at the wrong time.” That is their value-add, and it can be significant.

Keep in mind these are Bogle’s opinions and not necessarily my own.

Vanguard Adds Two-Factor Authentication

vglogoVanguard has announced that they now support two-factor authentication via SMS text messages when logging into your financial accounts. There should be a little blurb when you log in, or after logging in you can navigate to “My Accounts > Account maintenance > Security code” to activate it.

I definitely appreciate the availability of two-factor authentication, although my actual usage depends on how often I have to use it and the importance of the account. Since my Vanguard accounts contain a significant chunk of my assets and I usually log in less than once a week, I enabled it immediately. Here are the highlights:

  • If activated, you’ll receive a unique 6-digit code via text message that can only be used once to gain access to your account. The code will expire after 10 minutes.
  • Security codes sent via e-mail, phone call or other methods are not supported. No future plans are mentioned.
  • You can choose to receive a security code every time you log in, or only when Vanguard doesn’t recognize the device that you’re using. This can be a good compromise if you log in frequently from the same computer.
  • You’ll still need your current user name and password. You may also need to answer your previous security questions like “high school mascot?” when calling Vanguard.
  • Security codes work with and their official mobile apps. They do not work with
  • Two-factor authentication may conflict with financial aggregation tools such as, Personal Capital, or Yodlee.

Also: is a nifty website that tracks which financial websites (and other services) offer two-factor authentication.

Chart: International Bonds and Risk-Adjusted Returns

Here another data point on the topic of adding international bonds to your portfolio. The AllianceBernstein Blog has post on how adjusting the US/Global mix of your bond asset allocation affects risk-adjusted returns:


Using data from 1994-2013, you can see some trends as you go from 100% US bonds to 50/50 to 100% International ex-US (hedged). As you add more international the historical return drops a little bit, but the volatility drops even more. Thus, the risk-adjusted return actually goes up (dotted-line). The author suggests a 50/50 US/non-US mix as a “realistic target”, while reminding you that if you do add international bond exposure it should be currency-hedged.

Also note the fine print that the chart measures the performance of an index, while international bond funds usually have higher fees in the real world. For example, the Vanguard Total International Bond ETF (BNDX) has an expense ratio of 0.20%, while the domestic Vanguard Total Bond Market ETF (BND) has an expense ratio of 0.08%. The gap is smaller that it used to be, but it still exists.

So it is a critical asset class to include? International bonds are the world’s largest asset class by market cap. Since 2013, Vanguard has included international bonds in their Target Date Retirement and LifeStrategy all-in-one mutual funds – currently 20% of the total bond allocation.

I’m still not convinced myself. I think there may be a benefit in a real-world portfolio, but it likely will be small and even smaller after the higher fund fees and internal trading costs. I just don’t feel the need for such added complexity. As the cost gap shrinks further, I will reconsider.

Morningstar Top 529 College Savings Plan Rankings 2014


Investment 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 2014. 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.

Morningstar uses a Gold, Silver, or Bronze rating scale for the top plans and Neutral or Negative for the rest. The criteria include five P’s:

  • 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.

Here are the Gold-rated plans for 2014 (no particular order):

  • T. Rowe Price College Savings Plan, Alaska
  • Maryland College Investment Plan
  • Vanguard 529 College Savings Plan, Nevada
  • Utah Educational Savings Plan

Here are the consistently top-rated plans from 2010-2014. This means they were rated either Gold or Silver (or equivalent) for every year the rankings were done from 2010 through 2014.

  • 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)

I collected the previous individual year rankings from 2010-2013 last year. Utah only missed on out the consistent list because they weren’t top-ranked in 2010.

Again, either you go for the in-state tax savings, or pick a top plan from any state. Ignoring state tax differences, my standard recommendation is to pick either Nevada or Utah, although many other state plans may have specific investments that will work just fine. The Vanguard-branded 529 Plan has low costs, decent investment variety, and a long-term commitment to passing on future cost-savings. The Utah 529 plan has very low costs and is highly customizable for DIY investors.

Chart: Stocks and Bond Returns Tend To Move In Opposite Directions

Inside this AllianceBernstein post about the more complex concepts of levering bonds and risk parity strategies, there was a reminder about simple portfolio construction. For a very long time now, holding both stocks and bonds has been considered a “balanced” portfolio. Why is this? Because stocks and bond returns tend to move in opposite directions.

This behavior can be summed up using the finance term Beta. The 5-year rolling average beta of the S&P 500 return to the 10-year US Treasury return has consistently ranged from negative 0.1 to negative 0.3 over the past decade. This means that when when stocks went up, bonds tended to go down (but not too far down). When stocks went down, bonds tended to go up (but not too far up).


