My Money Blog Portfolio Asset Allocation, October 2018

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

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Here’s my quarterly portfolio update for Q3 2018. These are my real-world holdings and includes 401k/403b/IRAs and taxable brokerage accounts but excludes our house, cash reserves, and a few side investments. The goal of this portfolio is to create enough income to cover our household expenses. As of 2018, we are “semi-retired” and have started spending some dividends and interest from this portfolio.

Actual Asset Allocation and Holdings

I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings. The Personal Capital financial tracking app (free, my review) automatically logs into my accounts, tracks my balances, calculates my performance, and gives me a rough asset allocation. I still use my custom Rebalancing Spreadsheet (free, instructions) because it tells me exactly how much I need in each asset class to rebalance back towards my target asset allocation.

Here is my portfolio performance for the year and rough asset allocation (real estate is under alternatives), according to Personal Capital:

Here is my more specific asset allocation broken down into a stocks-only pie chart and a bonds-only pie chart, according to my custom spreadsheet:

Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
Vanguard Small Value ETF (VBR)
Vanguard Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard Intermediate-Term Treasury Fund (VFITX, VFIUX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Target Asset Allocation. Our overall goal is to include asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I personally believe that US Small Value and Emerging Markets will have higher future long-term returns (along with some higher volatility) than US Large/Total and International Large/Total, although I could be wrong. I don’t hold commodities, gold, or bitcoin as they don’t provide any income and I don’t believe they’ll outpace inflation significantly.

I believe that it is important to imagine an asset class doing poorly for a long time, with bad news constantly surrounding it, and only hold the ones where you still think you can maintain faith.

Stocks Breakdown

  • 38% US Total Market
  • 7% US Small-Cap Value
  • 38% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 50% High-quality, Intermediate-Term Bonds
  • 50% US Treasury Inflation-Protected Bonds

I have settled into a long-term target ratio of 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and taxes.

Holdings commentary. On the bond side, as Treasury rates have risen, last quarter I sold my shares of Vanguard High-Yield Tax Exempt and replaced it with Vanguard Intermediate-Term Treasury. I liked the slightly higher yield of that (still pretty high quality) muni fund, but as I settle into semi-retirement mode, I don’t want to worry about the potential of state pension obligations making the muni market volatile. In addition, my tax bracket is lower now and the Federal tax-exempt benefits of muni bonds relatively to the state tax-exempt benefit of Treasury bonds is much smaller now. On a very high level, my bond portfolio is about 1/3rd muni bonds, 1/3rd treasury bonds, and 1/3rd inflation-linked treasury bonds (and savings bonds). These are all investment-grade and either short or intermediate term (average duration of 6 years or less).

No real changes on the stocks side. I know that US stocks have higher valuations, but that’s something that is already taken into account with my investment plan as I own businesses from around the world and US stocks are only about 30% of my total portfolio. I have been buying more shares of the Emerging Markets index fund as part of my rebalancing with new dividends and interest. I am considering tax-loss harvesting some older shares with unrealized losses against another Emerging Markets ETF.

The stock/bond split is currently at 68% stocks/32% bonds. Once a quarter, I reinvest any accumulated dividends and interest that were not spent. I don’t use automatic dividend reinvestment.

Performance commentary. According to Personal Capital, my portfolio now slightly down in 2018 (-2.7% YTD). I see that during the same period the S&P 500 has gained 5% (excludes dividends), Foreign (EAFA?) stocks are down 8.2%, and the US Aggregate bond index is down 2.4%. My portfolio is relatively heavy in international stocks which have done worse than US stocks so far this year.

An alternative benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund (VASGX) and 50% Vanguard LifeStrategy Moderate Growth Fund (VSMGX), one is 60/40 and one is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of +0.07% YTD (as of 10/16/18).

I’ll share about more about the income aspect in a separate post.

Savings I Bonds November 2018 Interest Rate: 2.32% Inflation Rate

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

sb_posterSavings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. You could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the November 2018 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a October 2018 savings bond purchase will yield over the next 12 months, instead of just 6 months.

New inflation rate prediction. March 2018 CPI-U was 249.554. September 2018 CPI-U was 252.439, for a semi-annual increase of 1.16%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 2.32%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.

Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in October 2018. If you buy before the end of October, the fixed rate portion of I-Bonds will be 0.30%. You will be guaranteed a total interest rate of 2.52% for the next 6 months (0.30 + 2.22). For the 6 months after that, the total rate will be 0.30 + 2.32 = 2.62%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2018 and sell on April 1, 2019, you’ll earn a ~2.09% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you held for three months longer, you’d be looking at a ~2.20% annualized return for a 14-month holding period (assuming my math is correct). Compare with the best interest rates as of October 2018.

Buying in November 2018. If you buy in November 2018, you will get 2.22% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS, which has been rising a bit. The current real yield of 5-year TIPS now about ~1.00%. My best guess is that it will be 0.50% or 0.60%. Every six months, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (minimum floor of 0%).

Buy now or wait? In the short-term, these I bond rates will not beat a top 12-month CD rate if bought in October, and probably won’t if bought in November unless inflation skyrockets. Thus, I probably wouldn’t buy in October. I haven’t bought any savings bonds yet this year, and will wait until November to see what the new fixed rate will be. If it greatly lags the real yield on short-term TIPS, then I will probably just buy TIPS instead. However, if it is close, I will probably buy some savings bonds as a long-term investment given the unique benefits below.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

For more background, see the rest of my posts on savings bonds.

[Image: 1946 Savings Bond poster from US Treasury – source]

Total Bond ETF Review: iShares Aggregate Bond ETF (AGG) or Vanguard Total Bond ETF (BND)

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

One of the major building blocks of your portfolio is probably a bond mutual fund or ETF. The most popular bond benchmark is the Bloomberg Barclays Aggregate Bond Index (AGG), which basically tracks all U.S. taxable investment-grade bonds. These popular index funds all track some variation of this index:

  • Vanguard Total Bond Market Fund (VBTLX/VBMFX) and ETF (BND). The biggest bond mutual fund. This fund is also inside all Vanguard Target Retirement 20XX or LifeStrategy All-In-One funds.
  • iShares Core U.S. Aggregate Bond ETF (AGG). The biggest bond ETF.
  • Schwab U.S. Aggregate Bond ETF (SCHZ).

What’s inside a Total Bond fund? A recent Vanguard Blog post provides some insight into the components that make up the Barclays U.S. Aggregate Index from 1977 to 2017:

  • US Treasury. Bonds issued and backed by the US government, including Treasury notes and bonds. (Nominal only, TIPS are not included.)
  • US Government-related. Securities issued by a Federal Agency or a government-sponsored enterprise like Fannie Mae or Freddie Mac. These are either explicitly or implicitly backed by the US government.
  • Securitized (MBS). Mortgage-backed securities, backed by residential mortgages and packaged by Ginnie Mae, Fannie Mae, Freddie Mac, and others including private issuers.
  • Securitized (ex-MBS). Asset-backed Securities, backed by things such as consumer auto loans, credit card debt, and home equity loans.
  • US Corporate. Securities issued by corporations with investment-grade ratings from the major ratings agencies.

The first thing to note is that the bottom three layers are essentially all backed by the US government. When considered in this chart format, you can see that these bottom three layers consistently make up about 60% to 80% of the AGG. Thus, historically you can estimate that roughly 2/3rds of the index is backed by the US government and 1/3rd is privately-backed by securitized assets or corporations.

How much more does a Total Bond fund yield than a Treasury Index fund? Here’s how much the AGG Total Bond index yields above a Treasury index historically:

So the ingredients are little riskier overall than 100% US Treasury bonds, but you also earn a little higher yield.

Which is better? For the most part, I agree with this William Bernstein list of what kinds of bonds should be in an individual portfolio. I slightly prefer either 100% Treasuries, municipal bonds, or bank CDs – all depending on the after-tax yield. The idea is to pick the safest bonds that are hopefully the least correlated with your stocks. For example, the expectation is that Treasuries are more likely to go up when stocks are dropping.

But for the most part, I think a total bond fund is just fine as well. You can see it’s still pretty safe and you get extra interest in exchange for the extra risk that the market has decided is the proper compensation.

First things first – Buying a low-cost total bond index fund is very likely to return more over the long run than an expensive actively-managed bond fund. Choosing between Treasuries and a Total Bond fund is a secondary decision.

Bottom line. Lots of people own bond funds and ETFs that track the US Aggregate Index (AGG). These charts help show you what’s held inside such Total US Bond funds and how much more they yield than 100% Treasury bonds.

