Switching Back to Sharebuilder

I have updated my review on Zecco to reflect their nasty bait-and-switch. Do you know how many people opened up accounts with them in October for the free trades? Only now to rope them in with either $4.50 commissions or a $50 transfer out fee. A very shady company.

After some thought I have decided to close my Zecco account and switch to Sharebuilder. I considered some other brokers (Sogotrade and thinkorswim) and I've settled on Sharebuilder. Sogotrade's $3 trades seem nice, but I'm a little hesitant about some of these smaller brokerages - will it still be the same next year? Sharebuilder has been around for quite a while.

My experiance with Sharebuilder before has been good - the only advantage that Zecco had was the free trades, and that's now gone. Also, I forgot about their pricing plans. For $12 a month I can do 6 automatic investments. I opened up a new account with them (but it's linked to my other account) and using the promo code TRADEUP50, I'll get $50 when I transfer $500 of securities from another company to them. This makes my transfer out of Zecco free.

The nice thing about the plans at Sharebuilder is that I can change them at any time. So if I'm only going to make 1 or 2 trades, I will choose the Basic Plan for $4 a trade. If I'm doing 3 or more, I will choose the Standard for $12 (up to 6 transactions, $2 thereafter). The only downside is that selling a stock is $9.95. Of course, since I am a buy-and-hold investor, that shouldn't happen too much.

Major Changes at Zecco

When I logged onto my account this morning I was greeted with a message from Zecco stating that due to the current economic situation they were changing their minimum requirements. As of March 1, 2009, you will need to have $25,000 in your account in order to qualify for free trades.

I quickly read the message and then went on to my account. I am wishing now that I had printed the message, as I cannot find it on their site nor elsewhere on the internet.

This new change is very disappointing. As a small investor, there's no way I will come up with $25,000 for several more years. This means a change in my investing style. Instead of being able to add a little of this and this and this each month there will probably only be a single purchase, and I will no longer add anything to my speculation portfolio.

At least I still get 10 trades for the month of February. This will allow me to close out some of my speculative positions and some of my smaller positions that I don't think I'm going to be adding to.

This new development really equals the playing field for Zecco and Sharebuilder, and probably all of my future investments will be done with Sharebuilder. Sharebuilder's automatic investments are 50 cents cheaper than Zecco's commissions, and you can get partial shares that way. Even better is that dividends can be reinvested completely. Another advantage is that Sharebuilder's recording of your dividends is much easier to read than Zecco's.

Since the vast majority of my stocks are ones I am planning on holding for a long time, and since I am only investing a small amount ($100-$200), it's not going to make too much of a difference using Sharebuilder where I have no control over the purchase price or Zecco where I could do a limit order.

And to think, a couple months ago I almost considered closing down my sharebuilder account!

It's not too late to open an IRA account for 2008

I have not opened an IRA account yet. I considered one a while ago, but I figured I would wait until tax time to see how much of a difference it would make on my taxes.

I actually forgot all about it and almost filed my taxes. Luckily I remembered before I finished. Turns out, putting in $500 into an IRA is going to increase my federal refund by $275 (meaning it's only going to cost me $225 for an investment of $500!). I played around with different numbers and that was by far the best amount ($1000 changed it to $350).

This money is mainly going to be used as a down payment on a house someday (I wish that was next week, but realistically, probably 3-5 years), and since that would allow me to withdraw it with no penalty, this seems like the way to go. I'd rather not use my 401k for my house mainly because if I were to make a withdrawal, then I am prohibited from making more contributions for 6 months (and therefore no company match!). However, if at that time I am no longer employed by them, then I might use my 401k as well.

I considered opening an IRA with Zecco, but their $30 annual fee doesn't agree with me, and since it would be quite a while before I would have $2,500 in there I would not get any free trades.

I helped my mom open up an IRA account at Schwab and it was pretty easy. The minimum to open is $1000, but if you have $100 deposited each month automatically then the minimum is waved. There are no transaction fees for Schwab Funds, and there are a variety of them to choose from. You must invest at least $100 in a fund, and then after that you can do any amount over $1. I'm thinking this is the route I am going to go - probably an index fund (SWPIX?) and a bond fund (SWGIX?).

I've heard a lot of good things about Vanguard, but their minimum balances are much higher than I can afford. I looked at ING with my sharebuilder account, but I wasn't too pleased with them.

If anyone has any suggestions please comment.


Update: February 1 - I did open an account at Schwab a few days ago. It took just a couple minutes and was easy to fund. I forgot to mention above - you have until April 15th to put money into an IRA account for 2008. Just make sure that you specifically state what year you want your contribution to count for. Schwab asks you that when you add funds to your account.

