Archives for May 2010

Now that I’m probably going to set up Vanguard Brokerage Services (VBS) with a taxable account, I did an online chat to figure out their funds availability rules for buying and selling stocks. The main reason is that their money market funds don’t yield very much right now (0.04% for Prime Money Market), so I want to keep my cash elsewhere.

Bank Transfers, Trade Dates, and Settlement Dates
According to their bank transfer policy, transfers from a bank to a money market fund submitted before 10 p.m., Eastern time, on a Vanguard business day will receive the next business day’s trade date. Purchases submitted “after 10 p.m., Eastern time, or on weekends or holidays will receive a trade date of the second business day after your submission.”

Your bank account will be debited on the business day following your trade date (typically two business days after you enter your purchase request). For most mutual funds, the settlement date is one business day after the trade date. This is known as “T+1”.

Stock Settlement Timing, T+3
When you buy a stock, the settlement date is three business days after the trade date. This is known as “T+3”. According to the SEC, this rule means that when you buy securities, the brokerage firm must receive your payment no later than three business days after the trade is executed.

What Does This Mean?
Let’s say I get the urge to buy some shares of VWO while the market is still open, call it Day 1. But my sweep money market is empty. I can actually place a buy order for VWO as long as I place a bank transfer on Day 1 as well, and I already have other assets at Vanguard. (There may be a warning message, but you can override it.) Theoretically, my trade date will be Day 2 and my bank account will be debited on Day 3. Therefore, the money will be ready by the due date of Day 4.

This is nice, because it means I don’t have to keep any cash in the sweep account until I wish to make a purchase (as long as it’s not larger than my existing assets).

Warnings
However, you should be sure that you have money in the bank, because if the bank transfer does not go through, Vanguard has the right to sell your other assets (mutual funds, etc.) to fill that VWO order. They won’t just cancel it, because otherwise this would be an easy way to cheat the market if the stock price dropped in the meantime. The Vanguard Rep said that they would call you in this case, probably to either get you to wire money over or have you choose what assets to be liquidated.

Another option would be to enable margin on your accounts, which lets you borrow money against your other assets and pay interest. You can then use that borrowed money to buy stocks. Sometimes paying a few days of interest is worth the flexibility.

Vanguard recently announced a much lower commission schedule for Vanguard ETFs (free!) and all other common stocks when using their Vanguard Brokerage Services (VBS) account. With VBS, I can now buy and sell stocks, bonds, ETFs, CDs, and non-Vanguard mutual funds. If you meet certain asset level requirements, this would allow folks to add a great deal of flexibility to buy to my account at no added cost. If you have less than $50k in total household assets, there is a $20 annual fee (although it still might be worth it).

Last week, I opened a new Vanguard Brokerage Services account in my existing Roth IRA, which previously only held Vanguard mutual funds. The process was straightforward and much like opening any other brokerage account, except that most of my personal information was already filled in. From the Vanguard Brokerage FAQ:

How do I open a Vanguard Brokerage Services account?
To open a brokerage nonretirement account, traditional IRA, Roth IRA, SEP-IRA, or education savings account, you can:

* Complete an application form online. Use an e-signature to sign it, and then submit the form.
* Download an application form. Complete the form and mail it to Vanguard Brokerage Services.
* Request a form by mail. Contact us and we will send you an account application.

You can also call them up and have them start your application for you over the phone, although you’ll still have to finish it online. After logging in, I clicked on the “Complete an application form online.” option followed by “Add a new brokerage account to your existing Vanguard relationship.” This brought me to an overview screen (click to enlarge):

Application Highlights

• I confirmed the Roth IRA account and my personal information. As an existing client, all of the information was pre-filled.
• I chose whether I wanted to automatically reinvest dividends or transfer them to my money market settlement account.
• I chose the money market fund that I wished to be my settlement account. The only choice was the Prime Money Market Fund (VMMXX), as this was a retirement account. For taxable account, I could have also chosen the Tax-Exempt Money Market Fund. Since this is the sweep account where all the cash sits when not invested, there is no minimum balance requirement.
• I entered my employment information and industry affiliations, which is required on all brokerage accounts.
• I reviewed funding information (bank transfer, check, wire, selling shares). Since I already have some bank accounts linked, I can fund later using those methods after the account is opened.
• I chose to electronically sign the application. It took about a business day or so for the account to be approved. I did not need a notary, medallion signature guarantee, or any other physical paperwork.

In total, this took less than the 10 minutes suggested. I knew that my account was approved when I logged in the next day and was asked to sign various agreement for stock quotes from the NASDAQ, NYSE, and Options Price Reporting Authority. While viewing my accounts, I really didn’t notice much difference except for the new money market fund that popped up in my Roth IRA.

I haven’t made any trades yet, but since it is an IRA and I’ve already made my contributions this year, I will have to either sell or convert some of my existing mutual fund holdings. I did make a few test runs on the stock trading interface. There is a regular interface like all other brokerages and a “guided trading path” version which is a Q&A-based system for “investors with limited online trading experience.” Nothing terribly special to report there.

In summary, in my experience the VBS opening process for an existing customer was very easy with no surprises. If this was a taxable account, I could simply use an online bank transfer and start trading as soon the funds were available. I am still doing some research on funds availability and settlement times for when you want to make a trade quickly.

LendingClub requested an opportunity to clarify the Net Annualized Return measure and overall Lending Club performance discussed in my updated analysis based on historical return data. I’m just going to go ahead and share it in its entirety. The following is provided by from Renaud Laplanche (CEO) and Rob Garcia (Sr Director of Product Strategy).

Is Average Net Annualized Return Meaningful?
The first question raised was whether or not the aggregate 9.64% net annualized return is representative of a track record that is long enough to be meaningful, considering that it includes many loans issued recently. This is a valid question, and we believe the answer is positive: the average age of the Lending Club portfolio is around 12 months and, considering that it takes 4 months for a loan to default, a 12-month average age is really reflective of an 8-month track record. In a 3-year unsecured loans portfolio, defaults typically occur faster in the first 6 to 8 months, after which they start to level off. See for example data provided by our friends at ZOPA, who service a portfolio with characteristics similar to the Lending Club portfolio.

[Read more…]

LendingClub is supposed to provide me with an official response to my updated analysis of their loan performance numbers. Hopefully it will shed more light on how their advertised returns are calculated.

While I’m waiting for it, here is another chart I put together for prospective lenders using data from LendingClubStats.com, which pulls directly from LendingClub’s own statistics database. The full term for LC loans are 36 months (3 years). This chart organizes all loans by their age, allowing you to compare new loans and old loans on a more equal basis. Only officially defaulted loans are included, not late loans with payments up to 120 days late. The numbers are sorted by credit grades A through G.

I’ll let the numbers speak for themselves for now, and save my opinions for another time.

New Lender Incentives – Free $25 to $250 Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’ve done your research and are willing to jump in with both feet, those that are willing to invest at least $2,500 at once and link a bank account can get a $100 bonus when you get a referral from an existing member. (Yes, you must actually invest $2,500 in loans.) Send me an e-mail if interested.

You can also view my personal LendingClub portfolio details here.