Archives for September 2010

Behind The Scenes: No Transaction Fee (NTF) Fund Supermarkets

September 20, 2010 By Jonathan Ping 3 Comments

After the Bogle/Hennessy squabble (here’s the latest), I’ve been digging for more details about mutual fund “supermarkets” where you can buy funds from various managers all with no transaction fee (NTF)… but at a cost. Charles Schwab introduced the concept first in the 1980s. Today, the Big 3 of fund supermarkets are:

Charles Schwab with 2,000+ NTF funds,
Fidelity Investments with 1,400+ NTF funds, and
TD Amertrade with 1,600+ NTF funds

How They Work

Each of these brokers currently charge fund companies 0.40% annually of their fund assets owned through their specific NTF network. So, if a mutual fund XXXXX had $200 million of assets total but only $100 million was through Schwab, they’d have to pay 0.4% of $100m ($400k) a year to Schwab. The fund has to then pass this cost onto investors. However, the annual expense ratio charged to fund investors has to be the same for everyone, no matter where they hold the fund. Therefore, the investors that own the fund through cheaper or more direct means are effectively subsidizing the NTF investors.

Result: Although they are cheaper to buy and sell, NTF funds tend to be more expensive when you look at their annual expense ratios.

TD Ameritrade raised their fee from 0.35% to 0.40% in April 2010 to match the other two, according to this InvestmentNews article. There is speculation now if this means Fidelity and Schwab may raise their rates again as well. Part of this is due to the fact that after the recent financial crisis there is even less competition, due to closures and mergers. (TD Ameritrade itself is a result of a merger of TD Waterhouse and Ameritrade .)

From this Kiplinger’s article, NTF funds can also hurt your net performance in other ways:

NTF funds typically receive a tidal wave of money when performance is red-hot. The money flows out just as rapidly when returns cool. That swift ebb and flow of dollars hurts a fund’s long-term returns because it forces managers to buy and sell securities at times when they may be better off doing the opposite. In-flows and out-flows are usually much less volatile for funds that are outside NTF networks.

The Convenience Factor

If you’re a small fund company, it’s probably a lot of work to sell directly to shareholders, and also you lack the marketing might of the big brokers. From a investor point-of-view, beyond avoiding any transaction fees, we also love convenience. From this RIABiz article:

Schwab and its rivals have gotten a stranglehold on the distribution of mutual funds because they are in the best position to provide the convenience of one-stop shopping and one-statement viewing that no individual mutual fund company ever could.

“It is true that investors can go direct to many of the larger fund families, but they give up a consolidated view of their accounts when they do that,” Ellis says. “We know that clients value that single report that shows all their holdings.”

If You Don’t Pay, You Can’t Be A Top Pick

Each of the brokers has their own “preferred” set of funds that they promote to their customers. Well, you can’t be one of these funds unless you pay the money to be in their NTF platform. Check out Fund Picks from Fidelity, OneSource Select from Schwab, and the Premier List from TD Ameritrade.

Yup, they are “specially screened” alright… and the first screen is if the check cleared… Pay to play.

Do Huge Funds Get Special Discounts?

What about the big boys? Are these fees set in stone or is their a discount for funds with huge assets? Apparently, TD Ameritrade is much more flexible than the others. Perhaps that has helped them grow so fast. From the same InvestmentNews article:

TD Ameritrade is negotiating with fund companies that have low expense ratios and can’t afford the new fee, said one fund company official familiar with the situation, who asked not to be identified. Schwab and Fidelity are not as flexible, the official said.

More proof of this is that T. Rowe Price is now a NTF fund at TD Ameritrade. From the MutualFundWire article Did TD Give T. Rowe a Deal?:

In the past, T. Rowe Price has been reticent to join the NTF platforms, preferring to have shareholders who purchase shares through the marts to pay the transaction fee thereby keeping shareholders who buy directly from subsidizing the sales. T. Rowe Price’s brand is popular with advisors, which may give it a leg up in negotiations with the mutual fund supermarkets, say industry insiders.

A source familiar with the situation said T. Rowe Price is paying “significantly less than 40 bps” TD Ameritrade has been charging other mutual fund firms since early this year when it raised its fee from 35 bps. Just how much less than 40 bps the fund firm is paying could not be learned.

T. Rowe Price is known for their relatively low fees on their actively-managed mutual funds, which combined with their good past performance has created a very strong following of investors and financial advisors. I’m not sure if I would see this as a good or bad thing. If they can increase asset size without hurting performance, then in theory TRP can maintain their low costs for all investors. I guess we’ll see.