Also, I can no longer recommend Zecco for any type of an account. They have raised their required minimum $25,000 in order to get 10 free trades.

MarketWatch

I am always on the lookout for a good portfolio tracker. Currently I use an Excel file.

This morning I tried out MarketWatch's portfolio tool. Of all the sites I have tried, this was probably the easiest to set up. You simply put your ticker in the box and click "Add." Then you click in the area to add the # of shares and the cost basis. All of this is done on one page - it does not reload the whole page after a change (a nice advantage over Morningstar's).

Another thing I really liked was the different font sizes. Every other portfolio I've used has everything the same font size, which can be a little taxing on the eyes. MarketWatch has the current quote larger than the rest of the text so it stands out.


Another feature I really like is that even though you can have several different portfolios, you can also view them all together as a whole. I have my portfolio seperated into a few different categories - my dividend portfolio, my speculation portfolio, and my 401k, but it's also nice to see it all as one big whole without having to enter everything twice.

The only major complaint I have is that there doesn't seem to be a way to add individual transactions. It seems that you can only change the total # of shares/cost basis for the entire holding.

Review of Morningstar Premium Membership

I did a two-week trial of Morningstar's Premium membership. The Premium membership has a lot to offer.

The major thing I liked was the Analysts Reports, which they offer for around 2,000 stocks in addition to 2,000 mutual funds and 100 ETF's. This, in my opinion, is one of the best things the membership has to offer. You can view the reports online or save them as pdf files. One of the things I really found useful was the list of what bulls say and bears say, so it gives you two unique perspectives.

The Morningstar Stock Rating is also useful. This provides a star rating (up to 5 stars), lists the stocks economic moat and what they consider to be its fair value.

Their Stock Screener has a ton of options on it - you can pretty much use any criteria you want to. I thought it was useful that you could screen the by their dividend growth rate or even their payout ratio. But overall, I found the screener a little difficult to use. Making a screen involves way more "clicks" than it needed to. You start off with a drop down box where you select from a huge number of choices. This really could be broken up into different categories. Once you select that, a pop-up box opens and you fill out what you want it to do. Clicking ok refreshes your main screen and you can start all over with another criteria.

Their portfolio tool has some useful features, but overall I found it too much of a hassle to be of much use. Entering transactions is a real pain. You can import them from Microsoft Money, but it did not work correctly for me. The symbols for almost all the stocks would be off, and would need to be manually changed. For example, the symbol for Duke Energy was not imported as DUK but as DUKE. Only the commissions were imported for some stocks, not the actual amount I invested.

Once you get your portfolio set up it also a pain to make changes. If I purchased more shares of DUK and enter those in at the bottom of the portfolio, it creates a completely separate holding. In order to correctly add shares, I have to hover my mouse over DUK, wait for a menu to pop up, and select edit. That takes me to a completely different page, and then I have to click yet another tab where I can now enter the transaction. If you have a lot of transactions to enter this is just way too time consuming.

With the Premium membership you also get access to the X-Ray tools for your portfolio. This is really cool. It breaks up your portfolio by Asset Allocation, Stock Style Diversification, Stock Sector, Stock Type, World Regions, Fees & Expenses, and overall Stats. Each of those tools can be expanded in detail. Another tool I really like is the Stock Intersection. This tool works best for mutual funds/ETF's. This shows you the overlap your funds have. For example, in my 401k plan, I have FUSEX, FCNTX, and FBALX. Each one of these funds holds PG. This shows you how much PG makes up of each of those funds, how much I would proportionally own in my portfolio, and the total value of that one stock in my portfolio (1.2%).

There are also more features to the Premium membership, but most of the rest were not really useful to me at this time. The current price is $18.95 a month or $174 for a year. For a small investor who only invests $100-$200 a month, that's a little too pricey for me.

As a side note, I have been very pleased with Morningstar. I have read two books authored by staff members there and they were some of the best books on investing I have read. If they paid a dividend I might even consider investing in them.

Update: Jan 31 - I canceled my trial membership. You have to call them to cancel it, but the call was quick. Other memberships I have canceled on the phone took quite a while, and you had to listen to a ton of spiels by someone you could barely understood. Not the case with Morningstar. They guy I talked to was very helpful, just wanted to know if I had had enough time to look it over and said he could give me 2 more weeks if I wanted. I said no and he didn't try to keep going. There's a lot of useful stuff there, but it's just too expensive for me.

Some Interesting Articles

I came across two interesting articles today. The first article is "Wall Street Paychecks May Wither" by Floyd Norris. Published in the New York Times on 1/22/09.

