The Sun's Financial Diary » Investing

optionsXpress 5 Free Trades for a New IRA Account

Sun — Wed, 03 Mar 2010 04:01:52 +0000

Here’s another broker promotion for new IRA account.

Online broker optionsXpress is offering 5 commission free trades for a new IRA or rollover IRA account. Eligible IRA accounts include Traditional IRA, Roth IRA, Rollover IRA, and SEP-IRA. If you open an account with optionsXpress before April 15th, 2010, which is the tax deadline, with at least $500, either as bank deposit or securities transferred from another broker, you will receive 5 free trades, valued at $74.75. The free trades will be credited within two weeks after the account is opened and funded in the form of $14.95 commission per trade for the first five trades. The new fund has to remain in the account for at least 12 months, or the credit will be forfeited.

Sure, optionsXpress isn’t really a *discount* broker because its commission is rather high (see discount broker comparison for commissions charged by brokers for stock, options, and mutual fund trades) when compared with others. But there’s one little nice thing about optionsXpress: It also has a referral program that lets you earn 10 free trades for every person you refer to optionsXpress (you can select to receive $100 bonus instead). So if you don’t trade a lot, a couple of referrals will let you trade commission free for quite a long time Also, the broker recently launched a standalone trading platform Xtend, which is pretty cool.

Early, OptionsHouse also offered commission free trades for new IRA account.

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optionsXpress 5 Free Trades for a New IRA Account

Lending Club Loan Update

Sun — Tue, 02 Mar 2010 14:45:25 +0000

I am still investing in Lending Club loans as an alternative investment, but I must admit that I am a little disappointed by the performance of my investments, especially when two loans went bad after only two months since they were issued. Overall, the number loans and the number of late and charge-off all grew since last update in December.

I have added 25 new loans since last December, bringing the total number of loans invested to 172. As you can see from the above screenshot, there are 6 loans that are more than 31 days late, up from 3 in late December. Of the three new loans that are late in making payment, one grade B loan filed for Chapter 7 bankruptcy in January only two months after the loan request was approved. I know that unexpected things can happen, but filing for bankruptcy must be an extreme step for a person to take. In this case, I wonder if Lending Club has done a thorough investigation of the borrower’s financial condition before approving the loan. Of course, I also share the blame as there were clear warning signs in the original loan request, such as more than $75K revolving credit balance and 1 delinquency in the last two years. I always avoid borrowers with delinquency history, but somehow this one slipped away.

Of the other five loans that are late, four of them either made partial payments since the first failed payment or had a new payment plan with reduced payment. If all the revised payment plans work out, then the overall situation won’t be that bad as right now the charge-off/default rate is only 1.7% (3 out of 172). Otherwise, the investments in Lending Club will become a little sour because the total value in charged-off and late loan is about $260, almost equal to the total interests of $274 received so far, one year since I first began to buy loans on Lending Club’s secondary market in February 2009.

Though not very happy with the number of late loans, I will keep investing with Lending Club. With nearly $150 monthly payment, I can add a few more new loan every month to keep it going.

BTW, if you are interested in becoming a Lending Club investor, you can receive $100 bonus if you make an initial investment of $2,500 or more. This is a limited offer from LC through its referral program.

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Lending Club Loan Update

Open an OptionsHouse IRA Account and Get 100 Commission Free Trades

Sun — Thu, 18 Feb 2010 03:38:53 +0000

Though it’s still almost two months away from the 2009 tax deadline, April 15, 2010, brokerage firms and mutual fund companies have already rolled out promotions to lure taxpayers to open IRA accounts with them. Among them, OptionsHouse is offering 100 commission free trades if you open an IRA account, such as Traditional, Roth, SEP, or Educational IRA, with the broker before April 15th with promotion code IRA2010 and make an initial deposit of at least $3,000. While the number of commission free trades offered in this promotion are a lot, you only have a limited time to use them. In fact, you only have 60 days to exhaust your free trades or you will lose all unused free trades left in your account after 60 days.

As you may remember OptionsHouse had a 100 commission free trades promotion last year. If you have taken advantage of the previous offer, or you have an IRA account with OptionsHouse, then you are not eligible for this promotion. OptionsHouse charges $2.95 for online stock trade. Check out my OptionsHouse review post and interview with OpttionsHouse CEO to learn more about the broker.

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OptionsXpress Launched Xtend, A Standalone Trading Platform

Sun — Sat, 13 Feb 2010 15:32:26 +0000

When I compared broker web-based trading platforms a while ago, I mentioned that most brokers I am using only have web-based trading platforms, except Scottrade, which also offers a standalone, PC-based platform called ScottradeELITE (available for customers with account balance of $25,000 or more). What I like about the separate program is that it’s much, much more powerful than the web platform. Especially in terms of doing research, ScottradeELITE is more convenient.

Now, another discount broker that I use joined Scottrade to offer a standalone trading program: The Xtend from OptionsXpress.

The first look at Xtend is pretty positive. The interface looks cool and I like how different sections of information are arranged and presented.

At the top of the screen, there are benchmarks that give me a quick idea of how the broad market is doing, including the Dow, the Nasdaq, and the S&P 500.

The main area is where you can customize to display what you want to monitor. The default setting shows my stock watch list, which is the same as the one I set up in my web account after logging into Xtend using the same login info. When I double click a symbol in the Watch List, it opens new window of details of stock.

Right-click on any symbol in the Watch List brings up options to trade the stock, as well as going to OptionsXpress website for real-time streaming quote, which I find is quit weird. Isn’t Xtend the perfect place for streaming quotes?

The central section has all the trade related information, for both stocks and options. Here, I have Trade Ticket, which is the place to enter an order, whether it’s a stock, options or future, all those trades offered by OptionsXpress. There’s also an Options Chain section for options trading which I am not very familiar. Finally, all the stocks I have in the Watch List also show in the Trade View. Here, trading can be made with only a few mouse clicks, which is quite convenient.

On the right, I have account related information, such as Account Balance and Positions.

At the bottom of the screen, there are a lot of tools from OptionsXpress that can be added to the main window. For example, I added Charts into the left column to display the price change and volume of a stock for the past two days. Another feature of Xtend that I noticed is that when the program is running, it displays pop-up alerts when stocks’ gain or decline reach certain levels. The alerts I saw were set as default. I think they can be customized to only show what I am interested, but I haven’t found out how to do it.

From the first look, I feel that Xtend looks better than ScottradeELITE, though I haven’t full explored all its functions yet, nor did I make any trade. If you are interested in opening an account with OptionsXpress and trying Xtend out, you can take advantage of the OptionsXpress $100 bonus offer if you fund the account with at least $500 and make 3 trades in 12 months.

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OptionsXpress Launched Xtend, A Standalone Trading Platform

Can the Super Bowl Help Forecast the Stock Market?

David Dierking — Tue, 09 Feb 2010 14:43:47 +0000

Like about 100 million people across the country, I spent my Sunday evening watching Super Bowl XLIV between the Indianapolis Colts and the New Orleans Saints. I didn’t have a particular rooting interest in either of the teams although I did enjoy the feel good fairy tale ending for the city of New Orleans. It was mainly about the food and the commercials for me but that doesn’t mean that I wasn’t interested in the outcome.

Some Wall Street analysts like to try to forecast the economy and the stock market in the same way that Punxsutawney Phil likes to predict the weather – trying to derive something meaningful out of a random event even though there’s no rational connection between the two. A groundhog in Pennsylvania doesn’t have the ability to control global weather patterns but that doesn’t seem to prevent some folks from trying to harness their predictive power.

The Super Bowl is no different. Some prognosticators believe that the result of the game helps determine the direction of the market for the coming year. Here’s a look at a few of the theories tied to the NFL’s biggest game (thanks to Capital IQ for several of the stats).

Theory: If the Super Bowl winner comes from the old NFL, we’ll be in for an up year. If the Super Bowl winner comes from the old AFL, look for a down year.
Evidence: Historically, this indicator has been surprisingly accurate being right on the money about 80% of the time. The indicator has been slightly less than reliable in recent years.
Outlook: Good. New Orleans is an original NFL team and picked up the win this year so, according to this at least, things could be looking up.

Theory: Stock market returns are significantly higher when the Super Bowl winner comes from the NFC versus the AFC.
Evidence: In years where the Super Bowl winner comes from the NFC, the S&P 500 is up an average of 15% per year. In years where the Super Bowl winner comes from the AFC, the S&P 500 is up an average of just 7% per year.
Outlook: Good. This one is pretty similar to the first theory. New Orleans comes from the NFC.

Theory: Years in which the Super Bowl produces a first time champion tend to also produce solid stock market returns.
Evidence: The S&P 500 has produced an average annual return of about 9% in years where the Super Bowl winner is a first timer. This, perhaps not so coincidentally, is also roughly the long-term average annual return for stocks.
Outlook: Good. New Orleans won their first Super Bowl this past weekend.

Theory: The stock market will perform better if there is a higher combined total score.
Evidence: In years where the combined number of points scored by both teams tops 45, the market has returned an average of 17% per year. If it’s below that number, stocks have averaged about 7% per year.
Outlook: Good. The final score for this year’s game was 31-17.