Owning Businesses Around the World: Global Market Cap Breakdown 1990-2018

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When you’re deciding where to invest your money, a good starting point is to consider every single business that you can invest in around the world. I still find it amazing that with a few clicks, you can own a share of Alibaba in China, Nestle from Switzerland, and Apple in the US.

Inside a post about investing in Emerging Markets stocks at Bps & Pieces, I came across this chart that tracks how all the investable stocks in the world could be broken down by total value (“market cap”) between the US, non-US Developed Markets, and Emerging Markets since 1990 (click to enlarge):

How much international stocks should you own? There is not a consensus amongst “experts” as to the optimal ratio, but I personally don’t deviate from this breakdown very much. My portfolio stock allocation has been set at 50% US and 50% non-US (including both Developed and Emerging Markets) for a while. Vanguard and Fidelity, which manage huge retirement funds, have settled on something closer to 70% US and the rest international.

Keep in mind that investable value is not the same as gross domestic product (GDP). China’s GDP is roughly 60% that of the US, but the total investable business value in China only makes up about 5.5% that of the US (about the same as Canada). Foreigners can’t invest in every public business in every country, and many countries don’t have stable public markets in the first place. In many ways, 50% US might even be too little if you really wanted to track the world’s business value.

Again, I go back to the classic Jack Bogle quote: “Don’t look for the needle in the haystack. Just buy the haystack.” I don’t know which companies will be the most successful in the future, or in which country they will be located. If it’s in the US, I will own them. If it’s not, I will hopefully own them as well. I hope that stable and transparent equity markets spread across the globe over time. I just want to sit back as a part-owner and earn a share of the profits.

If you care about valuations, you are probably aware that right now the US is “expensive” based on historical prices. Emerging Markets and Developed non-US are “cheaper”. But as usual, that is because US businesses are making lots of money (especially after tax cuts) and look strong, while the rest of the world has struggled on relative basis. Cheaper valuations could be taken as another reason to at least invest some of your holdings into international stocks.

Does Robinhood Brokerage Make Money in Shady or Questionable Ways?

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Robinhood has gotten a lot of buzz as the smartphone app that offers free stock trades. From the very beginning, the most common question was “How Will They Make Money?” Here’s what Robinhood says in their Help Center:

Robinhood Financial makes money from its margin trading service, Robinhood Gold, which starts at $6 a month. Additionally, Robinhood earns revenue by collecting interest on the cash and stocks in customer accounts, much like a bank collects interest on cash deposits.

However, there is another source of revenue that they don’t mention in their FAQ, but they do disclose in SEC filings (since it is legally required).

Selling order flow. When you make an order to buy or sell stock at a retail broker, the broker usually decides which market-maker can fulfill your request. In turn, market makers are allows to pay brokers like Robinhood, E*Trade, or TD Ameritrade for this “order flow”. This is common practice in the industry. If you have a sophisticated brokerage account, you can choose to direct exactly where your order will go. (Being able to direct your orders isn’t necessarily better unless you know what to look for, i.e. tracking Level 2 quotes.)

Robinhood gets paid 10 times the rate of TD Ameritrade and E*Trade for their order flow? Then came an article Robinhood Is Making Millions Selling Out Their Millennial Customers To High-Frequency Traders where the author Logan Kane made the following observations (via @JBrown6109):

  • These days, the people paying for order flow are often high-frequency trading (HFT) firms.
  • TD Ameritrade made $119 million last quarter from selling order flow. Payments were about a 1/10th of a cent per share.
  • E*Trade made $47 million last quarter from selling order flow. Payments were about a 1/10th of a cent per share.
  • Robinhood does not have to disclose their revenue from order flow as they are private company. (And they don’t.) Payments averaged about $0.00026 per dollar of executed trade value. At $50 average share price, this equates to about a cent per share.
  • This means that Robinhood is getting paid roughly 10x that of E*Trade and TD Ameritrade for the same amount of order flow.

Why? Here are some possibilities:

Theory #1: Robinhood is letting HFT “front-run” their customers, resulting is worse trade execution. If an HFT could give you 2 cents less per share, it would be worth paying 1 cent per share for that order. (Evil laugh.) However, this is countered by the SEC rule of National Best Bid and Offer (NBBO), which says that brokers must trade at the best available bid and ask prices when buying and selling securities for customers. This law may be hard to enforce by the millisecond, but would Robinhood or the HFT really blatantly break the law in this manner? Is it worth the risk to their business?

