Ohio CollegeAdvantage 529 Promotion Code: $50 New Account Bonus

The Ohio CollegeAdvantage Direct 529 college savings plan is offering a $50 bonus contribution if you open a new account and invest at least $100 of your own money. A guaranteed 50% return-on-investment! The promotion code is PLAN. Expires November 18, 2011. The $50 bonus will be applied on or about March 15, 2012 as long as the account is still open. You can easily set up an automatic contribution of as little as $25 every month. I’ve had mine going for over two years now, and I barely notice it anymore.

How is good is the Ohio plan relative to other state plans? Well, you should always check if your own state plan has special incentives. Mine doesn’t, and I hold my 529 assets in the Ohio plan. Another good one is Utah, although most plans with Vanguard investments are going to be well below-average in costs. I like Ohio because they offer low-cost conservative investments for college, including high-yield CDs and inflation-indexed bonds. I should have bought more of that 10-year CD at 5% APY.

Posted in College & Education, Deals & Offers, Investing | 2 Comments »

Vanguard Lowers Fees and Improves My Portfolio Performance Again, Offers More Admiral Shares

Last week, Vanguard officially announced the addition of the Admiral share class to six of their existing index funds. Admiral shares have a higher minimum investment amount ($10,000 for those listed below) than the usual Investor shares ($3,000 for those listed below), but with lower annual expenses. Every time my costs and fees go down, my future performance goes up! Below is a list of the newly-available funds, along with an expense ratio comparison.

The only one I am converting over this time is the Small Value fund. However, I did notice that this now means that for every single Vanguard stock index fund I choose to own, I can choose between both Admiral shares and ETF versions. I like mutual funds because they always trade at NAV and don’t have bid/ask spreads, as well as the ability to schedule automatic monthly investments. ETFs have the advantage of not having any purchase or redemption fees and the ability to be trade in any brokerage account. I went into more detail on the Vanguard mutual fund vs. ETF decision process here.

Vanguard even has a cost comparison tool for mutual funds vs. ETFs. But long-term expenses for me are no longer a concern because they are almost identical with all these Admiral shares. (I suspect the Small Cap Value differential is only temporary.) Here’s the list:

I wrote previously about why I invest in the Vanguard Total US and Total International market funds. Want to convert your Investor shares to Admiral shares before they are automatically converted eventually? It just takes a clicks online – here’s a quick guide [pdf]. Want to convert your mutual funds to ETFs? Check out this post on Vanguard mutual fund to ETF share conversions. It turns out you can also do so easily with minimal tax implications.

Posted in Investing, Retirement | 9 Comments »

Why Emergency Funds Can Provide The Best Return On Investment

Many recent articles and surveys have illustrated how many American are basically living paycheck-to-paycheck, with no significant savings cushion:

• Most Americans can’t afford a $1,000 emergency expense – “A majority, or 64%, of Americans don’t have enough cash on hand to handle a $1,000 emergency expense, according to a survey by the National Foundation for Credit Counseling.”
• Many don’t have $2,000 for a rainy day – “A new study by the National Bureau of Economic Research shows 50% of Americans would struggle to come up with $2,000 in a pinch.”
• CareerBuilder.com Survey – “Forty-two percent of workers in the survey of more than 5,200 workers say they usually or always live paycheck to paycheck”

Along the same lines, a reader introduced me to an interactive poverty “game” called Spent, in which you try to make it through one month as an unemployed worker looking for a job and housing with their last $1,000. Try it out, and you’ll have to make some touch choices.

In just one month, I managed to get sick, need dental work, receive an undeserved traffic ticket, my best friend gets married and I can’t go, my mom needs money for medicine, my landlord raises the rent illegally, and my child refuses to eat the government-subsidized lunch. Seems a bit unlikely, yes. But a combination of a streak of bad luck and lack of support is exactly how you might end up in such a scenario.

In addition to the societal issues this brings up, from an individual point-of-view, I found that this simulator shows how living close to the edge is often significantly more expensive than someone with a cash cushion. Being poor can cost more than being rich. Consider the following:

• If you don’t have enough money for a security deposit, you’ll have a hard time renting an affordable apartment. Many renters are thus forced into long-term motels that actually charge more on a monthly basis.
• If you can’t afford a car repair, you can’t make it to work and face the prospect of losing your job.
• If you don’t pay for preventative medicine, you can end up needing more expensive treatment later.
• If you have a low balance on your bank account and overdraft by just $10, you’ll get hit with a $35 overdraft charge.
• If you just don’t pay the bill, you’ll get a late fee charge.
• If you don’t pay the bill for consecutive months, you’ll get your gas/electricity service shut off and be subject to an additional $250 deposit to get it back on.
• If you charge any of this on a credit card and don’t pay off the balance each month, you’ll owe 15-25% interest. That’s if you have the credit history to get a credit card. If you go with a payday loan instead, you’ll owe more than 100% annualized interest.