Look at that! We’re four for four! Guess we’re in for a good year, right? It could be except for one little thing. The Super Bowl has nothing to do with the stock market.

Keep in mind that everything presented here is just for fun. The result of a football game obviously has no bearing whatsoever on what the stock market is going to do over the next 12 months. If you’re planning on managing your money according to anything you’ve read here, you might want to rethink your strategy. Any investment you make needs to be based on the fundamentals of what you’re investing in and nothing more but it’s OK to have a little fun with it too.

Just don’t put too much trust in a game or a groundhog!

Photo credit: guardian.co.uk

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It Could Be Time To Jump On The Buffett Bandwagon

David Dierking — Wed, 03 Feb 2010 14:33:29 +0000

Warren Buffett is in the news again!

Well, I suppose in the world of Wall Street, Warren Buffett never really leaves the news but the information that came out of Omaha, Nebraska this past week is particularly noteworthy.

On January 26th, it was announced that Berkshire Hathaway, Buffett’s holding company, would be replacing Burlington Northern Santa Fe, the railroad that Berkshire recently acquired, in both the S&P 100 and S&P 500 indices. Buffett and Berkshire have long been likely candidates to join one of the S&P indices and this announcement proves significant to investors for a couple of reasons.

The first has to do with the performance of the stock itself and what is known as the “index effect”. This refers to the short-term price bounce that stocks joining a major index typically see as institutions and fund managers begin snapping up the stock to add to their own index fund products. Wall Street reacts fast though and it’s worth noting that Berkshire Hathaway’s shares (both “A” and “B” classes) have already jumped over 10% since the news broke.

The second reason is that Berkshire Hathaway’s shares just became more accessible to a lot more investors. Berkshire’s “B” shares underwent a 50-to-1 stock split in order to help finance the purchase of Burlington Northern Santa Fe – a split which resulted in the share price dropping from around $3,500 a share down to about $70. Berkshire Hathaway’s “A” shares, currently priced at about $112,000 per share, have been out of reach for most investors for a while now but suddenly through the “B” shares Warren Buffett’s expertise could be had for the price of a nice dinner for two. Intriguing, no?

If you’re a long-term investor, it makes sense to consider trusting some of your money to Warren Buffett. After all, Berkshire Hathaway has generated some phenomenal market-beating returns since Buffett took over. But by “long-term investor” I mean years and years. Buffett is well known for investing in companies and sometimes holding on to his stakes for decades. You should be prepared to make the same type of commitment if you plan on buying Berkshire shares.

The other question is one of value. We should probably disregard the potential for short-term returns because the stock price appears to have already reacted to the S&P 500 addition news along with the fact that Berkshire isn’t managed that way. Berkshire’s shares struggled last year as investments in financials, insurance companies and other cyclicals lagged behind the broad market so backers can argue that there is some value potential here. Buffett himself has even said that the current price-to-book ratio of the shares is as cheap as it’s ever been.

Does all this indicate a buy signal? As far as Buffett himself is concerned, although he’s not technically a Wall Street money manager you’ll be hard pressed to find an investment guy as talented as he is. Buffett is a throwback to the old school method of investing – find well managed companies that demonstrate exceptional value and hold on to them until that value is finally realized. In the current era of technical analysis and short-term returns, Buffett is a welcome reminder of how investing can be executed well.

If you have some cash sitting on the sideline waiting to be put to work, the Oracle of Omaha might not be a bad person to hand it to.

*Stock chart from MarketClub

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Fidelity Reduces Trading Commission and Offers Commission-Free iShare ETFs

Sun — Tue, 02 Feb 2010 22:06:04 +0000

This is what competition is about.

Early last month, Charles Schwab reduced the commission for online equity trading to $8.95 per trade from the original price of $12.95. The move, as an recent article on Barron’s noted, could trigger a new price war in online trading. Now, there’s a strong evidence that the war may have indeed started after mutual fund giant Fidelity announced today that it’s also cutting online trading commission and offering commission-free trade of iShare ETFs to its customers through its brokerage unit starting February 3, 2010.

Effective tomorrow, the new commission for online equity trades is $7.95 per trade, regardless the number of shares and trading frequency. The new price is lower than what Schwab charges for online stock trading and only slightly higher than discount broker Scottrade’s equity commission (currently at $7.00/trade). Meanwhile, Fidelity also said today that it will offer commission-free trade of 25 iShare ETFs through Fidelity.com, Active Trader Pro, Wealth-Lab Pro, or through Fidelity’s wireless channels. iShare ETFs that are eligible for commission-free trades cover three categories: domestic equity index funds, international equity funds, and fixed income funds.

U.S. Equity Index Funds

Russell 1000 Growth (IWF)
Russell 1000 (IWB)
Russell 1000 Value (IWD)
Russell 2000 Growth (IWO)
Russell 2000 (IWM)
Russell 2000 Value (IWN)
Russell 3000 (IWV)
S&P 500 Growth (IVW)
S&P 500 (IVV)
S&P 500 Value (IVE)
S&P Mid Cap 400 Growth (IJK)
S&P Mid Cap 400 (IJH)
S&P Mid Cap 400 Value (IJJ)
S&P Small Cap 600 Growth (IJT)
S&P Small Cap 600 (IJR)
S&P Small Cap 600 Value (IJS)

International Equity Index Funds

MSCI ACWI (ACWI)
MSCI EAFE (EFA)
MSCI EAFE Small Cap (SCZ)
MSCI Emerging Markets (EEM)

Fixed Income Funds

Barclays Aggregate (AGG)
Barclays TIPS (TIP)
iBoxx $ Investment Grade Corporate (LQD)
JP Morgan USD Emerging Markets (EMB)
S&P National AMT-Free Municipal (MUB)

Now that both Schwab and Fidelity have lowered their stock commissions and offered some extra for free for their customers, I hope that other discount brokers, especially Scottrade which has the closest commission to that of Fidelity, will also do something similar to reduce trading cost. Will that happen? I don’t know. But if more firms join Schwab and Fidelity to lower their trading fees, discount brokers will feel the pressure and that will be good news for us

Photo credit: Kongharald

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Why Direct Stock Purchase Plan Still Makes Sense

Sun — Thu, 28 Jan 2010 14:35:51 +0000

I bought a lot of individual stocks in 2009 in my brokerage accounts, mostly with Scottrade. Many of them were purchased before the market hit the bottom (now we can safely call it the bottom) in March. But those stocks were not all what I bought last year. In addition to stocks purchased here and there, I also added two stocks, ExxonMobile (NYSE:XOM) and Boston Properties (NYSE:BXP), to my regular purchase list, all through Direct Stock Purchase Plan (DSPP) at ComputerShare. With the two additions, the list of DSPP stocks I buy regularly grew to 5, which also include Bank of America (NYSE:BAC), Procter & Gamble (NYSE:PG), and Progress Energy (NYSE:PGN). I will probably add more to the list gradually.

With so many discount stock brokers where I can buy unlimited number of stocks at only a few bucks of commission (such as OptionsHouse $2.95/trade and SogoTrade $3.00/share) at any time, you may ask why I still bother to use programs like ComputerShare to buy stocks. Well, the reason is quite simple: Because I think DSPP still makes sense, even when there are so many cheap alternatives including the two I just mentioned.

Investing with DSPP Is still Cheap

Actually, this is THE reason why I am still using DSPP, even though DSPPs usually involve more fees and most plans, if not all, impose a minimum investment for both initial and ongoing purchases. Unfortunately, most of them can be avoided by carefully choosing which plan to use. For example, a typical DSPP plan offered through ComputerShare charges such fees as Initial Setup Fee, Cash Purchase Fee, Ongoing Automatic Investment Fee, Purchase Processing Fee (per share), Dividend Reinvestment Fee, Batch Sale Fee, Batch Sale Processing Fee (per share), Market Order Sale Fee, and Market Order Processing Fee (per share). That’s a lot of fees comparing to buying stocks from most brokers which charge a flat fee for a buy or sell order, regardless the number of shares. However, not every plan charges so much fees. Otherwise, it wouldn’t make any sense to use DSPPs. For instance, when I joined ExxonMobile’s DSPP last year, I didn’t pay any fee. The only fee that I will pay later is the Batch Sale Fee of $25 and Batch Sale Processing Fee at $0.12/share. All other fees are waived and the company pays for dividend reinvestment. Since I am only buying $100 a month, I probably won’t own a lot of shares at the time when I decide to sell in the future. Thus, using XOM’s DSPP to buy the stock is an affordable option for me.

On the other hand, there are also plans like the Coca-Cola plan which charges $10 Initial Setup Fee, $3 Cash Purchase Fee, $2 Ongoing Automatic Investment Fee, $0.03/share Purchase Processing Fee, and 5% of amount reinvested up to a maximum of $2.00 for dividend reinvestment. I will definitely stay away from plans loaded with fees.