Honestly, I doubt it. Here’s the SEC Rule 606 Disclosure for Robinhood that shows where the orders are routed (source):

Yes, the names like Citadel and Virtu are well-known HFT firms. But Vanguard Brokerage doesn’t sell any order flow at all, yet most of their orders still go through Citadel (source):

Theory #2: Robinhood customers are broke and cheap, so they mostly trade a lot of stocks with low share prices. A lot of this argument is based on the amounts reported on the 606 disclosures. If you change the estimate for average share price traded to $4 a share, then Robinhood would get paid the same amount as the other firms. With zero commissions, anyone can afford to trade a few bucks of stock back and forth.

Theory #3: Robinhood’s order flow is somehow inherently more valuable than that of TD Ameritrade. Big brokers can fill some orders internally (one person is buying at the same time another is selling on the same platform) and they get to keep the market-maker profit. This rebuttal article says that Robinhood internalizes nothing and sells 100% of their orders. Maybe this “unfiltered” order flow is more valuable? Maybe the fact that their customers are younger and mostly non-professional traders make the order flow more valuable? More odd lots? More trades of single shares? More market orders instead of limit? Maybe Robinhood packages the data in some way that makes it more palatable to HFT firms?

HFT firms are using the data to build complex algorithms for their own trading, so they want to understand market behavior. Getting unlimited access to raw order data would certainly be key to understanding the behavior of “dumb money”.

Personally, I think it’s maybe a little #2, but more #3. Robinhood was founded by former HFT software engineers. They know exactly what type of information would be valuable to HFT firms. In fact, I think selling customer data (in aggregate) was a big part of their business model to pull off free trades from the very beginning. So they optimize the selling of your data quietly, while also making money on idle cash and margin subscriptions. It’s also a big money saver when they only answer customer service questions via e-mail and don’t have a phone number.

The bigger question: Do you care? Okay, so Robinhood gets paid by selling your order data. They get paid a penny per share. Some firm will know you bought 10 shares of Nvidia and sold 10 shares of AAPL exactly 54 minutes and 12 seconds after the new iPhone announcement. In some indirect way, this arrangement might give the HFT firms a greater trading edge in the future. In exchange, you get free stock trades today. Is this a bad deal?

They’ve also helped inspire more free trade competition:

Bottom line. I view Robinhood as “free” in the same way that Gmail is “free” and Facebook is “free”. They make money via traditional means, but your personal data and behavior patterns are also part of the true price. The theme of this entire decade is that our personal data is the most undervalued asset (by us). Google, Facebook, Amazon, Visa, every major corporation – they are perfectly aware of the value of data. As the saying goes, “If you’re not paying for the product, you are the product.”

P/E Ratios Don’t Predict Anything Over The Next Couple of Years

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Here are some charts from a Credit Suisse research report that you should keep in mind when reading articles about high valuations and future returns. I first saw the highlighting done by WSJ Daily Shot, but I can’t find the post anymore.

Here is a chart plotting the starting Forward P/E ratio and the subsequent 10-year annualized returns for US Stocks (S&P 500). As of September 2018, the Forward P/E ratio is approximately 17. As you can see, this is higher than the historical average, with the trendline suggesting that the average expected future return is about 5% annually. Chart like this explain why many articles warn of low returns ahead.

However, step back and you see that the historical range has varied from -1% to 8%. Over 10 years, that’s a big spread. It’s the difference between $100,000 turning into $90,000 or $215,000. Focusing on the line gives you a false sense of accuracy.

Here is a chart plotting the starting Forward P/E ratio and the subsequent ONE-year annual return for US Stocks (S&P 500). In the next year, just about anything could happen! You should shoot up 30%+ or drop 30%+. (There appears to be a typo with the vertical axis missing some zeros. I believe the range should be from -60% to +60%.)

P/E ratios are not reliable for market timing. Yes, P/E ratios are something to watch and consider, especially to keep reasonable expectations for long-term returns. But when people sell all their stocks, they feel a drop is coming soon, not 10 years out. That crash might happen. But it might not. As the John Maynard Keynes quote goes, “The market can stay irrational longer than you can stay solvent.”