Fund Families Fight Back?

As fees keep rising, an analyst from the RIABiz article mentioned above thinks small funds may band together to revolt:

“As fees increase and the platforms capture more of the value stream, I would not be surprised to see smaller mutual fund families, faced with extinction, combining into a sort of ‘open architecture fund warehouse,’ and pull their diminished fund sales from the platforms,” he says. “A fund co-op could undercut Fidelity, Schwab and TD Ameritrade while still providing a single report.”

I think this would be awesome, and relatively easy to set up in this digital age. Good idea for a start-up?

Vote With Your Money

It’s interesting to see how such funds are distributed and promoted behind the scenes, but in the end it is up to us investors to vote with our money. If you think it’s worth it to buy NTF funds through one of these brokers, then you can continue doing so. But look around, there may be similar funds out there that are cheaper to own. Look at fund companies like Vanguard, PIMCO, and Dodge & Cox that don’t do NTF hardly anywhere. In addition, smaller fund supermarkets like E-Trade may charge less and thus offer a more options.

Filed Under: Investing

Last updated: September 20, 2010

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Mutual Fund Supermarkets Charge 40 Basis Points?

September 16, 2010 By Jonathan Ping 13 Comments

In a recent Wall Street Journal Op-Ed article by Vanguard founder Jack Bogle, he reaffirmed studies like the one from Morningstar showing that one of the strongest predictors of mutual fund performance is how low their annual expense ratios are. In addition, he shared data that fees on actively-managed funds continue to rise despite increasing asset sizes:

Conclusion: The huge economies of scale available in managing other people’s money have largely been arrogated by fund managers to their own benefit rather than to the benefit of fund shareholders.

In a letter to the Editor, Neil Hennessy, president and chief executive of fund manager Hennessy Advisors Inc. shot back, listing his own reasons for keeping his fund fees north of 1% (100 basis points) annually.

For one of our typical funds, federal and state registration fees have increased 44%, legal fees have increased 73%, and audit fees have increased 30%. […] Also, while no-transaction fee platforms didn’t exist in the 1960s, today funds pay as much as 40 basis points to be on the platforms offered by the likes of The Charles Schwab Corp. and Fidelity Investments.

According to this Investment News article, other mutual fund managers also feel this way.

His grievances are shared by many in the fund industry, said Don Phillips, a managing director at Morningstar.

“I think a lot of people would be afraid to do what Neil did and that is to out the distributors,” he said. “The asset managers are taking all the blame for high fund expenses, while the distributors are completely off the radar.”

I thought this was an interesting debate. I had no idea it cost that much for smaller mutual funds to get the accessibility of being part of a mutual fund “supermarket” like Schwab or Fidelity. However, that cost does allow investors to buy the funds with no transaction fee (NTF) at these places, which no doubt encourages more activity. In the long run though, 40 basis points is a huge ongoing drag. Here is an old 2004 Forbes article I found on fund supermarkets that also confirms the 35-40 basis point number.

I logged into Fidelity and found that all 10 non-institutional Hennessy retail funds were on the Fidelity NTF list. However, their expense ratios were also in the 1.30% to 1.70% range – well above average even for active funds. Hennessy isn’t exactly doing all they can to save money for the investor.

It would be nice if smaller mutual funds had a more open marketplace to distribute themselves, since it would seem a huge percent of their cost is just marketing. Of course, that’s also true for a lot of other things we buy, from breakfast cereal to basketball shoes. At the very least, an investor should always try to buy direct from the fund provider whenever possible.

In the end, I’m happy that I can buy most of my mutual funds “wholesale” from Vanguard with their at-cost philosophy, along with some “loss-leader” index funds from Fidelity. Shop smart! 🙂

Hat tip to Barry Barnitz of Bogleheads.

Filed Under: Investing

Last updated: August 9, 2018

PineCone Application Links + Other Paid Surveys

September 16, 2010 By Jonathan Ping 6 Comments

PineCone Research remains one of the better paying and reliable survey companies, with a payout of $3 (check or PayPal) for each 15-minute online survey. The annoying part is that they only take applications intermittently. Here is the current application link at Pinecone Research, which is again accepting new members. (May expire at any time, so apply now if you’re interested!) Looks open to all, but only one person per household can sign up. Thanks @gbhargav for the tip.

Some users have reported a recent increase in unpaid “weed-out” surveys, while others seem to remain happy.

Other legit survey sites in my experience are SurveySavvy, InboxDollars, Opinion Outpost, GlobalTestMarket, NFO MySurvey, and BzzAgent.