For this reason, one of the first financial steps a person should take is to save up a cash cushion. That emergency fund can easily save you more money than a 20% increase in the stock market. I would tell my own child to forget saving for retirement until you have a least a couple months of expenses saved up. Luxuries like smartphones, alcohol, cable TV, and dining out should be off-limits until then as well.

One should expect “unexpected” expenses. Even though I have a relatively high income, I place great value on my emergency fund.

Posted in Frugal Living, Investing | 19 Comments »

Build A Complete Stock Portfolio With Just Two ETFs: Vanguard Total US (VTI) and Total International (VXUS)

If you are constructing your own portfolio and like the idea of low-cost, passively-managed index funds, you should definitely be aware that just two ETFs that can provide you diversified exposure to stocks worldwide and all at rock-bottom fees. Given how many choices there are out there today, I can’t assume that everyone knows about these already.

The Vanguard Total US Stock index fund invests in over 3,000 stocks that represent the entire U.S. stock market, from small-cap to large-cap companies. The smallest company on their holding list is 100 shares of Qualstar Corp, worth a mere $200. The entire company is worth about $20 million. Compare that to the largest holding of Apple, worth $380 billion (that’s 19,000 times larger). The ETF and Admiral shares have a mere 0.07% expense ratio ($7 annually per $10,000 invested), which is taken out in tiny amounts daily out of the fund’s net asset value. That’s just 6% of what the average mutual fund charges. There are three versions:

• Vanguard Total Stock Market ETF (VTI)
• Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
• Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

The Vanguard Total International Stock index fund invests in over 6,000 stocks that covers 98% of the world’s investable markets excluding the US (“ex-US”). This includes 44 countries from the “European, Pacific, and emerging market regions, as well as Canada.” The fund also includes both small-cap and large-cap companies from these countries. The ETF and Admiral shares charge a 0.20% expense ratio. Three versions as well:

• Vanguard Total International Stock ETF (VXUS)
• Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
• Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)

This graphic shows you how these two funds relate to other Vanguard ETFs you may already be aware of:

(Source, brighter red text is added by me)

(I should also mention that there is the Vanguard Total World Stock ETF (VT), which covers the entire world in one tidy fund. However, it only holds 2,904 stocks total, which is nearly 2/3rds less than a VTI/VXUS combo. On top of that, it charges a 0.25% expense ratio, which is nearly double how much a VTI/VXUS combo would cost when weighted appropriately. I personally think the added diversification and lower cost is worth the hassle of owning two separate funds.)

Implementation

As of August 31, 2011, the world market value breaks down to about 42% US and 58% Ex-US. For simplicity, I chose to own VTI and VXUS in a simple 50/50 ratio as part of my target asset allocation. I rebalance back to 50/50 regularly using new cashflows, and also at least once annually. Bonds are a separate discussion.

Side note: The reason I thought of writing this is that I previously held Vanguard FTSE All-World ex-US ETF (VEU) as my primary international holding, which as you can see above is a subset of VXUS, but realize that VXUS only arrived earlier this year. I’ve shifted most things over already, but I have been hesitant to sell some of my taxable holdings because I’d owe capital gains taxes. I noticed yesterday that I am actually at slight loss now (yay?), so I am able to do some tax-loss harvesting by selling my VEU and swapping it for VXUS. Since they are not “substantially identical” funds, I am not subject to wash sale rules.

Posted in Investing, Retirement | 17 Comments »

Vanguard Allows Same-Day Trades With Bank Transfer Funding

If you have an account with Vanguard, you may have noticed them rolling out improvements to their online interface this month. If not, try logging in and see if you notice anything different. Today, I received an e-mail that they are also improving their funds availability rules when buying mutual funds with online bank transfers:

Same-day trades with electronic bank transfers
Now you can get today’s trade date if you use our electronic bank transfer service to buy a Vanguard mutual fund. Just submit your request on business days before the close of regular trading on the NYSE (generally 4 p.m., Eastern time) and you’ll receive that day’s closing price.