In my opinion, it is a much more reliable bet to maintain broad exposure to stocks for decades. You can do some trimming around the edges if that helps you minimize regret.

Big Picture: Is Compounding Growth Working For or Against You?

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

I’m a finance geek and like to dig around in the details like asset allocation or tax strategies. However, sometimes I read some news that reminds me to step back and look at the big picture. Half of all Americans don’t own any stocks at all. Before the 2008 financial crisis, about 2/3rds of US adults had some skin in the stock market, but that number dropped significantly and hasn’t rebounded. From a Gallup poll:

Even out of the half of Americans with some amount of stock ownership, most of them have no idea about stock market performance. Betterment conducted a survey [pdf] asking people to estimate the US stock market performance since December 2008, and Axios made it into a nice chart. Note that all of the respondents in the Betterment survey stated they had at least $1 invested in the stock market.

About half of respondents either thought the stock market dropped or stayed the same over the last 10 years. The correct answer is that the stock market is up over 200%. Only 8% of people who own stock got this right.

I worry that this means that only a small percentage of people are aware of the potential power of investing in productive assets like businesses. Sure, 200% is a lot, but over 10 years it’s not an insane number. At 12% annual growth, your money doubles in 6 years and thus quadruples in 12 years. At 8% annual growth, your money doubles in 9 years and thus quadruples in 18 years. Even at 6% annual growth, your money will double in 12 years and thus quadruples in 24 years.

Owning productive assets like public companies, real estate, or private business ownership gets you on the train powered by compounding exponential growth. Debt like student loans, credit card balances, even a home-equity loan for a new kitchen remodel, that’s like putting the compound interest engine in reverse. I know that it is easier said than done, but one of my favorite quotes from Mr. Money Mustache is that you should treat “debt as an emergency”. The difference between even putting a $50 into stocks a week, versus paying $50 week in interest to carry your debt each month can become the difference between having choices and the treadmill lifestyle forever.

If someone realizes the power of compounding, then they are more likely to covet that rental property or share of Apple stock as much as a new BMW lease or Viking stove. I love buying new shares of VTI. It gives me a dividend gift every quarter. This appreciation is the key to the constant accumulation of productive assets and not stuff.

Webull App: Free Stock Trades + Free Share of Stock Referral Bonus

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Webull is a new brokerage app that has unlimited free stock trades with no platform fees, free real-time quotes, and no minimum balance requirement. (Similar to Robinhood.)

Webull also has a referral program where new users can get a free share of stock worth between $3 and $1,000. I believe the referring user also gets the exact same share of stock. Also similar to Robinhood, most people will get a stock closer to $5 in value.

Here are the full odds from their Terms and Conditions:

$4 to $6 value, odds are ~1:1.1
$10 to $20 value, odds are ~1:24
$50 to $100 value, odds are ~1:200
$150 to $250 value, odds are ~1:333
$1,000+ value, odds are ~1:1,000

Here is my Webull referral link. (Thanks if you use it!) I received a free share of ABEV worth about $4.46. I have also seen SNAP and some lucky ones got AAPL. You will need to sign-up initially either with a phone number or e-mail address, and then open an account after downloading the app (Android or iOS). Webull is a real SIPC-insured broker, and the application is the same (name, address, SSN, work questions, investing experience questions, etc). I did not have to make any deposit, make any trade, or even link a bank account to receive my free share of stock. My account was approved and I claimed my free share within 12 hours.

(Note: I opened a cash account. Margin accounts will require a minimum balance of $2,000. I believe this requirement is the same for all brokers.)

Robinhood vs. Webull.

  • Robinhood definitely has a sleeker user-interface, which should appeal to younger users and those who want a simple trading experience. Webull has a more “busy” interface with charting, news, technical indicators, and stock screeners. You may like having more information, or you may want a cleaner app.
  • Robinhood offers free options trading. Webull does not offer options at all.
  • Both are primarily apps, but Robinhood has a web trading option now. Webull does not that I know of.
  • Webull has customer service available via Live Chat or phone number. Robinhood only has an e-mail address.

Both will make money from normal users via interest on cash balances and selling order flow. Robinhood’s premium features basically let newbie users access a simple version of margin (flat fee instead of interest rate). Webull has traditional margin accounts that allow shorting, and makes money by selling premium subscriptions to advanced quotes so serious traders can get the absolute best bids and offers across any of 13 different stock exchanges.

