Michael

As long as you don't trade individual stocks excessively and are reasonably organized, I find tax time pretty easy. As far as an IRA or 401K, it doesn't matter how much you trade since nothing has to be reported so I don't keep any paperwork for that. On my regular account, I print the conformations during a buy and put them in a folder and when I sell, I attach that to the sell confirmation and put that in my tax folder. Just in case I lose some paperwork, I also enter the buy and sell orders in the msn portfolio manager. Finally as a final backup, I keep my year end statement in the tax folder for that year. As long as I don't change brokerages, I can always get access to the conformations for at least 10 years. Usually I don't have any problems and just use my stapled conformations to report the capital gains and losses and the year end 1099s to report dividends, interest, and foreign taxes paid. Usually within an hour, my tax return is complete.

Usually I don't do many sells but occasionally one of my preferred shares get called so usually I only have a few conformations stapled together. My two foreign ETFs are US ETFs holding foreign stocks and RDS-A and RDS-B are ADRs and I wouldn't think of buying stocks, ETFs, or mutual funds on foreign exchanges. The main problem with my ETFs with foreign stocks and ADRs are the tax consequence that they can produce.

As far a purchasing individual stocks, that is about 80% of my portfolio. I was lucky enough to completely get out of the market (both my normal account and my IRA account - was a 401k account that was rolled over to an IRA) in March of 2007 and got back in in 2010 during a market correction caused by congress and a European sovereign debt crisis. I'm primarily a value player and in 2011 there was another European sovereign debt crisis and another market correction, so I again looked at value stocks and purchased Home Depot (HD), Verizon (VZ), and Intel (INTC). All were depressed paying between 4%-6% dividends and since then, including dividends, HD has risen by 178%, VZ by 62%, and INTC by 20%.

If I only invested in mutual funds and ETFs, I wouldn't have as much fun. I also enjoy watching preferred shares especially when speculators panic due to rising interest rates or European sovereign debt problems and jump in after the speculators drive them down and then watch as they jump back in and drive them back up. The recent rise in interest rates pushed many shares below par value making them a pretty decent buying opportunity. With them below par value and yielding about 6.5%, it is unlikely they will be called and if they are, I'll get capital gains besides the dividends. The fun ones are shares like JPM-I and BCS-D which pay over 8% dividends but are above par value. Both of those I bought when they were only slightly above par value so I'll make money on both and if they aren't called, I'll get over 8% APR dividends for each quarter until they are called. JPM-I just went ex dividend so I'll get the dividend for this quarter and immediately the price dropped to par value. So the guessing game is do I purchase more JPM-I at par value since there is still a possibility it will be called this quarter (I'll only lose the buy commission if it is called) but if I wait too long, the price will rise. Also I was holding DXB which rose to about 8% above par value and thought that was crazy so I sold them and when the correction occurred, I rebought them at near par value. There is an art to trading preferred shares trying to guess what might happen and jumping in and out at the right time.

nun

For a beginner I would not recommend Micheal's approach to investing. Indeed many experienced investors also avoid owning indvdual shares and timing the market. So to start just keep it simple and invest in a few passive mutual funds. Once you get some confidence then you might branch out into stocks and other investments.....but personally I wouldn't.

Michael

I agree 100% until a person has a good understanding, they should remain with ETFs and passive mutual funds. Even for me, there are very few value stocks available with decent prospects so I haven't invested in common stocks since 2012 and I don't invest in what are classified as growth stocks. However Apple which at one time was considered a speculative growth stock has become more of a value stock so I am watching that. However what concerns me is that when stocks reach that large of a market cap, they tend to falter but if it drops below $400 per share with a dividend of about 3% (about 1/3rd of it's annual profit) and over $100 billion in cash, I may consider buying.

However I still get my kicks with preferred shares.

Michael

I made a mistake in an earlier post and stated that it doesn't cost anymore to buy them through a brokerage than buying them direct. That is not true. Vanguard mutual funds have a transaction fee when you buy Vanguard mutual funds through a brokerage. TD Ameritrade charges $50 to buy those funds.

Apparently Vanguard does not pay the brokerages to manage their funds so the brokerages charges a commission those funds. That is probably one of the reasons that Vanguard has a lower expense ratio than most other mutual funds.

So if you are buying tracking funds through a brokerage, you are probably better off buying ETFs than mutual funds.

Also most brokerages charge a transaction fee for "no transaction fee (NTF)" funds if you sell then within 180 days of purchase. TD Ameritrade charges $50 for an early sale of a NTF fund.

nun

This is why I avoid brokerages. I buy mutual funds or ETFs directly from the company. Most of my investments have expense ratios <0.1%. I've recently been looking at the costs of investing in the UK and I'm amazed at how expensive it can be and that may brokerages (eg Hargreaves and Lansdowne) promote front loaded actively managed funds with ERs of 1.5%. I asked them about this and they claimed these were top performers......well they would be top performers for their bottom line, but not for the investor.