Get Free Dividend Reinvestment

More and more discount brokers are offering free dividend reinvestment these days. Among brokers I am using, I know TradeKing and Zecco have such services, but not Scottrade. At Scottrade, dividends are paid as cash and if I want to use the distribution to buy more stocks, I will have to pay $7 commission for every purchase. Given the difference in return between with and without dividend reinvestment, it will be a big loss in the long term if dividends are taken as cash because the broker I use simply doesn’t offer free dividend reinvestment service. And having the dividend reinvested is the reason I buy those dividend paying stocks in the first place. With DSPP or DRIP (Dividend Reinvestment Plan), I can get dividends reinvested automatically for free if I choose to buy stocks from plans with free dividend reinvestment (not the Coca-Cola stock though). Even though stocks offered through places like ComputerShare are limited in quantity, but not so in quality. In fact, there are many high quality companies with rich dividend payouts. Investing in these companies with DSPP is a valid choice.

Automatically Invest in Good Market and Bad

When you buy stocks from a broker, you will pay a fixed commission for every order and you can only buy a round number of shares. For example, if you want to buy one share of Google stock (NASDAQ:GOOG), you need at least $540 to buy the minimum of one share at the current price. If you only have $100 to invest, then sorry, you will have to look for something else that’s cheaper in price because no broker will sell you one fifth of a share of GOOG. This is not the case with DSPPs that I am using with ComputerShare. I basically set up an automatic investment plan for the stock I want to buy and each month a fixed amount money will be withdrawn from my bank account on a given day of the month to purchase the stock that usually gives me fractional shares. This whole scheme is a lot like what ShareBuilder is doing with its automatic investment plan, but in a much cheaper way. With ShareBuilder, it will cost you $4 for each investment. When you choose a DSPP with no ongoing automatic investment fee like the XOM plan I mentioned above, there’s no fee involved in the transaction.

Actually, if you are familiar with dollar-cost averaging often used in mutual fund investing, the free DSPP automatic investment plan works in the same way, thus you get the same benefit: Buy the stock in good market and bad, no market timing of any sort. This is especially good for investors who can only set aside a small amount of money, say $100, to invest each month. Unlike mutual funds which usually require a minimal initial investment of $1,000 or more (most Vanguard funds require at least $3,000), DSPPs’ initial investments are much smaller, usually below $1,000, making it easier to buy stocks with a small budget than invest in a mutual funds (I am not talking about the risk of investing in individual stocks and mutual funds here).

Of course, DSPPs have their limitations. In you buy through ComputerShare, you have a limited number of choices because not every public company has a DSPP. Also, many plans do involve high fees that make them less appealing for regular purchases (like every month), plus the lack of flexibility to choose on what day you want to buy and the frequency you want to buy (with ComputerShare, you can only make monthly investment). But I feel these drawbacks don’t overshadow the benefits of using DSPPs.

Does investing with DSPP still make sense? It does for me. If you want to know more about buying stocks from ComputerShare, check out my ComputerShare review post to learn more about the process.

Photo credit: jm3

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ChoiceTrade: Another Discount Stock & Options Broker

Sun — Thu, 21 Jan 2010 20:14:23 +0000

ChoiceTrade, headquartered in Central New Jersey, is another online discount broker which offers stock and options trading at a discounted price (ChoiceTrade is one of the discount brokers highlighted in my discount broker comparison post). The current trading commission at ChoiceTrade is $5 per online stock trade with no limit on the size of the order, at the same level as TradeKing’s commission ($4.95/trade). Commission for options trading costs $0.99 per contract. However, there’s a minimum of $8.95 per lag on options trading. There’s a $25 surcharge for broker-assisted trades for equity or options. There’s no minimum balance requirement to open an account. However, if you want to get streaming quotes or use their standalone trading software, there will be additional cost.

ChoiceTrade Trading Platforms

Unlike other discount brokers which offer only one web-based trading platform, you can have multiple choices on how to trade with ChoiceTrade, including both web-based and standalone platforms (ChoiceTrader Select). The web-based platform is free of charge, like any other web-based trading platform. It will give you real-time quote (a snap shot), but not the streaming quotes, which you can get from other brokers like Scottrade, Firstrade, and TradeKing. For ChoiceTrader Select, which offers all of the services of the online platform plus direct access trading, advanced order entry, and algorithmic trading, there will be a $60 monthly fee.

Free ChoiceTrade Trading Simulator

ChoiceTrade’s FREE online trading simulator allows you to try out our online platform and test trade in a real-time, simulated trading environment. You can test your option and equity strategies without opening an account and without risking any capital.
The trades are 100% simulated so that your trading capital is never at risk. The executions have been simulated as well to reflect the fact that sometimes you will be filled immediately and other times you won’t, depending on market conditions. When an order is not executed you will be able to cancel or modify the order.

Real-Time Data Stream

As mentioned above, you will get real-time quote with the free web-based platform. However, to get real-time streaming quotes, you will need to subscribe to data feeds through streamer platforms, which are priced as the following:

Data Feeds

Web-based
Basic Streaming platform

ChoiceTrader Select Platform with eSignal

Base Monthly

$14.95

$23.95

$126 ($46 off reg. price)

Streaming/Polling

Streaming
as-it-happens

Nasdaq, Amex, NYSE Level 1

Included

Options

Included

NASDAQ Level 2

$10

Included

NASDAQ TotalView

N/A

ARCABook

$10

NYSE Open Book

N/A

$60

Dow Jones Newswire

$110

$115

Pink Sheet Level 1

Pink Sheet Level 2

$12

Time and Sales

Advanced Charts

Mobile Version

If you make 5 trades or more per month, you can get the basic streaming for free.

Promotions

Right now, ChoiceTrade is offering $50 bonus for any new account opened before February 5, 2010 using promotion code JA50CT. In addition, you can also receive basic streaming for free for 4 months, as long as you maintain the account balance of $2,000 at any time through the free trail period.

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ChoiceTrade: Another Discount Stock & Options Broker

Actively Managed or Index Funds?

Sun — Thu, 21 Jan 2010 14:32:33 +0000

This topic has been discussed many times in the past. In my last post in April 2009, I mentioned that despite the apparent lower costs, index funds remains unpopular among investors, accounting for only 12% of the total equity mutual fund assets as of 2007. There are many reasons that investors turn their back on cheap index funds and pour their money into actively manage funds instead. Among them, hoping for a performance that beats the average return is the main reason for people to favor actively managed funds over cheap index funds. By investing in actively managed mutual funds, investors effectively put the fate of their investments in the hands of fund managers who make all the decisions of what to buy and when to buy, as a recent article on the WSJ put it

the decision to buy an index fund isn’t “saying that you can’t beat the market. It’s just saying you don’t know who will beat the market and that you’d rather keep costs low and have the average rather than risk picking a stud or a dud.”

However, even the seasoned fund managers like Bill Miller can’t avoid making wrong investment decision. His Legg Mason Value Trust Fund (LMVTX) beat the S&P 500 for 15 straight years until 2006. Then when the financial crisis reached it peak in 2008, the fund lost more than 55% in one year. That was 18% lower than the return of the benchmark in the same year, according to Morningstar data. Even though 2009 was the year that the average return of actively managed mutual funds beat their index peers by 1 percentage point (32.8% vs. 31.7%), index funds won the battle if we look at the period after the March 9 lows. From March 9 to December 31, 2009, index mutual funds gained 82% vs. 73% gain of active funds.

The debate between passive funds (index funds) and active funds will sure to continue and people will keep investing in the latter (I am still holding all my actively managed funds and keep investing in them every month), probably even so after the robust year of 2009 (LMVTX returned 41% last year, beating the S&P by 14%). However, before deciding where to put your money, in an index fund or an actively managed funds, there are a few things you need to keep in mind, as the WSJ article suggested:

A good run will not last forever: Bill Miller is a good example of what the market could do to a veteran investors. Though the fund recovered a little bit in 2009, it has lost nearly 67% from the peak in October 2007. Another example of a great fund turning sour lately is Dodge & Cox Fund (DODGX).
Expense ratios vary widely: Expense ratio (ER) is the fee that investors pay the fund manager(s) to research what to invest in addition to other administrative cost. Index funds win the cost battle by a wide margin as index funds involve only passive investment strategies.
Other fees can add up: Though I invest in active funds with higher ER, I always stay away from funds that charge a 5% front load fee to just begin to invest in them. Plus, I always buy funds from the fund companies directly, not from a brokers. While the fund it self may not have a commission, many brokers do charge a transaction fee when investing in a mutual fund through them, unless it’s a no-transaction fee fund.
Short-term gains can be taxing: Since managers of active funds have to trade frequently in order to “beat” the market (a fund’s turn-over ratio will give you an idea of the fund’s trade), the fund will distribute more short-term capital gains, which are taxed at a higher rate, sometimes as high as 35%.
If it acts like an indexer… Then maybe it’s better to just buy an index fund since the fund manager may have realized that he/she can really beat the index fund but still wants to charge a higher fee.

Photo credit: BusinessWeek

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Actively Managed or Index Funds?