Personally, I think it would be very good to see smaller paychecks in the financial world. (Keep in mind, I don't mean the low-level employees who actually do all the work, I mean the people at the top making $250k+). It really makes my blood boil seeing these people make such a mess j
. People like John Thain, former chief at Merrill Lynch, who gave out $15 billion in bonuses before they were acquired by Bank of America, should be jailed (he even spent $1.2 million last year to redecorate his office!). People need to be responsible for their actions.

The author quotes Thomas Philippon:

He is convinced that less financial innovation could be good for a time, and that this crisis has shown to all that much more regulation is needed. “Some of the financial innovations we have seen are obviously inefficient,” he said. “A good chunk of innovation has to do with tax and regulation arbitrage. That is really a waste for the society.”

And, he added, the society could benefit from a flow to other industries. “As a society, do we want to put a third of our best brains in the financial sector?” he asked, pointing to a study indicating Harvard graduates from the early 1990s were far more likely to go into finance than were those who had graduated a decade earlier.

I think it would be much better to have the best brains in the country working on other things than how to make a quick buck.

The second article was by Peter Schiff, entitled "The World Won't Buy Unlimited U.S. Debt", published by the Wall Street Journal on 1/23/09.

Barack Obama has spoken often of sacrifice. And as recently as a week ago, he said that to stave off the deepening recession Americans should be prepared to face "trillion dollar deficits for years to come."

But apart from a stirring call for volunteerism in his inaugural address, the only specific sacrifices the president has outlined thus far include lower taxes, millions of federally funded jobs, expanded corporate bailouts, and direct stimulus checks to consumers. Could this be described as sacrificial?

And Schiff points out that the ones called on to sacrifice are not Americans, but rather are those nations who buy our debt. Instead of putting that money to work in their own lands they must hold on to it almost ad infinitum. How much longer until they say enough is enough?

It is also clear from the political chatter that the policies most favored will be those that encourage rapid consumer spending, not lasting or sustainable economic change.

Though I may not know what the exact solution is for the financial crisis we are in, I do know that encouraging people to continue to spend money they don't have on things they don't really need is not the answer.

New Look

Please bear with me while I experiment with several new designs.

Edit: I changed the template just before my lunch hour was over so I was not able to fix all the broken links and the spanish. That has all been fixed now, with the exception of the very top links (Portfolio and BlogRoll) which don't exist yet.

I like this look a lot better than the previous template. The previous one didn't allow for much in the way of extras, and I was limited to one side column. Having two allows me to add more things without you having to scroll down 1/2 a mile to see it all!

I got the template from Allblogtools.com. They have a large number of templates.

Blue Chip Stocks with 10% Yields

As a dividend investor I'm always looking for quality stocks with high yields. Those can be very difficult to find as everyone wants them. I've noticed most blue chip stocks have a 1-3% yield, which really isn't that good - I can get that from the bank.

There is a way to get high yields - buying and holding the stock over time. Take for example Johnson & Johnson (JNJ). Currently the stock has a yield of 3.1% (which is actually high for it). If you had purchased the stock in December 1995, in 1996 you would have recieved 36.75¢ in dividends for an unattractive yield of 2.2% (share price of $17.02 in Dec 1995, adjusted for splits). But if you held that share over the years, in 2008 you would have recieved a dividend of $1.795 - which now gives you a yield of 10.5%.

Even better - in 1976 (the first year listed on Yahoo Finance) the price was 58¢ and it paid a dividend of .0071¢ for a 1.2% yield (prices adjusted for splits). 32 years later that ends up getting you a yield of 309%! That's pretty impressive.

The key is to find quality companies that pay dividends and regularly increase them - that's how a pathetic 2.2% yield can turn into a wonderful 10.5% yield in a decade.

I am going long on JNJ and their consistent dividend increases is the major reason. GE is another one that I am going long on. Short term it might have some trouble, but 10 years down the road I think I'll be very happy with it.

Asset Allocation

In the article I blogged about yesterday there is another quote I wanted to comment on. Alicia Munnell, the director of the Center for Retirement Research at Boston College said:

It's so crazy to have a system where people can lose half their assets right before they retire.

I wouldn't say this is a problem with the system. This is a problem with the individual - if you lost 1/2 of your assets this past year and you are planning on retiring in the next few years, then had your asset allocation completely messed up. As a person gets closer to retirement age their portfolio should contain less and less stocks and more and more bonds/money market funds. Any book on asset location will tell you that.