Finally! I placed at trade and it appears to have worked. The previous rule was that if the purchase was before 10pm Eastern of Day 1, then you will get the purchase price as of closing on Day 2. So even if I wake up at 6 am in the morning on Thursday and place a trade, I would get the price as of market close at 4pm Eastern Friday. Your bank account is debited on Day 3.

Others have reported receiving this notice weeks ago, and while I’m happy to see it in my account, I also think it was long overdue. You can already get the same-day closing price if you exchange from another mutual fund already in the account, like a money market fund. So basically what they were saying is that they don’t trust that your bank funds would clear. However, it takes 3 business days (T+3) for things to clear anyway, so it’s not like you could run off with the money. I have been able to initiate a money transfer into my Scottrade account and start buying stocks seconds later for years. This way, I don’t have to keep money sitting around in a money market fund earning zero interest.

You could argue that if I’m not timing the market then I shouldn’t really care when the trade clears. But the way I see it, I am rebalancing my account and buying what has been dropping. I would be highly annoyed if the stock market bounced up 5% the next day, meaning I shouldn’t have rebalanced at all.

Posted in Investing | 11 Comments »

Rising Rents, Flat Home Prices, and Owning REITs In My Portfolio

The NYT Economix blog points out that rents are rising again according to inflation data from the Bureau of Labor Statistics. The chart included doesn’t have zero on the y-scale, but a value of 100 corresponds to rent from 1982-1984. Rents nationwide are about 40% above their values in 2000. I recently saw the last house I used to rent on Craiglist and the rent was up 15% from 4 years ago.

Credit: NY Times, Bureau of Labor Statistics, IHS Global Insight

There is definitely an increase in the number of renters, and perhaps there is also an overall psychological shift in that less people think homeownership is a part of the American Dream. Perhaps this means it’s a better time to be landlord? Home prices are still hanging around 2003 levels:

Credit: Marketwatch, S&P/Case-Shiller Home Price Indices

Although I know many successful people who are landlords, I don’t now if I’m cut out for it. However, I do like buying real estate investment trust (REITs), which allows me to collect rent like I collect stock dividends. (Not familiar with them? Here’s a post all about REITs.) I even did a comparison post of rental property vs. REZ, a residential ETF. I see REZ has done quite well recently.

Now, I’m not pushing REZ, and don’t own it myself. I continue to get my real estate exposure through the low-cost, passively-managed Vanguard REIT Index Fund, available both as a mutual fund and ETF. It tracks the MSCI US REIT Index and includes all kinds of real estate, currently holding 20% in residential ETFs that own things like apartment complexes. It like the diversification of this fund, even though it can be a rough ride, and in a struggling economy things like commercial properties will be harder to rent out.

Here’s the growth of $10,000 chart of both the Vanguard REIT Index Fund and the S&P 500 index, from mid-1996 to today. This type of chart accounts for total return, including dividends.

The REIT fund has done better than the S&P 500, which some may find surprising (or not) given the housing bust. As you can also see, they don’t always move together, which is good. Including REITs and rebalancing has offered a way to achieve better returns even if you like a simple buy and hold portfolio. I can’t guarantee that this type of helpful diversification will continue in the future, but I’m happy with my current portfolio right now, and am glad to be a lazy “landlord” in this manner.

Posted in Investing, Real Estate | 4 Comments »

Jack Bogle Makes Market Prediction For Next Decade

I don’t usually post market forecasts, but I just wanted to jot this one down for posterity. Jack Bogle, founder of Vanguard, is interviewed in a WSJ article Why a Legendary Market Skeptic Is Upbeat About Stocks where he makes a prediction of 7% annual returns for stocks for the upcoming decade. He correctly predicted 10%+ gains for the 1990s, and also low single-digit returns for the 2000s. Let’s see if he’s correct for the 2010s.

Over the next decade, Mr. Bogle said stocks are likely to generate an average annual return, including dividends, of around 7%. “Your money will double in 10 years,” he said. “How bad is that? People ought to get over the illusion [of higher expectations] and realize that they may have to invest for longer time periods, start earlier and save more.”