30 Free Trades per Month from BoA

Sun — Wed, 20 Jan 2010 14:40:26 +0000

Bank of America is offering $0 equity trade for customers with $25,000 or more in all asset across BoA deposit accounts, including checking, savings, and CDs.

Offer available with an individual or joint Banc of America Investment Services, Inc. (BAI) Self-Directed Brokerage account. If you have a combined total of $25,000 or more in your deposit accounts at Bank of America N.A., BAI waives its commission fee for as many as 30 online equity trades each month. When you make an online equity trade, BAI determines whether you meet the balance requirement to qualify that trade for the commission fee waiver. BAI adds the average collected balances in your checking and savings accounts as of the prior month to the balances in your CD and FDIC-insured IRA accounts as of the prior business day. If this calculation reflects a combined total of less than $25,000, BAI then makes a second calculation to see if the trade qualifies by adding the balances in your checking, savings, CD and FDIC-insured IRA accounts as of the prior business day. Offer applies only to online equity trades, including stock and exchange traded fund (ETF) trades. Standard commission fees apply when the balance requirement is not met, or when you exceed 30 qualifying trades.

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30 Free Trades per Month from BoA

2009 Chinese IPO Stock Performance

Sun — Mon, 18 Jan 2010 14:50:11 +0000

After a dismal year of 2008, the U.S. IPO market recovered a little bit in 2009. According to Renaissance Capital, there were a total of 63 deals last year, up more than a third from the year before when only 43 companies went public. To give you an idea of how bad the past two years was for IPOs, there were more than 200 initial offers from 2004 to 2007, when the IPO market peaked in 2007 with 272 offers when the recession began in December. As Renaissance Capital put it in its 2009 Global IPO Review, “2009 will be seen as a transition year between crisis and recovery to normalcy.”

Of the 63 IPOs in 2009, 10 were Chinese companies. Of those 10 Chinese IPOs, Lihua International (LIWA), which manufactures industrial wires, Duoyuan Global Water (DGW), which makes water conditioning, filtration, and purification products, and Changyou.com (CYOU), which is a online gaming provider, are the best performers of the 2009 class, not only among Chinese companies, but also all the IPOs.

Company	IPO Date	IPO Price	Year-End Price	Return
Changyou.com (NASDAQ:CYOU)	04/01/09	$16.00	$33.51	109.4%
Chemspec International (NYSE:CPC)	06/23/09	$9.00	$6.60	-26.7%
Duoyuan Global Water (NYSE:DGW)	06/23/09	$16.00	$36.08	125.5%
Lihua International (NASDAQ:LIWA)	09/04/09	$4.00	$10.55	163.8%
Shanda Games Limited (NASDAQ:GAME)	09/24/09	$12.50	$10.25	-18.0%
China Real Estate Info. (NASDAQ:CRIC)	10/15/09	$12.00	$11.20	-6.7%
ZST Digital Networks (NASDAQ:ZSTN)	10/19/09	$8.00	$8.75	9.4%
7 Days Group Holdings (NYSE:SVN)	11/19/09	$11.00	$12.49	13.5%
China Nuokang Bio-Pharma (NASDAQ:NKBP)	12/09/09	$9.00	$7.75	-13.9%
Concord Medical Services (NYSE:CCM)	12/11/09	$11.00	$8.72	-20.7%

I bought one IPO stock last year, 7 Days Group (SVN), the economy hotel chain operator, with a price of $12.50 from the secondary market on its IPO day, then some more in December when the stock was traded at $11.55. The stock gained 13.5% last year, is now at $14.70. The reason I invest in SVN is very simple: As people in China travel more and more these days, the demand for hotel rooms could be strong and SVN could benefit from the strong demand. By investing in SVN, I am hoping it can do as well as its competitor, Home Inns & Hotels Management (NASDAQ: HMIN).

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Schwab Reduces Online Stock Trade Commission to $8.95

Sun — Thu, 07 Jan 2010 18:02:10 +0000

Full service broker Charles Schwab announced today (press release, PDF file) that it is reducing commission for online equity trades. Starting January 19th, Schwab customers will pay a flat $8.95 commission for each online stock trade, regardless the number of shares. The current commission schedule charges $12.95 per stock or ETF (exchange-traded fund) trade if the customer trades less than 120 times in a calendar year, plus extra fee for trading more than 1,000 shares in each order. If you have more than $1M assets with them or trade 120 times or more a year, you already pay the reduced commission, but the bar is rather high for small investors. Under the new pricing plan, the commission for automated phone trades is $13.95 (online commission + $5) and broker assisted trades $33.95 (online commission + $25).

Schwab has made some big moves lately to be more competitive. Early last year, it introduced Schwab Invest First credit card that allows cardholders to move cash backs (at 2% which is quite generous) earned from using the card into Schwab brokerage account so they can invest the money. Later it cut expenses on some of its index mutual funds, making them even cheaper than similar offers from Vanguard. At the end of the year, it launched some extra-cheap ETFs to compete with Vanguard and iShare, etc.

When I compiled a list of discount brokers with cheapest commissions last year, I excluded Schwab because at $12.95, I didn’t consider it as a discount broker. Now that it is reducing the fee to $8.95, Schwab will get a spot in the list. That said, is Schwab a discount broker? Well, not according to my standard. For example, you can trade stocks and ETFs at lower commission rates at :

Scottrade: $7.00/trade
Firstrade: $6.95/trade
TradeKing: $4.95/trade
Zecco: $4.50/trade
SogoTrade: $3.00/trade
OptionsHouse: $2.95/trade

There’s no doubt that the new, lowered commission will attract new customers to Schwab, especially those who are interested in Schwab’s mutual fund and ETF products (there’s no commission to buy Schwab mutual funds through its brokerage account), but I feel the change will benefit more to their existing customers. For me, I don’t see myself switching to Schwab any time soon, if at all. I am still happy with the brokers I am using right now and commission cost is one of the most important factors when deciding which broker I want to use. At $8.95/trade, it’s still not cheap (since Schwab is a full service broker, its overhand should be much higher than its smaller rivals, which will prevent it from reducing the commission too much IMO).

Photo credit: TheTruthAbout…

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The January Effect: Is It Real?

David Dierking — Wed, 06 Jan 2010 14:38:01 +0000

As the new year begins, many investors are looking for two things. One is an indication as to what the year ahead will bring and the second is a competitive edge to help them achieve above average returns. One thing that seasoned investors look towards to get answers to both of these questions is a phenomenon known as the January Effect.

The January Effect holds that the stock market, particularly the market for small stocks, tends to perform disproportionally better during the first month of the year than during the others. Market watchers attribute this to the fact that investors like to sell stock at the end of the year in order to lock in a tax loss and then reinvest back into the market in January and thus push prices up.

Some also feel that stock market performance in January foreshadows what the upcoming year as a whole will look like. The theory goes that if stocks are up in January it will be a positive year for stocks as a whole.

But before you go radically altering your portfolio to try to chase after the “free money”, let’s ask ourselves an important question. Is the January Effect real? Does this phenomenon really exist?

There’s some empirical evidence to suggest that it does. Or at least it did.

Upon doing a little research, I found that the emergence of the January Effect started sometime in the 1910s. This is probably not an accident since taxes were introduced around this time and the leading theory for the manifestation of the January Effect was investors buying and selling their investments as a means of avoiding taxes.

And for a long time, the theory seemed to be valid. Through the early 1990s, small stocks had very consistently outperformed their large cap counterparts during the month of January (in 69 of 81 years through 1993 I read quoted in one study).

But then the January Effect stopped materializing. After so many years of history, why did this phenomenon suddenly disappear? The simple answer – everybody knew about it.

In the early 1990s, the theory of the January Effect became popular around Wall Street. Investment pros and individual investors alike wanted to profit from the seemingly predictable spike in equity prices at the beginning of the year and therein lies the problem. As soon as traders realized what was happening and markets became more efficient with the newfound information it could no longer be counted on.

The last 15 years have been a decidedly mixed bag. Small stocks have largely underperformed large caps during this period and during the “lost decade” of low stock market returns many years have seen losses in stocks. In short, there’s little evidence based on current market history to suggest that the January Effect still exists.

Theories are just that. Theories. They’re generally not based in fact and certainly shouldn’t be counted upon to materialize on a predictable schedule. The better bet is to just maintain your current asset allocation (after rebalancing for the new year of course!) and stay the path.

Chasing performance whether it’s in January or any other month is usually a recipe for misfortune.

Photo credit: nDevilTV

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Lending Club Investment Update

Sun — Wed, 23 Dec 2009 15:09:08 +0000

I like the potential of investing with Lending Club, even though it means I will take a bigger risk.

It has been a long time since I last shared my Lending Club portfolio, though I have been buying notes all the time, so I think it’s due for an update.

I mentioned a few days ago that my investment experience with Lending Club has been a mixed one so far. On one hand, I could get a return that beats any savings account that I own (and that’s the reason why I use Lending Club as an alternative investment); while on the other, a few defaults/charge-offs could ruin the entire investment portfolio. Even though I have been careful in selecting which loans to fund in order to reduce the risk, bad things still happened, especially since the summer when I had the first late payment. Now it seems that the pace is kind of accelerating.