More thoughts on paid surveys in general here. I call them Bored Money – not terribly efficient but you can do it at your leisure and occasionally get to try some neat things like shampoo, dog food, new soda flavors, and once a new $100 Sonicare toothbrush which I got to keep.

Filed Under: Bored Money

Last updated: April 10, 2013

LendingClub Investment Criteria – What Loans To Avoid?

September 14, 2010 By Jonathan Ping 22 Comments

LendingClub.com (LC) is a website that securitizes person-to-person loans so that you can lend money to other people in as little as $25 increments, and you earn the interest. The idea is to replace banks and credit cards as the major middlemen used for lending. Here’s an illustration from their site:

Now, if you read my previous posts on LendingClub, you know I’m skeptical about getting 9.5% returns in the long run. My LendingClub Net Annualized Return is currently 6.8% after fees. If I can stay in the 4-6% range, I’d be happy as I view this activity as a hobby. My favorite loan so far is helping a young couple purchase a tiny 200 sf house-on-wheels.

The investment process is set up such that LC examines the loan application and assigns it a credit grade with an interest rate from 6.39% – 21.64%. All you have to decide is whether to fund the loan or not in increments of $25. You can’t change the rate. Therefore, the key is to quickly fund the relatively attractive loans and avoid the unattractive ones.

You can view historical performance data at the LC website, but it is very raw. I recently came across a new site called LendStats.com that has been sorting through the data and presenting it in some very insightful ways. The owner KenL uses a nice, simple formula for return on investment (ROI) and one can see from the data several ways to improve your returns.

Loan Factors To Avoid

Business loans. If you look at all the loan categories, only the ones under the Educational and Small Business categories have negative ROIs. (Educational loans have a much smaller sample size.) In general, perhaps it is a form of adverse selection when someone with a business idea must resort to making a personally-backed loan from strangers to fund their idea. Also, it may be that the economy is so tough that only select new businesses survive.

Borrowers with mortgages. Until recently, a mortgage holder was deemed more credit-worthy than a renter. That person had to have the means to make a 20% down payment and pass underwriting from a bank. Now, with so many people underwater in their homes, the ROI from renters is higher than mortgage-holders. Renters have greater flexibility with their cashflow. I suspect many people find themselves so bogged down by their mortgages that they decide to simply declare bankruptcy and forget about all their other debts as well.

Loan amounts greater than $20,000. Loans over $25k have a negative ROI overall, with $20k loans not doing much better. Bigger loans means bigger risk, which apparently isn’t adequately compensated for by higher interest rates. Also, I am wary of people doing the “borrow-and-bankrupt” route where they try to amass as much debt as they can and then declare bankruptcy after either a huge party, leaving the country, or hiding assets.

Borrowers with more than 2 credit inquiries within last 6 months. Average ROI consistently goes down as the number of inquiries on your credit report goes up. This indicates that you are also trying to get credit from others, and thus your debt-to-income may be higher than reported. In general, this also increases the likelihood of either desperation, fraud, and/or impending crisis.

Any F and G rated loans. The general trend is still supporting my original plan of only buying the highest-rated A loans, however there are some improvements in the B through E grades. Loans with the lowest grades of F and G continue to have negative ROIs. These are also the loans with the smallest sample size, but since there are so few of them anyway I find it easier to simply avoid them.

Filed Under: Credit Cards, Investing

Last updated: May 14, 2014

ING Your Number: Retirement Calculator Assumptions and Factors

September 13, 2010 By Jonathan Ping 17 Comments

I was watching TV this weekend and kept seeing commercials about ING’s Your Number, which is an online calculator that supposedly helps you plan for retirement by telling you how much you need to save. Here’s one of them if you haven’t heard of them before:

After trying it out and finding out my 7-digit number, I wanted to see what was “under the hood”. Monte carlo simulations? Spits out random number to mess with your head? Maybe my Google-Fu is weak, but I couldn’t find anything except this Your Number worksheet [PDF] from ING dated 2009. The final numbers don’t match up, but it does provide some insight into how the current calculator works. Using this information and trying lots of permutations, I tried to backtrack how each question affects the final output.

Factors and Assumptions

Current age. This factor appears to be used solely to calculate how many years you have left until retirement. Since the ING Your Number is the amount of money you need at the time of retirement, it increases every year with inflation. This is an important fact to note, as needing $1 million today would be the same as needing $2 million 30 years from now due to inflation alone. (Inflation is assumed to be roughly 3% annually.)