Michael

There as so many reasons that I don't like mutual funds and prefer ETFs.

• For tracking funds, the expense ratios for mutual funds are higher than ETFs. For example, Vanguard has an expense ratio of 0.17% for the VFINX mutual fund and SPDR has an expense ratio of 0.10% for the SPY ETF and both track the S&P500.
• Actively managed stock mutual funds have high expense ratios and are typically about 1.0%-1.5%. The fee is used to pay the managers as well as administrative fees but can also include a 12-b fee (an additional 0.25%-1%) which is used for marketing and advertising the fund. However actively managed stock funds typically perform poorer than the market.
• Mutual funds can be load funds (both front load and back load or either). These funds are usually advised by investment advisors so that they get a big commission (typically about 5%) whenever you buy and/or sell the fund. Even when using a discount brokerage, load funds are carried and you are charged the load even though you chose the fund without any assistance from a broker.
• Mutual funds can also be no load funds with or without a transaction fees.
• Brokerages can impose a transaction fee on a non transaction fee fund if you sell the fund within a specific period of time.
• Mutual funds do not want you to trade their funds actively so have restrictions on how often you can trade their funds. Usually this is not a problem but when the market starts dropping, you may want to sell most or all of your funds and the mutual fund can restrict that from occurring or charge large fees if you are classified as an active trader.
• Besides expense ratios, mutual funds can have trading fees that ETFs do not. An ETF is traded between individuals but a mutual fund is bought and sold from or to the mutual fund company. Therefore mutual funds typically require 4 hours notice or more prior to the end of the trading day so that they can determine how many shares of each stock in the fund must be bought or sold at the closing bell. Because of this, an interesting phenomenon occurs during the closing bell where a stock can rise or fall significantly in the last few seconds as orders are placed by mutual funds to "buy or sell on close". This usually means that a mutual fund gets a poor price for it's sells and pays a premium for it's buys. In a falling market, people tend to sell their mutual funds and the closing downward spike can be very large as most mutual fund companies are selling with few buyers and on a rising market, people are buying mutual funds so most mutual fund companies are buying with few sellers causing an upward spike during the closing bell. The spike generally occurs 3 seconds after the markets officially closes at 16:00:03 EST. Usually mutual funds can temper that spike since most of the trades are between mutual fund companies at the 16:00 price but any trades that can't be made between mutual fund companies have to be made on the open market which causes that spike.

Buying direct from a mutual fund company is not too bad if you only buy from one mutual fund company but if you purchase funds from several mutual fund companies, the constant transfer of money, paperwork, and year end tax filings can become very burdensome. The price (NAV) quoted from the mutual fund company will be the same price quoted from a brokerage since the price is determine by the value of the stocks in the mutual fund at the end of the day.

Buying ETFs or stocks directly from a company is probably not the best idea. Although you can save on the brokerage commission, ETFs and stocks are traded and when purchased from a company, they may or may not have the stocks or ETFs available and have to purchase them on an exchange. If they have to purchase them, it is unknown when they were purchased and at what price and it is unknown how the price is determined for the customer. Usually companies that sell stocks will not buy them back and you then have to sell them through a brokerage (not sure if ETFs can be sold back to the company). Finally when purchasing stocks though a company, you will get stock certificates and you must keep them in a safe place because if they are lost, you lose the stock just like you would lose cash if it was misplaced. I'm not sure if stock certificates are issued by companies that sell ETFs directly or are held by the company. In the case of brokerages, the stock certificates are held by the brokerage unless requested.

nun

Micheal you make some good points.

However, I would recommend the novice investor buy some low cost index funds from Vanguard or Fidelity because they have good service, excellent websites, low costs, offer automatic investment and also have restrictions on trading. The intraday price variations and ease of selling ETFs can actually be bad when starting out. If you can buy Vanguard Admiral class funds you'll get ERs the same as the EFTs and have the advantage of being able to set up automatic monthly investments from your bank account. The Admiral class S&P 500 index fund from Vanguard (VFIAX) as an ER of 0.05%.

We have very different investing styles so Admiral class Vanguard mutual funds work for me. I take a Boglehead approach so do not actively trade, just rebalance as my asset allocation changes. I have no interest in the high frequency variations in stock or bond markets and 99% of investors would be better off ignoring them as well.

Michael

The reason that it is difficult to trade bonds individually is that there are so many of them and so few buyers and sellers for that specific bond (1 out of maybe a million different bonds) and therefore the spread between the bid and the ask can become very large. Although the bond price is supposed to be determined by a formula, bonds are traded and the seller is going to try to get as high of a price as possible and the buyer is going to try to get the lowest price possible. Companies now have better search programs to find bonds but the following link is a list of all "GE Capital" corporate bonds on the market (137 total ranging from a few months to maturity to 30 years to maturity).

https://fixedincome.fidelity.com/ftg...rtFormat=TABLE

Before you buy one of those bonds, you have to calculate what it is worth based on the coupon rate, time to maturity, bond rating, and determine the current yield to maturity for a bond with the same characteristics. Once you have determined all of that, you now have to find a seller that is willing to sell at the price that you believe the bond is worth and that may be difficult since there may only be one or two sellers during an entire day.