As of today, I have a total of $3,203 invested in 135 loans. Of the 135 notes:

128 are current;
1 is 16 to 30 days late;
2 are more than 31 days late;
2 are charged off;
2 is fully paid.

I first noticed those two now charged-off loans (they are from the same borrower) in August when they were 30+ days late in making loan payments . Though I can see from the loan activity history that Lending Club was very aggressive in contacting the borrower in attempt to recover investors’ money, there wasn’t much luck and the loan was declared as charge-off in November, six months after the borrower fist failed to make payments, and no money was recovered. Despite the charge-off status of the loan, LC was still in contact with the borrower through an external collection agency (the last contact was reported on December 9th), but I pretty much give up any hope that I can get my money back, even partially.

It was August when I started to make some adjustments on how I invest in Lending Club loans. First, I cleaned up my existing investments, getting rid of all loans from the same borrowers, even though it meant that I had to sell some notes at discount after I paid a premium to get them. Since then, I have been staying away from notes from the same lender when selecting which one to buy. The new Lending Club tool makes this actually a lot easier.

As you can see from the above screenshot, LC’s new tool let you set a few filters when choosing loans, one of them is “Exclude Loans already invested in” (bottom right) which is exactly what I need.

And that’s not the only change I made. Now, in addition to evaluating loans based on the borrower’s overall qualification, I am also staying away from loans with the total amount exceeding $15,000. I don’t have any proof against investing in large loans except my own feeling that smaller loans may be relatively less *risky*, even though the loan amount of those two charged off notes is only $7,000.

Overall, my investment with Lending Club has become conservative as I invested in my Grade A notes now than before. When I first started with Lending Club, my thought was to get a higher rate of return that I won’t get from other conventional investments. However, after the charge-offs and late payments, I feel that the extra risk of investing in low grade notes may not be worth it. After all, I am still getting an annualized return of 11.40%, even after I started to buy more high grade notes.

BTW, you can get $25 bonus to start lending if you join Lending Club and become a lender.

photo credit: Reza Vazirie

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Visa To Be Included in S&P 500 Index

Sun — Mon, 14 Dec 2009 16:30:13 +0000

Visa (NYSE:V) stock got a big lift today after Standard & Poor announced last Friday that the payment processor, along with four other stocks, will join the benchmark after the close of trading December 18th.

I bought the stock at $59.50 a share on March 18, 2008 when it went public, despite that the economy was already in recession at that time. It’s one of the stocks that I do plan to hold for as long as possible. As a payment processing card, not the issuer of the credit card, Visa doesn’t have the problem many banks face when cardholders fail to make payments. And the recession so far has proven not to be an issue for Visa. For 2009 fiscal year that ended last quarter, Visa had a net operating revenue of $6.9 billion, up 10% from 2008, with net income at $2.4 billion, an increase of 24% from last year. The stock has gained nearly 60% so far this year.

The inclusion is the S&P 500 index can boost Visa’s share price even further as mutual funds, especially index mutual funds, that follow the S&P 500 are required to purchase every stock in the index in order to accurately track the benchmark. A MarketWatch report this morning will give you an idea how the inclusion may affect Visa shares:

“We estimate that S&P 500 index funds account for about 11.4% of the float-adjusted capitalization of the S&P 500 Index,” wrote Keefe Bruyette & Woods analyst Melissa Roberts in a research note on Monday.

“Therefore, we estimate that about 51.3 million shares of Visa will need to be bought by S&P 500 index funds,” the analyst said. “Visa’s one-month average daily trading volume is about 4 million shares, implying about 13 days of buying volume.”

Another recent IPO stock, Mead Johnson Nutrition (NYSE:MJN), the maker of Enfamil infant formula, will also the S&P 500 on December 18th.

*Stock chart from MarketClub

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OptionsHouse Introduction: An Interview with CEO George Ruhana

Sun — Thu, 10 Dec 2009 14:30:39 +0000

OptionsHouse in an online discount broker which offers investors a wide range of products and services at competitive prices. I first knew the broker in April, then opened an account for myself in June (a $1,000 account minimum is required) and made a couple of trades. The reason I wanted to trade with OptionsHouse was that at $2.95 per trade for stocks, it charges the lowest commission among brokers I am currently using. Then, after getting my own account, I was also very impressed by their web-based trading platform.

Though OptionsHouse has been around for a couple of years already, it’s still relatively new to many people. Here on this blog, I also have talked about the broker quite often, mostly from the perspective of my personal experience, but I think it’s better to have a comprehensive introduction of OptionsHouse to readers who are not yet familiar with it so they can have a better idea about the broker and what it offers. With the help from Shannon Paul at PEAK6, I recently had an opportunity to have an interview with OptionsHouse CEO George Ruhana to discuss the firm’s products and services and its recently pricing change.

Q: To many investors, OptionsHouse is still quite new. Can you give us an introduction of the firm and its products and services? The name may suggest that OptionsHouse is a place for people to trade options. That’s not the case obviously.

A: OptionsHouse will celebrate its 3rd anniversary of being open to the public in January. It is a wholly owned subsidiary of PEAK6 Investments, L.P., which is one of the largest proprietary options trading firms in the United States*. OptionsHouse offers its customers a platform mainly for stock and options trading. We offer tools that help people find options based trading ideas, evaluate risk of either a single trade or a whole portfolio, and the ability to research stocks from either a fundamental or technical point of view. Execution is fast** and the platform is customized for ease of use of our customers. We also offer a fully functional virtual trading environment to let people practice before they use real money for strategies. OptionsHouse has recently released a full featured mobile trading platform as well.

Q: What are the distinctive advantages of OptionsHouse?

A: OptionsHouse has advantages because of its roots with PEAK6. We leveraged the years of building proprietary trading platforms to design the options chain and execution format. Because we did not have to start from scratch, we have the luxury of charging some of the best rates in the business. There is a lot of infrastructure that we use from PEAK6, rather than having to build or buy from somewhere else.

Q: Who’s the targeted audience of OptionsHouse?

A: OptionsHouse targets active retail traders. On average, our customers place 100 trades per year. Their trades are much more options based than a typical retail brokerage. Because our rates for larger trades are competitive, we have average trade sizes and account balances much above the typical retail firm. Stock traders also find us easy to use, but the base skews more towards options because of that functionality.

Q: At $2.95 per trade, OptionsHouse is cheap compared with other discount brokers. How can OptionsHouse keep its trading cost low?

Again, we did not start from scratch. When you set out to build a web based brokerage platform, it helps to be able to do so with things like data feeds, back office expertise, trading platform design, and execution capabilities already available to you. We tailored things to the retail base rather than recreating the wheel. Our customers have the advantage of getting that experience at a discount.

Q: People hate bait and switch, as it happened to other brokers before. Does OptionsHouse plan to keep its commission at the current level?

A: No one can predict the future or how the market will change. However, at this time there are no plans to modify the pricing structure again in the near future. Remember, we kept our pricing consistent (except for lowering both spread and stock pricing) for almost 3 years. It is not like we have a track record of doing this all the time.

We recently had changed our rates for a couple of reasons: first, we want to be the best overall value of product and price for all customers, and we think the added flexibility of multi-tier pricing allows us to do that. Many existing customers are getting a price cut with this plan at OH. Secondly, payment for order flow rates declined significantly this year, which made some high volume trades money losers for us without the change in structure. We had to make our pricing realistic long term with the new market realities.

Q: Is it easy to open an account with OptionsHouse? Is any paperwork required?

A: Simply go to www.optionhouse.com and click on the “open an account” located on the top right hand side of the page. From there you simply choose which type account suites your needs, be it an IRA, Margin or a Joint account. Once you’ve chosen the type of account, you enter your information as prompted and finalize the application by printing the agreement, signing and sending it in. If you are not able to print it, OptionsHouse will send the agreement to you so you can sign and send back. It’s that simple. If you need help, you always have to capability of calling, emailing or chatting live with one of our customer service members who will walk you through the steps in getting you signed up.

Q: OptionsHouse recently updated its pricing for options trading. Can you explain the new policy to us?

A: Customers have the flexibility to choose the plan that best suits their trading style and strategy. There are no trade frequency, trade size or account asset minimums. Customers have the ability to change their rate plan once per day. One plan caters to customers who generally trade less than 10 option contracts per ticket called “5 for $5″. With our up to 5 for $5 rate, customers actually pay 50% less than with the previous flat-rate commission schedule for trades with 5 contracts or less. Single-leg trades will be $5.00 for up to 5 contracts. Spread trades, up to 10 contracts, will be priced at $10.00. The per-contract charge, for additional contracts is only $1.00. The second plan is more for the customer who generally trades more than 10 contracts per ticket. In this plan, single-leg trades are $8.50, plus 15 cents per contract. Spread trades are $12.50 plus 15 cents per contract. Our new structure allows OptionsHouse to continue to be the leader in the industry for larger orders. For example, at OptionsHouse 250 contracts are only $46.00 compared to $200.49 at E*Trade, $207.45 at Fidelity and $375.00 at optionsXpress.