There other good observations in the article, although they won’t surprise any Bogle followers. I previously wrote about Bogle’s future return prediction methodology where total stock returns are the sum of earnings growth (aligns with GDP growth), dividend yield, and P/E ratio changes. The diagram below is reproduced from his 2007 book Little Book of Common Sense Investing, which also shows us a 7% forward prediction at the time. Well, we’ve got some catching up to do…

Posted in Investing | 12 Comments »

Vanguard Target Retirement Income Fund vs. Vanguard Wellesley Income Fund

There’s a ways to go, but we’re still aiming to retire within the next 10 years. As such, I’ve been thinking about what happens when we want to live off of withdrawals from our retirement portfolio. According to the passively-managed Target Date funds by Vanguard, if you reach retirement you’re directed to the Vanguard Target Retirement Income fund. Another popular option for retirees is the Vanguard Wellesley Income Fund, which has been around for over 40 years, and is actively-managed by Wellington Management Company, an advisory company that has been around since the Great Depression. Let’s take a quick look to see how these two funds compare.

Vanguard Target Retirement Income Fund (VTINX)

This fund seeks to provide “current income and some capital appreciation”. The approximate asset allocation is 30% stocks, 65% bonds, and 5% cash. It is a fund of funds, holding the Vanguard Total Bond Market II Index Fund, Vanguard Total Stock Market Index Fund, Vanguard Inflation-Protected Securities Fund, Vanguard Prime Money Market Fund, and Vanguard Total International Stock Index Fund. Here is the current asset allocation per Vanguard as well as the equity and bond style boxes from Morningstar.

Number of stocks held: 9,958 (3,323 US + 6,635 Foreign)

Number of bonds held: 4,486 (4,450 nominal bond + 36 TIPS bonds)

Expense ratio: 0.17% ($170 a year on a $100,000 balance)

Vanguard Wellesley Income Fund Admiral Shares (VWIAX)

This is an income-oriented balanced fund, which is another way of saying the same thing as above. The approximate asset allocation is 35% stocks, 65% bonds. I am choosing the Admiral shares as opposed to the Investor shares because the great majority of people using this for their retirement will reach the $50,000 minimum balance. Here is the current asset allocation per Vanguard as well as the equity and bond style boxes from Morningstar.

Number of stocks held: 60

Number of bonds held: 559

Expense ratio: 0.21% ($210 a year on a $100,000 balance)

Commentary

The overall asset allocation of the two funds is very similar, especially since you could consider cash/short-term reserves as bonds. However, how they are constructed is very different. Target Retirement is passively indexed on a market-cap weighted distribution and holds nearly 10,000 stocks from around the world. Wellesley is actively-managed to include only 60 selected dividend stocks from primarily large, US companies.

As for bonds, Target Retirement follows another market-weighted index of the Barclays Capital U.S. Aggregate Float Adjusted Bond Index. There is a large chunk of US Treasury, US Treasury Inflation-linked, and US Agency mortage-backed bonds. Wellesley is mostly in corporate investment-grade bonds.

Wellesley is produces more of it’s returns as income through stock dividends and the higher bond yields from corporate bonds, with a current SEC yield of 3.28%. This allows the psychological benefit of possibly spending only the dividends that the fund distributes every quarter. However, there is the concern that 60 stocks is not enough diversification, or that their bond analysts might drop the ball. Here is the growth chart of $10,000 (click to enlarge):

At least historically, the managers of Wellesley have added value. Will it continue? Unknown. The good news is that with such low costs, there’s one less reason to expect underperformance in the future. These are just an example of what is out there, although on some early retirement forums I see folks simply holding a 50/50 split of these two exact funds. Sometimes I think everyone should just start with these kind of low volatility funds in the first place, and just reinvest dividends.

Posted in Investing, Retirement | 12 Comments »

Poll: How Would Winning The Lottery Change Your Investment Risk Tolerance?

In a discussion about risk on the Bogleheads forum, member John Norstad brought up an intriguing question. Let’s say you won $1 million (net after taxes) in the lottery tomorrow. This money will get added to your existing investment portfolio, and may or may not be enough to allow you to fully “retire” as you would like to. As a result, how would you change your investment style?

Make it more aggressive. Sample reasoning: Now that I have a head start and a cushion, why not gamble a little and see what happens? I should buy more stocks, and perhaps I can retire even earlier or with a bigger nest egg. This is given the term Decreasing Relative Risk Aversion (DRRA).

Make it more conservative. Sample reasoning: I’ve just gotten much closer to my goal, and I don’t want to mess it up. I can now invest more in safer things like bonds and be more confident in reaching my goal eventually. Known as Increasing Relative Risk Aversion (IRRA).

Keep it the same. Sample reasoning: I have a set allocation set up, and I see no reason to change it. Anything I don’t spend, I will leave to my heirs. Known as Constant Relative Risk Aversion (CRRA).