Marital status. The calculator says “We’re not trying to pry into your personal life, but whether or not your married has an impact on your number.” Nosy or not, it actually doesn’t seem to matter. I tried all kinds of inputs, but I couldn’t find any that changed based on being married or not. Let me know if I missed something here.

Current household income. At first glance, you’d think your current household income wouldn’t affect Your Number necessarily, since it later on asks for the actual income required during retirement. I noticed that making slight changes in your current income doesn’t affect Your Number at all. However, large changes do – it appears that this number is used to estimate future social security benefits. If your current income is really low, then your future benefits will also be low, which increases Your Number.

Age at retirement. This factor is used twice – once along with your current age to find how long you have until retirement, and again with your death age to find years in retirement. The more years you plan to spend in retirement, the greater Your Number will need to be in order to maintain a margin of safety.

Annual income required during retirement. A recommended amount is 80% of your pre-retirement income, but I hate that rule-of-thumb. Instead, this is probably the hardest part of the calculator because it requires the most personal and in-depth thought. Is your house paid off and are you going to stay in it? How much of your current income goes towards work expenses? What activities do you plan to do in retirement?

Provide income through what age? As noted above, this “death age” is used to calculate the amount of years you’ll spend in retirement. I kind of wish they just assumed 100 or something for this, it seems a bit morbid to guess when you’ll die.

In the end, Your Number is essentially your annual retirement income multiplied by a factor ranging from 5 to 30, depending on how long your retirement horizon is. It could have just told people to multiply by 25 and be just as accurate (or inaccurate) . As you might expect with any calculator that tries to help plan your retirement by asking five questions, Your Number is mostly a marketing gimmick designed to connect you with ING-affiliated financial advisors and insurance salesmen. That doesn’t mean you still don’t want to try it, though, right? 🙂

What’s yours?

Filed Under: Retirement, Tools & Calculators

Last updated: September 13, 2010

2010 Q3 Investment Portfolio Update – Fund Holdings

September 10, 2010 By Jonathan Ping 17 Comments

I’ve already posted my target asset allocation, now here’s my actual portfolio holdings. Again, these are my own choices, governed by the size of my tax-advantaged accounts like IRAs/403b/401ks, the brokerage firms that I use, and my preference of passive management and low fees. Even with the explosion of new blogs, I still don’t see very many people sharing their actual holdings. I hope that if I share, then others will share as well. 🙂

Tax-Efficient Placement

One big change for me over the last two years is that I now run out of room in my IRAs and 401ks each year and now have money sitting in taxable accounts. Since each asset class is taxed differently, where you put your assets can make a big difference in your net return. As a result, I’ve moved some things around. Here’s a handy graphic taken from a post about tax-efficient fund placement:

Chart of Relative Tax Efficiency of Assets

Stocks

US Total Market
I used to own Vanguard Total Stock Market Index Fund (VTSMX) but recently converted that to the ETF share version Vanguard Total Stock Market ETF (VTI) due to the lower 0.07% annual expense ratio. This fund tracks the MSCI US Broad Market Index, and typically holds the largest 1,200–1,300 stocks (covering nearly 95% of the index’s total market capitalization) and a representative sample of the remaining stocks. It currently holds 3,391 different companies. All for $7 a year for each $10,000 hold.

In my 401k, since I have limited options, I hold a mix of 75% Diversified Stock Index Institutional Fund (DISFX) which is basically a S&P 500 fund and 25% Fidelity Spartan Extended Market Index Fund (FSEMX) as it tracks the entire market minus the S&P 500. Together, the track the overall US market very well, at only a slightly higher cost of a weighted 0.25%.

US Small Cap Value
Here, I still hold the Vanguard Small-Cap Value Index Fund (VISVX). I could convert to the Vanguard Small-Cap Value ETF (VBR) with identical holdings and a lower expense ratio of 0.14% vs. 0.28%, but since it is only 5% of my portfolio I haven’t yet. In addition, there are good arguments for alternative ETFs such as iShares Russell 2000 Value Index ETF (IWN) or iShares S&P SmallCap 600 Value Index ETF (IJS). They each track slightly different indices and thus hold different stocks. Something to analyze deeper at a later time.

REIT
I still hold the Vanguard REIT Index Fund (VGSIX) as opposed to the Vanguard REIT ETF (VNQ). Both track the MSCI® US REIT Index. I hold this inside my IRA, so I’d rather just have full investment rather than worry about partial shares and such.