Q: Is trading with OptionsHouse safe? What security features does it have?

A: Yes, we are extremely conscious of our customer’s security and trading with OptionsHouse is secure. All activity done after logging in happens over a secure SSL connection. Customer account data is stored in a protected network to safeguard access to any sensitive customer information.

From an insurance perspective, OptionsHouse is a member of SIPC.3 SIPC protects against the insolvency of a brokerage firm, but does not protect against market loss. SIPC will cover the securities of customers of its members up to $500,000 of which $100,000 can be cash. Additionally, our clearing firm holds insurance above SIPC coverage of ($200,000,000 in the aggregate) over all customer accounts, subject to a maximum limit of $900,000 per customer in respect to cash.

Q: Does OptionsHouse offer any free tools to educate investors and help them make better investment decisions?

A: We have a whole site full of things to help people make better decisions. First, our Research Tab allows people to look up events, fundamental data, and technical analysis on all stocks. Second, our options focused tools help people judge the probability that certain strategies make or lose money, the estimated P&L of positions, searches for call spreads, put spreads, covered calls, and even sorts for stocks by different fundamental criteria. Our suite of risk management tools lets customers look over their portfolio in one place to judge overall risk. Finally, we have a library of written and video content that customers can use to educate themselves on various options trading strategies. It is a great place for people interested in options to start to get educated for FREE. They can learn about strategies and practice them in our virtual environment.

Q: Will I talk to a real person when I call customer service for any questions about my account or my trade?

A: OptionsHouse customer service representatives are available toll free from 7:00 am to 6:00 pm CT, Monday through Friday (except exchange holidays) to answer all of your account questions. You can reach them on the phone 877-653-2500 ext. 2, email customerservice@optionshouse.com or chat live concerning any questions you have. For trade related questions you can reach the OptionsHouse trade desk at 877-653-2500 ext. 1 Monday through Friday 7:30 am to 4:00 pm CT. Also, we do not charge extra if you need to make a broker assisted trade.

Q: A little personal experience. I recently had to update my mailing address, but I couldn’t find how to do it in my account online. So I called and was told that I have to either fax the update or send an email. That’s not very convenient. In fact, I find I can’t do much account maintenance in my account. Any plan for an upgrade to make it more user friendly?

A: We always appreciate getting customer feedback concerning our sign up process, platform and account management. We definitely want to address this by the end of the first quarter of 2010. It is on the list of customer experience upgrades that we will be performing.

Q: The brokerage industry is very crowded. How does OptionsHouse compete with other established discount brokers? Where do you see OptionsHouse in the near future?

A: Even though we are considered “newer” in the brokerage space, OH brings a host of strengths with it. Our parent company, PEAK6 Investments, L.P. (“PEAK6″), is a large player in the options and stock trading businesses, and has a lot of capital available to invest in OptionsHouse. PEAK6 is not just building it to sell it. They have been in the business for over 12 years, and plan on being in the equity space for years to come.

PEAK6 has expertise in the options industry that only a few firms in the world have. This is a huge advantage as options trading becomes more mainstream, and a driver of growth in the brokerage space.

I think that over the next year you will see OptionsHouse expand some of its product offerings into things such as futures. We continually work on making our educational materials even more compelling for investors and considering our growth rate we will become a more every day name in the business.

Q: Finally, do you have any advices for investors in this economic environment?

A: I don’t think my advice for customers changes much: be disciplined, and be willing to exit a position that does not work. Understand your risks before entering a position. Before becoming CEO of OptionsHouse, I was a professional trader for 15 years. All traders, retail and professional, are going to make losing trades. There is nothing wrong with that. However, not understanding things before trading them is an easy way to lose a lot of your money. Use virtual trading and practice different trading styles to find the one that fits you as a trader. Educate yourself on the market as much as you can and take advantage of all the free educational sources out there.

Well, that concludes this interview. Thanks George and Shannon for this opportunity!

To find out more about the broker, go to OptionsHouse and read their FAQ section. If you are interested in getting an account, OptionsHouse is currently running a 100 commission free trade promtion for a new account before the end of the month. If you have any other questions, just leave a comment and I will pass them to OptionsHouse.

*PEAK6 Capital Management LLC traders have bought and sold hundreds of millions of option contracts over the past ten years.

**System response and access times may vary due to market conditions, system performance and other factors.

***Member of SIPC – which protects the securities of customers of its members up to $500,000 (including $100,000 for claims for cash). Explanatory brochure available upon request or at www.SIPC.org. As a member of the Securities Investor Protection Corporation (SIPC) funds are available to meet customer claims up to a maximum of $500,000 in cash and securities with a $100,000 cash maximum. Additionally, our clearing firm holds insurance above SIPC coverage ($200,000,000 in the aggregate) over all customer accounts, subject to a maximum limit of $900,000 per customer in respect to cash. This “insurance above SIPC coverage” protection is in addition to the protection provided by the Securities and Investors Protection Act, which is administered by SIPC and is subject to certain conditions and limitations, details of which are available upon request. Note that SIPC and insurance above SIPC coverage provides coverage against loss of securities and cash through the insolvency of a brokerage firm, not against market depreciation, fluctuation in market value of your securities or trading losses.

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The Importance of Having a Sell Strategy

David Dierking — Tue, 08 Dec 2009 15:16:46 +0000

Today, I’d like to share with you the story of both my greatest investing success and my greatest investing mistake. Unfortunately, you’re about to find out that both stories relate to the same investment.

It was the latter half of 1999. Tech stock mania was running wild and stocks were delivering unprecedented returns. Since every tech stock was going through the roof, I ended up buying a few and one of them was Internet Capital Group. They were basically a venture capital business for technology start-ups. I hadn’t done any real research but it sounded good to me. After all, every tech stock in the world was going up.

I bought moments after an analyst upgrade was announced and got in at about $117 a share. By the end of the day, it was over $140. Within a month, it was over $200. I couldn’t help but think about how easy this was. I reasoned that if the stock had done this well in such a short period of time it certainly could keep going for a while longer. At this point, everything was working out great except for one small fact – the tech bubble was about to burst.

Within a few months, the stock had entirely retraced its steps and it was back to the point that I bought in at. Regret was starting to set in and I was desperate to get my winner back. So I held on.

But the downturn continued. The same tech stocks that were all the rage just months earlier were now radioactive and the stock that I had done so well on so quickly was becoming a loser. A big loser. I rode it down and down for another couple of months until I had finally reached my personal point of surrender and sold. The final selling price? About $40.

Too often, people consider the concept of “sound” investing as picking the right investment and buying in at the right price. In truth, that’s only half the equation. When to get in can be just as important as its counterpart – when to get out.

As you can see, I was spot on when it came to picking a stock and getting in at the right time. My fatal flaw was two-fold: Not doing proper research on what I was investing in and not establishing a target price at which I would lock in my gain.

When I bought Internet Capital Group, all I really knew about it was that it was a tech stock. Since virtually every stock in the sector seemed to rise on a daily basis, I figured that alone made it a good investment. Although things like P/E ratios didn’t seem to matter much at the time, even a rudimentary analysis would have pointed out that the stock was vastly overvalued and the viability of the companies that it had stakes in was, at best, frail. Simply put, even though it worked out nicely at first, it was a bad investment from the start.

The real importance of doing your research before investing is in establishing a true value of the investment. That’s what determines whether it really is a good investment or not. The analyst upgrade that prompted my initial decision to buy said that the stock was valued at $200. It hit that price in a matter of weeks. Would that have been a reasonable price target for me since in fact I had no idea how much the stock was actually worth? Probably.

Setting a price target and sticking to it helps take the emotion out of investing. Had I set a $200 price target and sold once it hit that point, I should be absolutely satisfied with locking in my gain even if the stock proceeds higher still (the idea of “behavioral finance” argues that investing decisions like this should be absent of emotion but in reality we know that’s not often the case).

I like to think that I’m a better stock trader today than I was back then. The one thing I do in every case I buy a stock now is set a price target. Every case. I’ve had one case where I’ve gotten out near the top (a financial services ETF I bought recently) and I’ve had two cases where I sold at my price target and the investment has continued much higher. It still hurts a bit to think “what if” had I held on a little longer but the fact is that in each case I still sold with a sizeable gain.

And nowadays, that’s good enough for me.

photo credit: alvaroprb

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The End of the Year Means It’s Time to Rebalance Your Portfolio

David Dierking — Thu, 03 Dec 2009 14:50:09 +0000

In about a month or so, your mailbox will start to get filled with year-end bank account and investment statements.

And for the first time in a while, you won’t have to cringe when you look because as a whole the market has done pretty well this year. The S&P 500 is up over 20% year-to-date and many sectors as well as international stocks have done better yet. Even bond funds are rallying (although if you fled to Treasuries this year to avoid the chaos, you might be a bit disappointed).