For example, I compared three funds from my own 401(k) plan: Fidelity U.S. Bond Index (FBIDX), Fidelity Spartan U.S. Equity Index (FUSEX), and Baron Growth Fund (BGRFX). The following charts assume that you invested $10k into each fund on Jan 1, 1998, and all dividends and capital gains were reinvested. The spreadsheet here shows the values at the end of each year.



This chart is of FUSEX. It is the one in red (the others are market indexes). You can see how $10k in 1998 went to $17.5k in 2007 and then dropped down to $11k in 2008.


This chart is of FBIDX. This went from $10k in 1998 to $17.6k in 2007, then $18.2k in 2008.

BGRFX went from $10k to $29.6k in 2007 and then dropped $11k to $18k in 2008.


Good asset allocation is vital to any portfolio. I am under 30, and therefore I have the bulk of my portfolio in stocks. Right now my 401(k) portfolio consists of:

• Cash: 10%
• Bonds: 16%
• Stocks: 74% (80% US and 20% Foreign)

The general rule of thumb is to take 100 - [your age] to get your suggested allocation for stocks.

Many 401(k) plans have funds that have been made people who want to "set it and forget it." Fidelity is the company who handles my plan and they offer Fidelity Freedom Funds. There are a number of them, all based in 10 year increments. So if you were going to retire around 2020 you would pick the Fidelity Freedom 2020 Fund. These funds will adjust their asset allocation as time goes on to include less stock and more bonds/cash. These types of funds are probably very useful to someone who has no desire to manage their portfolio and wants someone else to do all the work. Of course, there is a fee involved. If you look at the portfolio of these funds they consist primarily of other Fidelity mutual funds, which means not only are you paying the fees for the Freedom Fund, but you are also paying fees to all of those other funds. I don't like that, but for someone else who doesn't want to worry about it, the extra fees would probably be agreeable.

If you have not figured out your asset allocation, CNNMoney has a tool you can use for free (there's a ton of free ones out there). Having a good allocation is vital to having a good portfolio.

Some Thoughts about 401(k) Plans

I read an interesting article in The Wall Street Journal a few days ago entitled, "Big Slide in 401(k)s Spurs Calls for Change" by Eleanor Laise. The article goes on about how the 401(k) system has failed and offers several supporting stories. Laise writes:

The most obvious pitfall is that 401(k) plans shift all retirement-planning risks -- not saving enough, making poor investment choices, outliving savings -- to untrained individuals, who often don't have the time, inclination or know-how to manage them.

That certainly is true to a degree, but that doesn't mean that the system has failed. The solution is better educate people on how to use their 401(k). Almost anyone can learn the basics on how to manage their plan. If you don't want to make the time to learn, then your deserve to have your plan fall apart on you. It doesn't take a lot of time, either. More time is needed at first to become familiar with how it works, and then it is just a matter of a simply check up every couple months.

There are only a very few things that a person needs to know to get their 401(k) plan set up.

1. How to figure out your asset allocation and understand what the different types of assets are. There are a variety of sites that will calculate this for you. Many 401(k) plans have such a calculator right on their site. Simply put, Money market and bond funds have little risk and little returns. Stock funds have greater risk but also the potential for high returns.
   
2. How to select mutual funds. As a general rule, Index Funds have the lowest fees and the best returns over time. They don't try to beat the market - they emulate it.
3. Never have more than 5% of your portfolio in company stock.
4. Always contribute enough to take advantage of your company match. My company matches 5%, so every paycheck I put in 5%. That's a 50% return right there.
   

That in a nutshell is all someone needs to know to get set up, and then all they need to do is evaluate it at least twice a year to make sure your asset allocation is still on track, or to revise it as necessary.

People need to learn to be responsible for themselves. They need to learn how to save for themselves and not to expect some bailout from Uncle Sam when times get tough and they didn't prepare themselves.

I have a coworker who I've been talking to about investing. Come to find out, even though he's been at the company for 3 years longer than I have, he doesn't participate in the 401(k). I tried to point out to him the company match and the tax benefits, but he really didn't want to have anything taken out of his paycheck. Sadly, that's the case with a lot of people. Personal finance is something that our schools really need to teach.

Review of Barron's

I have been subscribing to the Wall Street Journal for about 8 months now and I have been very happy with it. I got in at a very good price, too - at about 33¢ a day delivered it's almost 1/2 the price of the local paper (and usually twice as thick!).

I've heard (well, read) a lot of people comment on Barron's and I decided to look into it. I absolutely love to read, so another financial paper would probably be interesting.

One the Barron's website I found an offer for 56 issues for $99, which would be about $1.76 an issue. I didn't really want to fork out the money up front just to find out I didn't really like Barron's, so I e-mailed them and asked for a copy. They were kind enough to send me a copy of January 5th's, which I got today.