International / Total World excluding US
I used to hold Fidelity Spartan International Index Fund (FSIIX) but now hold the Vanguard FTSE All-World ex-US ETF (VEU) which tracks the FTSE All-World ex US Index and holds 2,239 stocks from around the world. There is the equivalent Vanguard FTSE All-World ex-US Index Fund (VFWIX) but since this is a bigger holding for me, the cheaper expense ratio makes a difference.

Emerging Markets
I converted to the Vanguard Emerging Markets ETF (VWO) from the Vanguard Emerging Markets Stock Index Fund (VEIEX). Even though my overall investment here is low, VEIEX has both a 0.25% redemption fee, and a 0.50% purchase fee, which is just too annoying to stay there. Another option would have been the iShares MSCI Emerging Markets Index (EEM), but it is both more expensive and has had more tracking issues. Here’s a EEM vs. VWO comparison post.

Bonds

Short-Term High Quality Bonds
I used to own the Vanguard Short-Term Treasury Fund Investor Shares (VFISX) but it now only yields 0.41% with an average duration of 2.2 years. If you had an IRA at certain banks, you could buy a CD earning 2-3% over the same time horizon. It would be just as safe. There would be less liquidity, but I’m not really concerned about that. The CD would be even better because you can’t lose what you put in.

I’ve actually gone ahead an put this portion of my portfolio in a stable value fund inside my 401k. I explored the risks and rewards of stable value funds, and while they are not of the utmost safety, the worst-case scenario is on the same order of the worst-case scenario of many short-term bond funds. My stable value fund is earning 3.5% for all of 2010.

I’ve also been looking at municipal bond funds such as the Vanguard Limited-Term Tax-Exempt Fund (VMLTX) and Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) since they are mostly rated AA and above with interest being federally tax-exempt. If I lived in California and had a big bond allocation, I’d still consider a partial holding in the Vanguard California Intermediate-Term Tax-Exempt Fund (VCAIX) since the interest is higher and is exempt from both federal and CA income tax. I wrote about VCAIX in late 2009 when the yield was 3.49%. It’s done quite well since then, although California’s still got major issues to work out. If I lived in New York, I’d consider the same for NY funds.

Inflation-Protected Bonds (TIPS)
Here, the only thing to buy is either individual TIPS bonds or a mutual fund/ETF holding TIPS bonds. Usually buying individual bonds is risky because you aren’t spreading the default risk across hundreds of issuers, but in this case every single bond is just as safe and backed by the US government.

I have my Self-Employed 401k at Fidelity, which allows me to buy individual TIPS with no commission (just bid/ask spread). I bought some longer-term TIPS with real yields of 2-3%, and they’ve been doing well since real yields have dropped since. In addition, I hold shares of the iShares Barclays TIPS Bond ETF (TIP) because I can trade iShares ETFs commission-free at Fidelity.

The Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX) was also considered, along with new TIPS ETFs that have different maturities such as the PIMCO 15+ Year U.S. TIPS Index ETF (LTPZ).

Filed Under: Investing, Retirement

Last updated: August 9, 2018

OptionsXpress Review: Application, Broker Commissions, Trading Features, $100 Bonus

September 9, 2010 By Jonathan Ping 9 Comments

OptionsXpress.com (OX) is a online brokerage site that specialized in options and futures trading, but has since expanded their offering to be one-stop-shop – offering stocks, bonds, brokered CDs, and mutual funds. Like some of you, I signed up a while back when they were offering a fat bonus (very limited-time offer). Since I have an account, here’s a user’s review of the broker.

Application

The online application is of the usual brokerage sort, with questions about your job, trading style, and any potential conflicts of interest. You can fill in most of your details online but you must still mail in a signed form to start trading. There is no minimum opening balance required for a cash account ($2,000 min for margin), but you can fund initially via electronic transfer, wire, or check.

Commissions and Fees

Stocks and ETFs are $9.95 per trade (market or limit, up to 1,000 shares), which is basically average now in the discount broker world. Broker-assisted trades are no additional charge, which is nice. Mutual fund trades are also $9.95.

Where OX is more competitive is in the options trading area. On their lower tier (0–34 trades/quarter), you can get 10 contracts for $15 with no base rate. They say that the average options trader trades 20 times a year, 10 lots at a time. Here’s their graphic how that stacks up:

No minimum account balances, no account maintenance fees, and no inactivity fees. Streaming real-time quotes are also free.