Firstrade is a traditional discount brokerage firm that recently started offering free stock trades and free options trades.

Bottom line. Webull is a new entrant to the world of free stock trading apps. The feel is more of a full-featured traditional brokerage account in app form as compared to competitor Robinhood. The free trades are the real draw, but new users can also grab a free share of stock worth up to $1,000 (but probably $5). It’s like a free lottery ticket, so why not?

TIPS ETF vs. TIPS Mutual Fund vs. Series I Savings Bond: 10-Year Performance Comparison (2008-2018)

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While updating my portfolio spreadsheet, I noticed that it had been 10 years since I bought my first electronic savings bond. I recently listed Reasons To Own TIPS, Treasury Inflation-Protected Securities and Reasons To Own Series I Savings Bonds. This got me wondering – How did my 10-year savings bond performance compare to buying a TIPS ETF or a TIPS mutual fund?

A $10,000 Series I Savings Bond issued 3/1/2008 is now worth $13,964 as of 9/1/2018, a 3.4% annualized return. The interest automatically accrues and compounds, assuming no withdrawals were made. This is taken straight from my TreasuryDirect.gov account.

The largest TIPS ETF is the iShares TIPS Bond ETF (TIP). According to ETFReplay, below is the total return (green) of $100 invested from March 2008 to September 2018. Total return includes the effect of the immediate reinvestment of any dividends and distributions. TIP is a basket of individual TIPS, with an average effective maturity of about 8 years. $10,000 invested in TIP on 3/3/2008 would have turned into $13,230 on 9/4/18, a 2.8% annualized return.) (Actual dates used are the closest trading days.)

The largest TIPS mutual fund is the Vanguard Inflation-Protected Securities Fund (VIPSX). According to Morninstar, here is the total growth of $10,000 invested from March 2008 to September 2018. VIPSX is a basket of individual TIPS, with an average effective maturity of about 8 years. $10,000 invested in VIPSX on 3/1/2008 would have turned into $13,100 on 9/1/18, a 2.7% annualized return.

I could have also bought an individual TIPS bond back in March 2008 that matured in 2018, but I’m not sure about how to compute the total return with reinvested dividends (which kept varying with CPI) all the way up to today. If someone wants to run the numbers, I’d be happy to add them to this post.

Bottom line. Over roughly the last 10 years, the total returns from owning savings I Bonds vs. popular TIPS ETF vs. popular TIPS mutual fund varied between 2.7% vs. 3.4% annualized. The savings bond probably beat the ETFs and mutual funds slightly this time because it held a fixed rate of 1.2% while the other bond funds have an ongoing ladder of TIPS with lower average real rates. Over the next 10 years, with the current low fixed rates on savings bonds, the ETF and mutual fund might win slightly instead. This is why you would compare the current fixed rate on savings bonds vs. the current real yields on TIPS when considering a purchase between them. I would also factor in the tax deferral feature of savings bonds.

The bigger question is whether you want to own inflation-linked bonds at all. (See links at the top of post for help on that.)

Warren Buffett on Reaching Stock Market Highs

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Warren Buffett had his annual charity lunch today and was on CNBC for a short interview. As usual, he was asked about the current stock market situations and, as usual, he managed to sum everything up in a few folksy sentences. Here’s a direct quote from the full CNBC interview:

If you had your choice between buying and holding a 30-year bond for 30 years or holding a basket of American stocks, there’s just no question, you’re going to do better owning stocks. It’s more attractive than, considerably more attractive than fixed income securities. That doesn’t meant they’re going to go up or down tomorrow, next week, or next year, but over time, a bunch of businesses that are earning high returns on capital are going to beat a bond that’s fixed at roughly 3% or 30 years. And it’s not my field of specialty, but actually they look, stock generally (American businesses), they look cheaper than, generally, real estate.

[…] That’s what you have to do in investing. I mean, you’re sitting with some cash in your pocket. You have savings, and the question is what do you do with it? You can buy a duplex next door and rent it out to people and do fine over time or buy a small piece of farmland or something of the sort or you can put it into something fixed income, bonds, or bank deposits, or whatever it may be.