If you won the lottery, how would you adjust your investment style?

• I would invest more aggressively and take more risks.
• I would invest more conservatively and take less risk.
• I would keep my same portfolio asset allocation.

View Results

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Posted in Investing | 20 Comments »

TradeKing $100 New Account Bonus Via Referral (September 2011)

Online stock brokerage firm TradeKing.com has a $100 bonus via referral promo for September 2011. If you get a referral from an existing account holder, open a new account with at least $1,000, and make a trade, both people will get $100. TradeKing offers $4.95 trades (market & limit) with no minimum balance requirement. I’ve had an account for years now, and they’ve gotten the job done without issues. They’ve recently added some social community features (which I don’t use), and were rated #1 in customer service by SmartMoney magazine in 2010. The details:

• New customer must fund new non-IRA account with a minimum of $1,000 within 30 days of new account opening, and must execute one trade within 180 days of new account opening.
• The minimum funds of $1,000 must remain in the account (minus any trading losses) for a minimum of 180 days of new account opening or the credit may be surrendered.

A new feature is that they allow referrals by Twitter, so you should just be able to simply click on this special referral link and be done with it. There is no promotion code, but the page does show:

Thanks for taking your friend’s suggestion to open a TradeKing account — we think you’ve made a great decision. We’ll treat you like a best friend should, we promise, and as a bonus, we’ll put $100 in your account.**

If you’d like an official referral just contact me, and I’ll be happy to send you one. I only need your e-mail address, please allow 24 hours. Offer expires Septmeber 30th, 2011.

Also, if you transfer an account of $2,500 value or greater from another broker over to TradeKing, they will also refund up to $150 in account transfer fees charged by your old broker. Both promotions are able to be combined.

Posted in Deals & Offers, Investing | 3 Comments »

U.S. Savings Bonds Have Outperformed Stocks Since 1998?

A reader recently told me that he was no longer investing in the stock market after seeing the chart below from the Savings Bond Advisor. It shows the total portfolio value after investing equal monthly amounts in either the S&P 500 stock market index or Series I US Savings Bonds. The time period is from September 1998 (when “I Bonds” started being sold) through August 1, 2011. My comments follow.

The past returns of savings bonds are indeed pretty good, but not likely to be repeated. Series I Savings Bonds (I Bonds) were the new thing in 1998, and the government offered some really enticing interest rates on them. I Bonds have a fixed component that lasts for the duration of that specific bond and an variable component that adjusts with inflation every 6 months. From 1998 to May 2001, the fixed component was always between 3% to 3.60% above inflation (source). However, since May 2008, the fixed rate has been between 0% and 0.7%. For the past year, the fixed rate has been a big fat zero. I would love to have a savings bond paying 3% plus inflation (currently 2.30%), as some current bondholders have, but I don’t expect that to ever happen again.

Now, that doesn’t mean that they aren’t still a competitive investment, especially for the short term. Since interest rates are so low, I still buy savings bonds even at a 0% fixed rate as part of my emergency fund cash reserves.

Savings Bonds are being slowly killed by the government. Even though savings bonds have historically encouraged people of all income levels to save, it appears that the US Treasury is slowly killing the savings bond. As recently as 2008, you could buy $30,000 worth of each type of savings bonds a year, per person. For a while, we were able to even use credit cards to buy them without a fee. Today, you can only buy $5,000 of paper I-bonds and $5,000 of electronic I-bonds a year, and even paper savings bonds are being phased out in 2012. (You can still overpay your taxes and buy paper bonds with a tax refund in 2012.) There was even a NY Times article last week entitled Save the Savings Bond. Basically, even if you wanted to create your retirement portfolio with savings bonds, you can’t.

Investing solely in inflation-linked bonds is actually recommended by some financial authors. The thing is, the government has so much debt that it greatly prefers US Treasury bonds which can be sold by the billions. Printing a $50 savings bonds is not even a drop in the bucket, it’s closer to a H₂O molecule in the bucket. What you can invest in is Treasury Inflation Protected Securities (TIPS), which like I Bonds are backed by the government and pay an interest rate linked to inflation. Economics professor Kolitkoff in the book Spend ‘Til The End recommends your entire portfolio to be TIPS. The problem? You’re gonna have to save a lot. TIPS yields are very low, currently offering yields of negative 0.7% above inflation (!) for a 5-year bond to a meager 1.1% above inflation for a 30-year bond. If you’re okay with saving 50% of your income every year for 30 years, then this plan might work for you.