When you have years like this where one asset class significantly outperforms another (or like last year when stocks significantly underperformed), your overall portfolio allocation may now be a little out of whack. With the new year approaching, there’s no better time than now to bring your allocation back in check.

Financial planners recommend that you examine your allocation about once a year. Doing it more frequently can be inefficient and cost-prohibitive and doing it less frequently could leave your portfolio seriously out of balance. That’s why most feel that the month of January when you have your entire financial life in front of you is the best time to do it.

Your target asset allocation should be a product of your age, risk tolerance and goals. For instance, a younger investor tends to have a portfolio more heavily weighted in equities due to the long period of time he or she plans on staying invested. Conversely, an individual nearing retirement typically has a larger investment in bonds and cash since they will need this money to provide a steady income when they’re no longer working.

Here’s how it works.

For the sake of this example, let’s say you have a modestly risky target allocation of 60% stocks and 40% bonds. The stock market has been good to you this year and your allocation now sits at 65% stocks and 35% bonds. In order to get back to your target, you’ll need to sell some of the stock investments and move that money into bonds. It’s as simple as that.

If you need a good reason to rebalance your portfolio, consider this. It could add money to your pockets!

Advisors and anyone else with some common financial sense will tell you that you should always buy low and sell high. One of the real advantages to you is that when you rebalance your portfolio, you’re doing just that. Using our example, stocks are a larger percentage of your portfolio because they’ve done well. You would be selling stocks after they’ve increased in value and invest that money in bonds which have comparatively underperformed. Studies have suggested in fact that portfolios that are rebalanced on a regular basis outperform those that aren’t due in large part to the “buy low, sell high” advantage.

The new year is a time to make resolutions and commit to making changes for the better. This year, make rebalancing your portfolio one of your resolutions and reap the benefits for years to come.

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optionsXpress Trading Platform Review

Sun — Tue, 01 Dec 2009 14:53:53 +0000

This is the third segment of the broker trading platform review series. So far I have covered Scottrade and Firstrade. Today, I am going to take a look at another online broker, optionsXpress. I mentioned early that, though I have an account with optionsXpress for nearly 2 years, I didn’t make any trades with optionsXpress until recently. The reason for not using it is quite simple: Unlike Scottrade and Firstrade, I don’t consider optionsXpress as a true discount broker. It’s quite expensive to trade with optionsXpress actually. Nonetheless, the broker has some features that are worth a look.

optionsXpress Commission

Yes, it is rather costly to trade stocks with optionsXpress. Currently, the broker charges $14.95 for each stock trade for up to 1,000 shares. If you trade more than 1,000 shares, the commission changes to $0.015 per share. If you trade 9 times or more, then the commission drops to $9.95 per trade, still very expensive. If you want to use optionsXpress to trade options, the fee is $14.95 for every contract if you trade less than 35 times a quarter.

In addition to stocks and options, optionsXpress offers mutual funds, also at $14.95 per trade. As I mentioned a number of times before, buying mutual funds from brokers is not the best way to invest in mutual funds because they all charge very high fees with almost no exception. To avoid such hefty fees, go with the mutual fund companies directly instead.

optionsXpress Trading Platform

In addition to the main web interface where you can find standard information such as account value and positions, optionsXpress also has a customizable interface called MyOX.

With MyOX, you have the flexibility of choosing what you want to see in your account, eliminating unwanted contents from the interface as those I see in Firstrade. On the default MyOX page, I have such basic information of my account as balance, positions, orders, stock/options watch list, and a quote of stock that’s not in the watch list. But that’s not all it offers. In fact, I can add a new tab if I want to have more contents, like charts, options chain, financial news, RSS feed, etc, though they will not be on the same page.

And like many other web-based trading platforms, trading can’t be done directly in the main optionsXpress page. To make a trade, you will need to click the Trade button at the top, select whether it’s a stock or options you want to trade, and go to a different page where you can enter your order information. However, if it’s a stock that’s already in your Watch List, you can trade right from the Watch List. The Watch List itself is also customizable, so you can choose see. The default setting includes Symbol, Last, Bid, Ask, Change, and Actions (Trade). With other web-based brokers, the quotes of those stocks either in the holding or watch list are usually not updated unless you manually refresh the screen. Not so with optionsXpress. At the bottom of optionsXpress Watch List, there’s a check-box where you can choose to Auto-Refresh the list. From what I noticed, the frequency is quite high.

optionsXpress Streaming Quotes

optionsXpress also offers web-based streaming that will give you quotes in real-time.

What I like about this tool is that stocks in the Watch List are added to the real-time quote window automatically, so you don’t have to enter the symbols again. This feature is what Socttrade and Firstrade streaming quote tools don’t have. If you want to trade a stock in your Watch List from the quote window, you can simply double-click the symbol from the list and the stock will be added to the order form underneath the quote list, where you can also find more detailed information about the stock , where trades can be made right from the streaming quotes window. It’s really convenient. And those symbols that you added to the Watch List from the streaming quote will also appear in your Watch List in the web page.

Other Tools

I have talked about optionsXpress’s Virtual Trading before. But that’s not the only tools that optionsXpress offers. In fact, the broker has a wide range of tools that help investors make better investment decisions.

Obviously, you will need to really use all those available tools to fully explore what are offered by optionsXpress, that’s something I haven’t done yet.

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SogoTrade 100 Commission Free Trades Promotion

Sun — Fri, 27 Nov 2009 15:38:10 +0000

Looks like online brokers are running a lot of promotions these days to attract new customers.

SogoTrade is offering 100 commission free trades for every new customer. It’s quite easy to get the free trades: Open a SogoTrade account; fund the account with $500; receive the bonus. There is a restriction on the free trades though. The free trades must be used within 30 days after the account is funded, or they will expire.

On one hand, the offer is quite generous because the total value of the offer is $300. That’s much better than promotions from other brokers (OptionsHouse also offers 100 free trades). On the other hand, how many investors, especial small investors, can make 100 trades in 30 days?

SogoTrade Commission

I first looked at SogoTrade nearly three years ago, when the broker was offering scheduled investment plans, like those you get from ShareBuider. At that time, before there was Zecco and OptionsHouse, I concluded that the it was quit cheap to trade with SogoTrade. It appears that with so many discount brokers competing for your business, SogoTrade remains a solid option for trading stocks for less.

So how much does it cost to trade with SogoTrade?

SogoTrade is very competitive in terms of commission. It charges $3.00 per internet equity trade, regardless the number of shares. From what I know, the commission is only higher than what OptionsHouse charges at $2.95/trade, but much lower than the fee at other widely used discount brokers like Zecco, TradeKing, and Scottrade. For options trading, there’s another $0.70 for each contract.

SogoTrade doesn’t charge any fee if the account is in dormant mode and, unlike other brokers, it doesn’t charge a fee if you are not happy with SogoTrade and want to transfer the account to somewhere else. The transfer usually costs $50 at other brokers. But this is not the only benefit. If you like Sogotrade and want to transfer your account at another broker to SogoTrade, you will get reimbursed for the account transfer fee charged by the other broker up to $100 if the account balance is $25,000 or more.

So, what do you think about SogoTrade and this 100 free trade promotion offer?

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Track Stock Portfolio in Real-Time with Google Template

Sun — Tue, 17 Nov 2009 15:37:09 +0000

What are you using to track your investments?

I have been using Quicken Home & Business for investment tracking for years. It is a powerful and convenient tool that does a lot of other things than tracking stocks and mutual funds. However, the convenience comes with a price tag of $100. It’s not cheap for sure. If you only want to have a tool to manage your investments, then you don’t need Quicken. In fact, there are plenty of tools to help you do what you want to do for free. One of them is Google Doc.

I recently created a Google Doc Stock Portfolio Tracking Tool based on a Google Doc Template. What makes it easier to create such a tool with Google Doc is that I can simply use GoogleFinance functions to retrieve values I need. You can do the job with an Excel Spreadsheet, but then you will need to figure out where to get the data and so on. With Google Doc, a function call to GoogleFinance() is enough. Here’s how my stock portfolio tracker looks like.

In addition to the columns in the original Google template, I added Purchase Date, Purchase Price, Position, Daily Change, Total Market Value, and P&L into the spreadsheet. At the end, I also have total daily change ($ and %), market value of the entire portfolio, and profit & loss ($ and %). I have published the spreadsheet, so if you want to use it, you can download the spreadsheet and save it as your own copy.

Right now, the spreadsheet only has a few stocks I own. To track the stocks you own,

Delete rows from the top and only leave the last row (row # 4 as in the screenshot below);
Highlight the last empty row by clicking the row number from the leftmost (# 8 in the picture below);
Click Insert from the menu bar on the top and select Row Above;
Copy the last row that’s left in the spreadsheet from Step 1 and paste the entire row to the new row just created

Now that you have the new row with identical information as the last row, all you need to do next is replace Ticker Symbol, Purchase Date, Purchase Price and Position with the new stock you want to add to the spreadsheet. The spreadsheet then will automatically calculate the rest for you.