Cash Management

OX has a basic and functional ACH funds transfer system for electronic transfers to a linked bank account, which is free for deposits and withdrawals. You can add additional linked banks online via the trial deposit method. All ACH deposit requests must be received by 3:30pm ET to be processed same business day. All other requests will be processed on the following business day. ACH deposits will be available for trading on the third business day after processing. If you send them actual bank statement, you can arrange for next-business day availability of funds.

Free checkwriting is available on accounts open at least 6 weeks with $5000 minimum equity balance.

Their FDIC-insured cash sweep account currently yields a tiny 0.02%, but sadly that’s also about average for the industry right now.

Features

While they aren’t the cheapest, here are some features that differentiate them.

MyOX
If you are a very active trader, you are familiar with proprietary software by software-based brokers. MyOX works inside a regular web browser, but still enables you to customize the trading interface with widgets that you prefer. The best way to describe it is if you use iGoogle where you can move around modules with drag-and-drop. You can have your watchlist, charts, RSS news fees, etc. Here’s a screenshot of how I had mine set up:

Customer Service
OX offers live chat Mon-Fri, 8am-10pm ET and Sat, 10am-2pm ET which is much later than market hours. Their general support line (888) 280-8020 is also open until 10pm Eastern. I don’t live on the East Coast so I found this very convenient.

XpressRouter – Improved Order Routing
A big concern when you go with a discount broker is the getting the best execution of your orders. How do you know you couldn’t have gotten $45.25 per share instead of $45.18? Times 100 shares, that’s $7 right there. They use what they call XpressRouter to routing your trade between several options and get the best execution. NBBO is National Best Bid and Offer.

At optionsXpress, you can be sure to get the NBBO on any eligible trade. We guarantee the best price or we’ll credit your commission. If you see a possible discrepancy, let us know immediately after you get the electronic confirmation of the execution. Our commitment is to provide the quickest execution at a reasonable price so you can trade with confidence.

$100 Sign-Up Bonus
OptionsXpress has a current promotion offering new customers a $100 bonus if they open an account with at least $500 and make 3 trades with a year.

Offer is valid for one new Individual or Joint optionsXpress account opened and funded with at least $500 by US residents on or before December 31, 2011 at 11:59 CST, and having executed 3 trades within twelve months of account opening. To receive $100 bonus, account must be funded with at least $500 cash or securities transferred from a brokerage firm other than optionsXpress. The $100 bonus will be deposited into the new optionsXpress account within one month after meeting the terms and conditions of this offer. optionsXpress may charge the account for the cost of the $100 bonus should account fail to remain open with minimum funding (excluding trading losses) 6 months from the account open date.

Since their overall price structure isn’t rock bottom, this bonus it will let you open an account and trade several options contracts for free to see if you like it.

Filed Under: Investing, Reviews

Last updated: February 25, 2015

Target Asset Allocation for Investment Portfolio

September 8, 2010 By Jonathan Ping 21 Comments

Asset allocation (AA) is an important part of portfolio design, and I like pinning down a target asset allocation for personal reference. This helps keep me focused as my portfolio shifts over time and makes it easy to re-balance back. For some educational posts on this topic, please refer to my asset allocation starter guide.

Below is my updated target asset allocation. Here is my target asset allocation from 2008. It’s not dramatically different, but I’ll try to explain the slight changes below. This is just my own AA, and I think everyone should develop their own based on their own beliefs and learning. If you just copy someone else’s without thinking, when things go awry you won’t have the foundation to stick to your guns. I have been strongly influenced by the writings of Jack Bogle, William Bernstein, David Swensen, Rick Ferri, and Larry Swedroe.

Stocks

I separate things out first into stocks and bonds, and then later it’s easy to go 60% stocks/40% bonds and so on. Here’s my stocks-only breakdown:

I now do a 50/50 split between US and International stocks. In general, I would like to mimic the overall world investment landscape. On a market cap basis, the US stock market is now about 45% of the world, while everyone else takes up 55%. 50/50 is just simpler, with a slight tilt towards domestic stocks.
I consider REITs a separate real estate asset class. I used to put Real Estate under US stocks since I only held US Real Estate Investment Trusts (REITs), but in the future I would be open to investing in foreign real estate as property laws improve and investing costs drop.
On the US side, I add some extra small-cap value companies. Historically, adding stocks of smaller companies with value characteristics (as opposed to growth) has improved the returns of portfolios while lowering volatility. There is debate amongst portfolio theories as to why this happened and if it will continue.
If you buy a “total market” mutual fund or ETF, you’ll already own many of these types of companies (although many will not be held due to their small size relative to the big mega-corporations). I feel this adds a bit of diversification.
On the international side, I add a little extra exposure to emerging markets. You may be surprised to know that “emerging” countries like China, Brazil, Korea, India, Russia, and Taiwan already make up 26% of the world’s markets when you remove the US. These are countries that have a greater potential for growth, but also lots of ups and downs. I add a little bit more than market weight for these as well.