My interpretation is that you have invest your money somewhere, and if you have a 30-year time horizon and you don’t plan on timing the market in and out, then stocks are still your best bet. Over the long haul, stocks will still outperform bonds and cash (at current interest rates), and he thinks real estate as well right now. Timing the market is too hard to do. Predicting returns over the next 5 years is too hard to do. If you don’t have a long enough time horizon or can’t handle the swings, you shouldn’t be in stocks.

Long-term stock investors just have to take some lumps if prices drop for a while. Keep enough money in bonds and cash so you don’t panic and have money to spend in the meantime.

[I actually have an issue with the CNBC caption “Buffett: Stocks always more attractive than bonds”. He never said that. He specifically noted that the 30-year bond was paying 3%. In the past (1970s?), Buffett has invested in Treasury bonds when the rates were really high and the stock market was overvalued. If today’s rates were 8% instead of 3%, Mr. Buffett would be rational enough to adjust his opinion.]

Reasons To Own Series I Savings Bonds

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

sb_posterSeries I Savings Bonds (aka “I Bonds”) are a unique investment sold directly to individuals by the US Treasury that pay out a variable interest rate linked to inflation. This post collects general reasons to own these savings bonds without going into the internal details of how they work. Please also see my related post Reasons To Own TIPS, Treasury Inflation-Protected Securities.

Backed by the US government and will never decrease in nominal value. If you buy an I Bond for $1,000, you’ll never get less than $1,000 back. Sometimes it’s nice to know that something will only go up in numerical value.

Pays interest that is the sum of a fixed rate and an inflation-linked rate. The fixed rate is set at purchase. The inflation-linked rate is reset every 6 months based on a preset formula tracking the CPI-U (Consumer Price Index for All Urban Consumers). This is unique and would come in helpful in times of unexpectedly higher inflation. I write about the upcoming I bond rate changes every 6 months as well.

Sold directly by US Treasury with no fees. You must either buy them directly online at TreasuryDirect.gov or via paper bonds via tax return. There are no purchase fees or annual maintenance fees.

Interest from I-Bonds are exempt from state and/or local income taxes. Same as with US Treasury bonds and TIPS.

Federal income tax on interest is not due until redemption. This means that you can defer paying taxes on accrued interest for up to 30 years. You don’t owe taxes until you cash out. This also means that you can time your eventual withdrawal during a year where you have the lowest tax rate (i.e. when your income drops after retirement).

Possible tax-free interest when used for qualified educational expenses. If you meet all the requirements, you can even avoid federal income taxes completely when paying qualified higher education expenses at an eligible institution. These include income phase-out limits.More information at this TreasuryDirect page. You can even contribute your proceeds to a 529 plan or Coverdell Educational Savings Account. Here are some tips from Finaid.org.

Series EE and I US Savings Bonds issued after December 31, 1989 may be redeemed tax-free in order to contribute the proceeds to a section 529 plan or Coverdell Education Savings Account. (To take advantage of this, file IRS Form 8815 to claim an exclusion for the interest after rolling the proceeds of these US Savings Bonds into a section 529 college savings plan or Coverdell Education Savings account. Write “529 College Savings Plan” or “Coverdell Education Savings Account” in the answer to 1(b), where it asks for the name of the educational institution. The specific citation in the tax code for this guidance is IRC Section 135(c)((2)(C).)

Reasons for NOT owning I Bonds.

  • There are purchase limits for I Bonds of $10,000 per person per year in electronic format. You can also buy an additional $5,000 in paper bonds per year using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.
  • The fixed rate has been low in recent years. Here, the inflation-linking may help you get an interest rate slightly above inflation, but after taxes, your net return may still lag inflation. For example if the fixed rate was zero and inflation was 2%, you would probably get less than a 2% return after taxes.
  • As with interest earned from bank accounts and taxable bonds, interest is eventually taxed at ordinary income rates. Long-term capital gains and dividends from stocks are usually taxed at lower rate.
  • You can’t redeem your savings bonds at all during the first 12 months. I believe there is a small exception if you can show yourself to be affected by an official natural disaster.
  • If you redeem within the first 5 years, you will be subject to an early redemption penalty of your last 3 months of interest.
  • TIPS are analyzed more deeply by financial professionals, and have not been found to lie on the “efficient frontier” curve. Thus, it is also unlikely that I bonds will optimal in that way.
  • You may not want to open and track a separate Treasury Direct account just to hold your I Bonds.
  • If you lose your online login and password to TreasuryDirect.gov and someone jumps through all the hoops necessary to steal your electronic I bonds, then the US Treasury will not reimburse you. If you lose paper bonds, there is a replacement policy.