Remember, when you add new investments to the spreadsheet, always leave a blank row above Total and always insert a new row above the blank row and copy and paste the entire row to the new empty row you just created. Each row is only for one transaction, even if it’s the same stock (as I have two rows of C above).

I am sure there are other functions, such as Year-to-date return, etc., that can be added to the spreadsheet to make it more useful, I just haven’t figured out how to do it yet. If you have ideas on what to add, please let me know.

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Bought a Few Stocks Today

Sun — Sat, 14 Nov 2009 04:31:28 +0000

I forget when was the last time I traded stocks. It must have been at least a few months ago because since I started this new job in June, I barely had any time during the day for *my own business* , but today I made a couple of purchases: one IPO stock and one DRIP stock.

The IPO stock I bought today is Dollar General (DG), the discount retailer backed by Kohlberg Kravis & Roberts (KKR). With more than 8,700 chain stores mainly in the south and midwest, DG is the largest retail store by the number of stores operated. Though items sold at DG are mainly priced around $1, the retailer is generating $10 billion in annual revenue with positive same-store growth for 20 straight years. Even in this tough economic environment, DG has increased its sales by 11% so far this year, according to IPOHome. Despite the growth potential, the stock, priced at $21 a share, is rather rich with its 26.9 price-to-earning ratio, higher than its competitors such as Family Dollar Stores and Dollar Tree. A Morningstar analyst said the stock is only worth $18 a share.

Anyway, I bought 83 shares of DG at $22.69 apiece at Scottrade.

Speaking of IPO stocks, my purchases so far are a mixed bag. On one hand, I got China Life (LFC) and Visa (V) on the day they were issued and they are doing very good. On the other hand, I also had Black Stone (BX) and Giant Interactive (GA) which are total disasters. Let’s see how DG will do.

Another stock I bought today is Boston Properties (BXP) through its direct stock purchase plan at ComputerShares. I have been looking at BXP for a long time, mainly for its dividend payout (currently at $2 a share), like other dividend-paying stocks I purchased through ComputerShares (except Bank of America which cut its dividend to 1 cent early this year after receiving massive bailout from the government). However, since BXP’s DSPP program requires $250 for each recurring purchase, I am not able to set up an automatic investing plan as I did with other stocks.

photo credit: Karen Apricot New Orleans

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Bought a Few Stocks Today

Buy Foreign Stocks: E*Trade vs. Fidelity

Sun — Thu, 12 Nov 2009 15:11:29 +0000

When E*Trade launched its global trading platform in 2007, I saw it as an opportunity to finally be able to buy some internationals stocks that are not otherwise available to retail investors in the U.S. At that time, Chinese stocks were as hot as they could be and buying Chinese stocks seemed to be the easiest way to quick money. As I still remember, in 2007 many top-performing mutual funds were those invested in China. Though I already own a China fund, the PowerShares Golden Dragon Halter USX China (PGJ) which also did quite well, I wanted more. So when E*Trade Global Trading became available, I jumped in shortly and bought two Chinese stocks that are traded in Hong Kong: Industrial and Commercial Bank of China (ICBC) and Alibaba.com. However, China stock market crushed after reaching the all-time high in October 2007 and stocks traded in Hong Kong were not immune to the catastrophe. Even though the markets, in both China and Hong Kong, have recovered a lot this year, my investments were a mixed bag: ICBC is doing quite well but Alibaba is a big disappointment.

Anyway, my investments are not what I want to talk about here. It’s the platform that allows ordinary investors to buy stocks traded on exchanges outside the U.S. Until last week, the only broker that lets investors invest in international stocks directly is E*Trade as far as I know. But now, it has a competitor. On October 30th, Fidelity introduced its own international stock trading platform as the appetite for investing in foreign stocks grows. The move puts Fidelity in direct competition with E*Trade. So how are these two compared against each other? I took a quick look at Fidelity’s new platform and the following are what I found.

Eligibility

I opened my E*Trade Global Trading account without any eligibility issue. At that time, I didn’t have any account with E*Trade and there was nothing that prevented me from getting the account. However, that doesn’t seem to be the case with Fidelity, which requires to have a non-retirement account that trades 120+ times per year and $25,000+ in assets, or
$1 million in household assets. Well, I have to say that the requirement is very high for a small investor like me. I may like Fidelity better than E*Trade, but I am not eligible to have Fidelity International Trading account for sure.

Foreign Markets

If you are eligible for trading with Fidelity International Trading, then you do have a wider selection of foreign markets offered through the platform. In addition to Canada, Hong Kong, France, Germany, Japan, and United Kingdom that are available at E*Trade, Fidelity also provides investors access to six more developed markets: Australia, Italy, Belgium, Netherlands, Norway, and Portugal.

Commissions

My biggest concern when trading stocks is how much a trade is going to cost me, whether it’s a domestic stock or a foreign equity. I am always looking for the cheapest brokers. However, there’s no such thing as cheap in foreign stock trading. It cost me a lot to buy ICBC and Alibab with E*Trade. Here how much Fidelity and E*Trade charge to trade in a particular market:

Country	Fidelity	*ETrade**
Japan	3,000 JPY	3,399 JPY
Canada	19 CAD	19.99 CAD
France	19 EUR	19.99 EUR
Germany	19 EUR	19.99 EUR
HonKong	250 HKD	299 HKD
United Kingdom	5 GBP	9.99 GBP
Australia	32 AUD	N/A
Italy	19 EUR	N/A
Belgium	19 EUR	N/A
Netherlands	19 EUR	N/A
Norway	160 NOK	N/A
Portugal	19 EUR	N/A

So basically, E*Trade charges a lot more in commission than Fidelity does. However, if you are like me, who wants to buy foreign stocks but don’t like a lot of money to meet Fidelity’s requirement, then E*Trade is the only choice, despite the high cost.

Currencies

When I bought those two stocks through E*Trade two years ago, I had to convert my fund into Hong Kong dollars before I could use the money to purchase the shares because E*Trade requires all trades be conducted in local currencies. At Fidelity, it seems that things a little more flexible as you can settle your trades in both local currencies and U.S. dollars. But, there is a price on settling with U.S. dollars. According to Fidelity,

If you choose US dollars as the settlement currency for your international stock trade, a foreign currency exchange fee (in the form of a mark up or mark down) based on the size of the currency conversion will be charged when the foreign currency exchange executes.

So you still have to pay for converting local currencies into U.S. dollars, not that Fidelity will do it for you for free. Thus, Fidelity recommends that if you trade in a particular market very often, it’s better to exchange “a certain amount of currency to avoid currency exchange fees on each trade”.

Currencies Exchange Fees

Since you may need to convert your U.S. dollar into the local currency before making a trade with either E*Trade (required) or Fidelity (recommended), another cost of buying foreign stocks is the fee that you pay to make the conversion. I wasn’t able to find the exact mark-up at E*Trade, but last time it cost me $11 to convert $1,000 to Hong Kong dollars. At Fidelity, the more money you convert, the less fee it charges. For $100K or less, the fee is 1.0% of principal. So if I exchange $1,000 into Hong Kong dollars, pretty much the same as what E*Trade charges. However, I am not sure whether the fee is also proportional to principal at E*Trade as the information is not available.

Well, from what I have seen, even though it costs more to trade with E*Trade, but it is still an affordable choice if you want to invest in foreign stocks unless you have a lot of money to be eligible for Fidelity’s International Trading.

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Buy Foreign Stocks: E*Trade vs. Fidelity

How to Open an OptionHouse Account

Sun — Sat, 07 Nov 2009 15:26:47 +0000

As you may know, discount broker OptionsHouse is currently running a promotion which gives 100 commission free trades for every new customer with $3,000 deposit. This is a good deal if you can get the most out of the offer, even though trading 100 times in 2 months (the free trades will expire 60 days after the account is funded) is pretty tough for anybody.

Anyway, since I already have an account, I won’t be able to take advantage of this offer. But if you are interested in getting the free trades (valued at $295), here’s the information you need to open an account.

There are a total of nine steps to go through in the process. At first, you need to select the type of account you want to have, individual or joint account. Then you will need to create a profile by providing your email address and selecting a user name and password. You will use the user name and password to log into your trading account once it is established. The other information are pretty standard, such as employment and financial information.

After you agree the terms and conditions, you will need choose how to fund the account in the next step. OptionsHouse offers several options to make deposit to the account, by wire, ACH, check or ACAT account transfer (OptionsHouse can reimburse up to $100 account transfer fee). If you are not planning to transfer your account from another broker to OptionsHouse, then ACH may be a better choice. To set up ACH, you will need your bank’s routing number and your account number. And as you know, it takes some time to set up ACH transfer. OptionsHouse uses trial deposits to verify bank account ownership which takes a couple of business days.

The online application process is rather simple, but the application isn’t completed yet. Once you finish the online process, you can log into your account immediately. However, you will need to printout you finished application form and fax it to OptionsHouse before your account becomes active. If your account isn’t active, you won’t receive real-time streaming quotes (of course, your account also has to be funded).

Now that you know the whole process, are you ready to open an OptionsHouse account and get the 100 free trades?

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