Bonds

I try to keep things simple for bonds, partially due to the fact that they are currently a smaller portion of my portfolio.

I like a 50/50 split between inflation-linked bonds and nominal bonds. Inflation-protected bonds provide a yield that is guaranteed to be a certain level above inflation. Nominal bonds pay a stated rate that is not adjusted for inflation. I like to balance the benefits of both.
Instead of only short-term US Treasuries for nominal bonds, I added some flexibility. I used to invest only in short-term US treasuries, as they provided the best buffer in my portfolio as they were of the highest quality and had a low sensitivity to interest rate fluctuations. Both TIPS and nominal Treasuries did great during the 2009 crash and the subsequent flight-to-quality, but now the yield on Treasuries is just too low in my opinion. There are trillions of dollars from countries and huge institutions around the world that are tucking their money away under the safe Treasury mattress. By venturing into other places they won’t with my tiny portfolio, I feel I can stay relatively safe yet increase my yield significantly. Possibilities include bank CDs, stable value funds, and high-quality municipal bonds.

Want more examples? Here are 8 model portfolios from respected sources, an updated Swensen portfolio, one from PIMCO’s El-Erian, and Ferri’s personal portfolio. Have fun!

Filed Under: Investing, Retirement

Last updated: November 6, 2011

Amazon Mom: Free 3 Months of Amazon Prime + Diaper Discounts

September 7, 2010 By Jonathan Ping 5 Comments

Amazon is promoting their new Amazon Mom service, which is aimed at all moms, dads, and primary caregivers. (They don’t make you send in a picture of your kid or anything.) It’s free to join, and here are the benefits:

30% off select diapers and wipes when you use their “Subscribe & Save” option, which is basically an automatic recurring purchase plan. It’s pretty flexible though, you can choose your interval (every one, two, three, or six months) and you can cancel any time, even after just one shipment. I personally have no idea if this makes them a good deal or not, having never bought diapers before.
Free Amazon Prime for the first 3 months of your membership, which includes free 2-day shipping on lots of stuff. For each $25 you spend within a single order in the Baby store, you get an additional month. You can earn up to one year from the date you joined Amazon Mom. If you already pay for Prime, you can cancel and they’ll refund you the pro-rated cost.
They’ll send you “exclusive” discounts and offers via e-mail.

Seems like it’d be worth checking out, if only for the 3 free months of Amazon Prime. (Students with a .edu e-mail get an entire year for free.)

Filed Under: Deals & Offers

Last updated: September 7, 2010

My First Shares Of Stock Ever Purchased

September 3, 2010 By Jonathan Ping 25 Comments

I was going through some old financial files and came across an old E-Trade statement which was my first brokerage account and found my first shares of stocks ever purchased in August of 2001. This was after the dot-com bubble burst, and I was still in grad school. I had managed to save up $1,000 and promptly invested it after pretty much zero research:

11 shares of Budweisder (BUD) at $43.04. Budweiser was bought by foreign conglomerate InBev in 2008 at $70 a share, but after that I’m not sure how to evaluate performance.
12 shares of Pfizer (PFE) at $38.31. As of yesterday 9/2/10, PFE closed at $16.40 with about $0.75 to $1.25 a year in dividends.

People were pretty depressed about the markets back too, so I guess I figured beer and happy pills was a growth industry. 🙂

Do you have any special memories attached to your first stock purchase?

Filed Under: Funny, Investing

Last updated: September 4, 2010

Continental OnePass Plus Card: Free 25,000 Miles, Free Checked Bag, Primary Rental Car Insurance

September 2, 2010 By Jonathan Ping 13 Comments

Now that I’m flying a lot more again, I’m back in the hunt for some frequent flier perks. I just came across the new Continental Airlines OnePass Plus Card from Chase, which has a pretty nice mix of perks for travelers.

Sign-Up Bonus: Free Flight

25,000 Bonus Miles after first purchase (no minimum amount) for first-time Continental Airlines personal Cardmembers. That’s enough already for one free round-trip airfare within the continental US.
No annual fee the first year. The regular annual fee is $85, but is waived the first year.
5,000 Bonus Miles for adding an authorized user to your account. This is another easy one to get. Remember, just because you add someone doesn’t mean you have to give them the card. 😉
If you spend $25,000 on the card annually, you’ll get another 10,000 bonus miles. Since you earn 1 miles per $1 spent as well, this works out to 1.4 miles/dollar when you reach that mark.