Looking it over I as actually somewhat disappointed. There were two sections - the main section with all the articles and then the Market Week section with about a dozen pages of articles, and then over 40 pages of stock quotes. The stock quotes made up about 1/2 of the entire paper, which seemed like a big waste of space to me, as it takes me about 2 seconds to look up the quote on Google (and it takes me even longer to look it up in the paper because they are all sorted by exchange, and then by the company name, not ticker). Not to mention the print is very tiny. I don't understand why they would devout 1/2 of the paper to quotes, especially as they are only a weekly paper.

There were some interesting articles in the main section and the overall format was nice and easy to read, but I think I'm going to stick with the Wall Street Journal. Barron's just didn't seem to have enough in it for me to really justify the expense.

New Purchases and Proceeding with Caution

I made 4 more investments today with the $100 that I intend to invest each month. I doubled my holding of JNJ to a whopping 2 shares! As my funds are very limited I considered whether I should continue adding a share each month or not, but I think that in the long run I am going to be very glad that I did. I also purchased some shares of GNA and BGS. I had $5 remaining so I put that in my speculative portfolio and got 160 shares of JDO at 2.9¢. Turned out to be a good speculation as it ended the day at 5¢.

I came across a good blog post today on A Slacker's Quest for His First Million entitled "Proceed with Caution." He basically points out that in many of the worst markets in history they have been followed by times of large gains (even lasting for months) before falling again. He also points out that people thought Chinese stocks were safe until the Olympics, but the market peaked before that. The same will probably be true for us now. People are saying the market will be safe at least until March 2009, so he suggests that it will probably peak sooner.

Personally, after the rallies of Monday and Tuesday (my portfolio went up about 10% in 2 days!) I was tempted to put more money in and invest while stocks are still cheap. But realistically I'm not sure how long this would last. I'm sure stocks will do relatively well until Obama's inauguration, but what then? But, as that post points out, it might be a good time to get some nice blue chip stocks with high yields and low prices.

I would recomment adding A Slacker's Quest for His First Million to your lists of blogs you subscribe to. There are a lot of good posts there and they are very helpful and informative.

Book Review: The Neatest Little Guide to Stock Market Investing

By Jason Kelly. Penguin Group/Plume Books, 2nd Revised Edition, 2008. 276pgs. Link.

This is a very basic book geared to the beginner. His section on "How to Evaluate Stocks" is something everyone should read before they start investing. Though basic, it provides the fundamental information that you'll need to know to begin making choices about what stocks to buy. The 2nd chapter gives you a brief introduction to the investing styles of Benjamin Graham, Warren Buffett, Peter Lynch, William O'Neil, and Bill Miller. When he sums up each person he mostly just repeats verbatim things he just said in the previous two pages which made it very repetitive (he could have at least re-worded it).

Chapter 4 is entitled "Permanent Portfolios" and is somewhat misleading and I found it to be dissapointing. The chapter only discusses the Dow Jones Industrial Average. He offers "five popular Dow dividend strategies" based on listing all 30 stocks in the DOW by yield, and then taking the top 10:
- Dow 10 (divide your money equally into 10 stocks)
- Dow High 5 (divide your money equally into the 5 highest yielding stocks)
- Dow Low 5 (divide your money equally into the 5 lowest-price stocks)
- Dow 4 (put 40% on stock #2, and 20% on stocks #3, 4, and 5)
- Dow 1 (put all of your money on stock #2).

I will admit that I am relatively new to investing (about 8 months now) but I have never heard of those "strategies", and they really seem more like gambling than anything. It is interesting that in his example in the book, for Dow 1 he would have put everything in GM, which he lists with a book value of $30.72. It closed Friday at $3.65. The old saying of never putting all your eggs in one basket is still good advice. Personally I would advise either doing a portfolio of the entire Dow or even the Dow 10. What is also interesting is that he lists a table showing the performance of the 5 strategies he listed compared with the entire Dow, but he states the table "details price change only and does not take into account income from dividend payouts." Umm... doesn't he call these "The Dow Dividend Strategies"? Aren't the selections based off of the highest yields? Any proper comparison would have to include the dividends.

One of the most helpful sections of the book was Chapter 7, "This Book's Strategy," which goes through in relative detail how to how to evaluate stocks. Included in the end of the book are a few worksheets to use with this. It would have been helpful if they had provided a link to download them on the internet.

I was hoping it would go into more detail concerning the annual reports and 10-K/Q filings, but it didn't really go into any kind of detail.

All in all this was a decent book and the beginner will profit from reading it.