TIPS vs. I Bonds.
Both have interest that both linked to inflation and is exempt from state/local taxes. You should compare the fixed rate from I Bonds with the current real rate in the TIPS market. Things that might make I Bonds more attractive than TIPS include the tax-deferral ability and the ability to avoid taxes when spent on qualified educational expenses. Things that might makes TIPS more attractive are the intra-day liquidity at all times and the ability to buy unlimited amounts via your choice of broker.

I own both TIPS and I Bonds in my personal portfolio. Inflation-protected bonds are part of my chosen asset allocation, and I prefer to use a lot of my tax-deferred account space for REITs. Series I Bonds allow me to own inflation-linked bonds in effectively a tax-deferred manner. I may also be able to use the interest tax-free for educational expenses as I have three young kids with 12-16 years to go before college.

Ally Invest Commission-Free ETF List Review (+ New Account Cash Bonus)

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Ally Invest (formerly TradeKing) has rolled out their own commission-free ETF list to augment their $4.95 trades and no account minimums. As an existing customer, they sent a short e-mail with the following paragraph:

We’re excited to announce that you can now trade some of our most popular ETFs commission free. We made sure to handpick a variety of funds that may fit your investment style, whatever that may be. They’re a great way to diversify and another way we strive to be a better ally.

You can view the complete list of 100+ ETFs here. I see three major categories:

  • WisdomTree “Smart Beta” ETFs (all of them)
  • iShares Sector and ESG ETFs
  • 6 iShares Core ETFs

Low-cost index ETFs. Here are their lowest-cost ETFs across the major asset classes. There are enough iShares Core ETFs to build a simple, low-cost portfolio with no commissions. I might have wished to see IEMG instead of ESGE or some more bond options, but otherwise these are not bad for portfolio building blocks.

  • iShares Core S&P Total U.S. Stock Market ETF (ITOT) 0.03% ER
  • iShares Core MSCI International Developed Markets ETF (IDEV) 0.05% ER
  • iShares MSCI EM ESG Optimized (ESGE) 0.25% ER
  • iShares Core U.S. REIT ETF (USRT) 0.08% ER
  • iShares Core 1-5 Year USD Bond ETF (ISTB) 0.06% ER
  • iShares Core 10+ Year USD Bond ETF (ILTB) 0.06% ER
  • iShares Core 5-10 Year USD Bond ETF (IMTB) 0.06% ER
  • iShares National Muni Bond ETF (MUB) 0.07% ER

This list is certainly not as “all-inclusive” as compared to the just-announced Firstrade free trades program but it is still a positive move, especially for those that already have an Ally Invest account and don’t want to move assets. You may also have an Ally bank account and want to keep things together.

Commission-free ETF rules. There is a minimum holding period of 30 calendar days for commission-free ETFs, otherwise you will be charged a short-term trading fee of $9.90. This is equal to their normal trade commissions ($4.95 buy + $4.95 sell = $9.90). Commission-free ETFs will also not be margin-eligible for 30 days from the purchase date.

New account bonuses of $50 to $3,500. Ally Invest is still running their new account promotions of up to $3,500 cash bonus + 90 days of free trades. Here’s the chart, the bonuses start at a $10,000 transfer or deposit.

Up to $150 transfer fee credit. If you’re already trading somewhere else, Ally Invest will reimburse up to $150 in ACAT transfer fees if you make a one-time transfer of $2,500 or more.

These promotions are stackable, so for example if you had $25,000 at E*Trade, you could move your existing holdings over (without having to sell anything) and get a $200 bonus while also having Ally Invest cover the transfer fee. You’d then have 90 days of commission-free trades to sell and buy as you wish.

Finally, I noticed that Ally Invest has a new “Select” tier where you get cheaper $3.95 trades and $0.50 options contracts when you maintain an average balance of $100,000 (or average 30 trades per month) for the past rolling 3 months.

Bottom line. Ally Invest has added a commission-free ETF list, which includes a few popular low-cost iShares Core ETFs, several iShares Sector/ESG ETFs, and every single WisdomTree ETF (“Smart Beta”). This is a continuing trend amongst online brokers. Ally Invest also has new account cash bonuses from $50 to $3,500.