There is no easy answer as to the best place to invest right now. I am sticking with a diversified low-cost portfolio with both stocks and bonds (including a nice chunk of TIPS inside, which has done quite well recently), and you can see with this chart that it has also done pretty well the last decade.

Posted in Investing, Retirement, Savings Bonds | 24 Comments »

Building An ETF Portfolio: Using Limit Orders vs. Market Orders

In recent years, Exchange Traded Funds (ETFs) have been growing in popularity when building an investment portfolio. You can buy them from any discount broker, they have no minimum purchase amounts, and offer lower expense ratios than their mutual fund equivalents. Here are some sample ETF portfolios. On a case-by-case basis, I’ve been switching over some of my holdings from mutual funds to ETFs. But a practical question arises – Do you buy them with market orders or limit orders? This is in the context of buying and holding ETFs for a certain asset allocation, not for active traders.

Briefly, a market buy order is a request to buy an ETF at the best price available at that instant that someone else is selling it for. It will usually execute virtually instantaneously. On the other hand, a limit buy order is an order to buy a specific price or lower. If you can’t get that price, it will not execute. (There are more order types, but these are the only ones I use on a regular basis.) Limit orders are useful in IRA or 401k accounts when you have a set amount of money to work with.

Why I Always Use A Limit Order

Let’s say you want to buy an ETF like Vanguard Total US Market (Ticker VTI). If you pull up a quote, the big number they will show you is the last traded price along with a bid/ask. Let’s assume the last trade is $60 a share, and the bid/ask is $59.90 and $60.40. That means at that instant, someone says they will buy X shares at $59.90 (bid), and someone else will sell their shares at $60.40 (ask).

If you put in a market order and nothing changes in the meantime (computers are constantly trading every millisecond), then you’d end up buying shares at $60.40. However, there is a chance that those shares will be sold already, and nobody else is selling at that moment except for someone who wants $75. Not a high chance, but not zero. Then you’d be stuck buying at $75.

Alternatively, you can put your limit order for whatever price you like, and see if it hits. Now, what if you put a limit order above even the current ask? You’re basically saying, I want to make a purchase right now, and I’m willing to pay a certain amount more if absolutely required. Let’s say you use a limit order at $61, a small 1% premium to the last ask. My fear would be, would someone out there see that and sell me shares at $61, even if I could get them at $60.40 or even lower? According to this Schwab.com article, you won’t be taken advantage in such a way of because such action would be illegal:

Markets are not allowed to fill orders at a price worse than the market price, even if your limit order allows for it. Building in a little extra room to ensure your order is filled will not cause you to overpay—you should still be filled at the prevailing market price when your order comes to the front of the line.

This is called “best execution”. According to this SEC article, the quality of trade executions are constantly being monitored, even on a stock-by-stock basis.

In my own personal experience, I have entered many limit orders above the market price, and my fills are usually shy of my limit price and the same as market or lower. Even though I could have easily been ripped off, I wasn’t. As a result, I don’t bother with market orders. I just use a limit order, usually with a buffer, and I get protection from a price spike or “flash crash” situation and being stuck with a horrible fluke price, while at the same time my order is likely to be filled quickly at a price no worse than a market order.

How To Choose Your Your Limit Order Price
Okay, some how much buffer do you put in? It depends on what your personal requirements are. Maybe you only want to buy at a set price, so you don’t need a buffer at all. If you really want to make a purchase today and just want to enter one order and be confident you’ll get the shares, you could add anywhere from 0.5% to 5% on top of the current market price. If you really want to make sure you get the best possible price at the exact moment you’re staring at the ticker, you can simply enter a limit order somewhere between the bid/ask spread. However, you run the risk of the price inching higher and ending up having to pay more later. According to the Schwab article above, your chances change with the size of the spread:

The wider the spread, the greater your chance of order execution between the bid and ask. The reason a market maker may be more willing to lower the ask or raise the bid in order to trade with you is that he or she knows that investors are less willing to trade at the market price when the spread is wide. By contrast, when the spread is $0.05 or less, it will be more difficult to trade between the bid and ask. In such cases, you may want to consider a limit order at the bid or ask, since shaving a penny may not be worth the risk of the order not getting executed.

Finally, the time of day matters. The time periods right when the market opens and right before the market closes are known to have higher volatility. For buy-and-hold investors, you may wish to avoid this time if possible.

Posted in Investing | 8 Comments »