Always good to have a reminder of the benefit of holding both stocks and bonds.

How to Win the Loser’s Game: Free Documentary recently released a free documentary about the fund management industry and the effect of their high fees on the returns of everyday citizens. “How to Win the Loser’s Game” includes interviews with Vanguard founder John Bogle, Nobel Prize-winning economists Eugene Fama and William Sharpe, author and wealth manager Larry Swedroe, amongst many others. While the publisher is UK-based, most of the concepts are widely applicable to all fund management. The film is broken down into 10 different parts, each about 8 minutes long.

If you are a visual learner and rather watch an educational video than read a book, this documentary is definitely for you. The brief episodes gradually cover the benefits of a low-cost, long-term, low-maintenance, diversified investment strategy. Here’s the trailer, which ends with links to all 10 episodes.

Top 1% of Income at Age 30 = $135,000 a Year

I’ve never been into the whole 1% politicized debate, but Derek Thompson at The Atlantic has put out another chart that just begs for a glance.

The richest percentile of Americans makes many hundreds of thousands of dollars a year. So how could a $135,000 salary make you a one-percenter? If you’re 31 or younger, that figure puts you ahead of 99 percent of your age group.

Here’s what salary it takes to be in the top 1% (red) and 0.1% (blue) of wage and salary income, separated by age bracket.


Okay, so some people I know apparently were in the top 1%e at age 30. But as the author points out, the really rich don’t make their money from earned income, they make it from investment income. In other words, their money is doing the working, not them. However, that all likely started with someone (perhaps them, but perhaps a father or grandmother) deciding not to spend their salary on consumer goods and instead putting it towards an income-producing asset.

Remember kids, it’s not what you make that matters, it’s what you save! ;)

REITs and Rising Interest Rates

risingqSince March 2009, the FTSE NAREIT All Equity index of US real estate stocks has has nearly quadrupled. When will the party end? Mathematically, we know that bond values will go down in general if interest rates rise. But how would rising interest rates affect future REIT performance?

Here are some articles that examine historical REIT performance relative to interest rates: A Wealth of Common Sense, AllianceBernstein Blog, and Altegris Whitepaper [pdf].

The TL;DR version is that based on historical data, an increase in interest rates will not necessarily hurt REIT prices. Sometimes it did, sometimes it didn’t. Out of the seven past periods of rising interest rates, REIT performance was positive in four of them and sometimes they kicked butt. The average statistical correlation between REITs and bonds is very low. On top of that, the actual correlation oscillates from positive to negative. Sometimes REITs and rates move in the same direction, and sometimes they move in opposite directions.

Using predictions of future interest rates to further make predictions of future REIT performance seems doubly silly.

REIT Primer: Should You Add REITs To Your Retirement Portfolio?

empireHere is a fairly balanced and informational Morningstar article about real estate investment trusts (REITs). Below are my notes and excerpts:

  • Equity REITs are publicly traded companies that own and manage income-generating real estate properties. REITs are required to distribute at least 90% of their income to investors, which allows them to avoid paying corporate taxes. The bad news is that most of their distributions are taxed as ordinary income.
  • In order to further improve diversification, investors can hold a portfolio of REITs through a low-cost fund, like the Vanguard REIT ETF (VNQ). (This is how I hold my REITs, via the mutual fund equivalent VGSIX and VGSLX.)
  • REITs represent about 3.6% of the CRSP US Total Market Index, which tracks the entire U.S. investable equity market on a market-weighted basis.
  • Much like homeowners with mortgages, REITs buy properties using debt financing. This leverage amplifies both gains and losses in real estate values and increases share price volatility. In other words, REIT values will be a lot bumpier than just estimated your home’s resale value whenever a neighbor sells their house.
  • From 1972 through September 2014, the FTSE NAREIT All Equity REITs Index generated a 12% annualized total return, while the S&P 500 posted 10.5%.
  • Nearly two-thirds of the REIT index’s return from 1972-2014 came from distributions, which are largely derived from rental income. Investors should have modest expectations for capital gains.
  • REITs have historically not been a good hedge against inflation in the short term. As noted, long-term returns are significantly above inflation.
  • Current REIT valuations as of November 2014 are considered relatively high by traditional metrics.

Random fact: Did you know you can buy partial ownership of the Empire State Building in New York City via the Empire State Realty Trust (ticker ESRT)? You’d be collecting rent from some big name tenants. ESRT currently makes up about 0.17% of the Vanguard REIT Fund, so if you own VNQ you also own a tiny piece.