Travel Perks

Free checked bag. If you fly on Continental, you and up to 9 travel companions will all each get your first checked bag for free. That’s a savings of $50 round-trip, per person.
Primary rental car insurance. Almost all personal credit cards only offer secondary rental car insurance, which means you have to file a claim with your own auto insurance first, which means you have to pay the deductible and possibly face higher future premiums. With primary collision damage waiver (CDW) even for personal use, you get coverage for damage or theft without having to make a claim.
More travel insurance that isn’t on all cards, like trip cancellation insurance up to $1500 for a illness with doctor’s note , delayed baggage coverage up to $300 if you have baggage delayed more than 18 hours and need to buy items to get by.
If you decide to keep this card past the first year, you’ll get two free passes to their First-Class airport lounge.

As you may have heard, Continental and United are merging, and the resulting airline is supposed to have the name United. Here’s a chance to rack up some miles that will eventually merge together – this card and bonus may not be available in the future. Until when they actually do merge, I should also note that Continental’s OnePass is known as one of the better programs when it comes to redeeming miles for trips.

Besides the Continental Airlines OnePass Plus Card, you can get a more flexible $625 travel bonus from the Chase Sapphire Preferred® Card, as well as other cards worth $500 in airfare.

“Disclaimer: This content is not provided or commissioned by the issuer. Opinions expressed here are author’s alone, not those of the issuer, and have not been reviewed, approved or otherwise endorsed by the issuer. This site may be compensated through the issuer’s Affiliate Program. “The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.”

Filed Under: Credit Cards, Deals & Offers

Last updated: November 16, 2015

Updated 529 College Savings Asset Allocation: Added Stocks, 10-Year 5% APY CD

September 1, 2010 By Jonathan Ping 19 Comments

Since we’re on the topic of college tuitions, I have recently adjusted the investment mix in my Ohio CollegeAdvantage 529 Plan. As I’ve mentioned before, I choose a very conservative mix because I think a 20-year or less horizon with a 4-year or less withdrawal period is actually a pretty short horizon. I just want to see gradual but reliable increases in my balances. In contrast, I view retirement as a 30 year horizon with another 20-30 year withdrawal period.

Previous Asset Allocation

My original asset allocation was 100% Treasury Inflation-Protected Securities (TIPS) through the Ohio 529’s Vanguard Inflation-Protected Bond Option which is essentially the Vanguard Inflation-Protected Securities Fund (VIPSX) with a slightly higher expense ratio. Back in 2009, I ran a comparison of the CollegeSure Tuition-Indexed CDs vs. Inflation-Protected Bonds, and picked TIPS. However, back then the real yield was 1.7%, and it is now 0.49%. Accordingly, the fund has a pretty good performance since then.

Updated Asset Allocation

20% Stocks (simple low-cost index option)
40% Inflation-protected bonds
40% Bank CD 10-year initial term, paying 5% APY.

Adding Stocks

The reason I chose to add stocks is that historically, adding 20% of stocks to a portfolio has actually reduced volatility while increasing returns. Here is a chart from my Choosing An Asset Allocation series of posts. As I get closer to college start date, this 20% portion will go down to zero.

Adding a 5% Bank Certificate of Deposit

Right now, a regular nominal 10-year Treasury Bond yields less than 2.50%. The real yield on a 10-Year TIPS bond is 0.95%, so the market is basically predicting inflation over the next 10 years to be about 1.50% annually.

However, the Ohio 529 plan offers a FDIC-insured certificate of deposit with a 10-year term earning 5% APY through Fifth Third Bank. (Heads up via Bogleheads.) That’s quite a big boost in yield. For every $10,000 I put in today, I’m guaranteed over $15,000 in 10 years. Early-withdrawal penalties are steep at half of accrued interest, so I had to be sure I wouldn’t need the money sooner.

As long as the real yield on the TIPS fund stays below 1%, then as long as inflation stays below 4% over the next decade the CD will win out over TIPS. If inflation somehow goes nuts, then the TIPS will keep the portfolio from falling too far behind. (Hopefully the stocks will help out as well.)

Since these are all in a 529 plans, the gains will be tax-free if used for qualified college expenses, which is good because otherwise federal and state taxes on a bank CD would be pretty high for us.

Filed Under: College & Education, Investing

Last updated: September 1, 2010

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