If we take the first bond in the link, it has a maturity of 11/15/2015 (about 2 years 3 months), a coupon rate of 5%, is rated AA+, and has an asking price of $109.36. So if you purchased that bond, you will get interest of about $11 until maturity but you will have a capital loss of $9.36 for a net gain of $2.36 or about 1% per year on a $100 bond. Is that a good deal?

kodokan

Nun, what's the difference between the Admiral Vanguard funds and the normal ones? I've only had a little look at their website so far, but they seem to have a ton of funds with slightly different names that are tracking the same indices and doing (what to me seems) the same thing..?

Michael

I agree if they stay with one mutual fund company such as Vanguard, that is probably the best for a novice. As far a Fidelity, they used to have a bad reputation for high expense ratio, a large number of front load funds, and 12-b fees but maybe they have changed.

It appears that VFIAX is Vanguard's profit loss leader with a very good expense ratio (probably the lowest in the world) to get people to invest in Vanguard mutual funds. Although VFIAX holds nearly the same shares as the S&P500, it doesn't track the S&P500 but instead tracks it's own index of approximately the 500 largest companies. That may or may not be important. By not tracking the S&P500, they don't have to rebalance the fund when the S&P500 rebalances keeping expenses low.

The problem when a fund is not rebalanced, one or two stocks can end up determining whether the fund makes or loses money during most days. The DOW (not a very well designed index since it uses the same rules at it did in the 1920's when everything was done by hand) only rebalances when a company replaces a company in the DOW or a stock split occurs for one of the companies in the DOW. Since the number of companies in the DOW is low, the index actually works pretty well. The S&P500 index is a modern index which rebalances to try to indicate what the market is doing and replaces stocks that have fallen out of the largest 500 companies at least once a year (it isn't always done but once a stock hits about number 600, they are out of the S&P500). As an example, if Apple and Google were in the DOW, they would dominate the DOW because of the way the DOW is calculated (each would carry 4-8 times the weight as Exxon Mobile which is larger than either) but in the S&P500, those companies have weight but they don't dominate the index.

So neither Apple or Google would be allowed in the DOW unless the do at least a 4/1 to 8/1 stock split and Berkshire Hathaway (Warren Buffet's company) would be required to do at least a 100/1 split to be allowed in the DOW.

nun

If you have a certain minimum amount invested in a fund, often $10k, you will get Admiral class shares rather than investor class shares. The Admiral class fund has a lower expense ratio, other than that they are the same.

nun

VFIAX is an Admiral class fund and Has a low ER. Most Vanguard funds have an Admiral version with ERs well below 0.1%. Vanguard concentrates on low cost index funds, while Fidelity has a bigger range of funds, but their Spartan series are low cost indexes.

For a few years I was also caught up with shares, analysis and spreads etc. but now I just go with some very broad indexes because I have other things to do and frankly I think you can over think investing.

Michael

After investigating the Capital One 360 Sharebuilder brokerage and actually making one trade (with the assistance of my TD Ameritrade account), I would be hesitant about recommending it to someone that is tying to save money on fees but instead would likely recommend Scottrade which has more branch offices in the US than any other brokerage firm and has fees similar to Sharebuilder plus Scottrade appears to have more capabilities.

Comparison:

Stock and ETF Trading Commission:

Sharebuilder: $6.95 per trade
Scottrade: $7.00 per trade

No Load Transaction Fee mutual funds:

Sharebuilder: $19
Scotttrade: $17

Although Sharebuilder links all Capital One 360 accounts together for instantaneous transfers, it takes about 2 days for everything to work properly. After that, everything works smoothly so that is a nice feature.

One of the most troubling issues with Sharebuilder is that it automatically enables reinvestment of dividends for stocks, ETFs, and mutual funds. After you buy a security, you have to go into the reinvestment option and disable the reinvestment of dividends for that security. After a while I noticed that there was an edit all and initially assumed that would disable reinvestment for all purchases but it appears to change only what is currently in your portfolio and new purchases would still need to be disabled after they are purchased. So it appears that if you forget to disable that feature after a new security is purchased, reinvestment for that security will occur.

The following is a comparison for the major discount brokerages (Sharebuilder is not considered a major brokerage so is not included).

https://www.scottrade.com/online-bro...?compareType=#

All fees are not shown and further investigation must be performed to determine all the different costs. For example most brokerages charge for monthly paper statements and some even charge for an email conformation of a purchase but usually those can be disabled so that you won't have any additional monthly charges. TD Ameritrade provides "Trade Architect" and "ThinkorSwim" free to all customers but others have minimum trading requirements or fees to use similar tools and some brokerages don't even have such tools.

https://www.tdameritrade.com/tools-a.../features.page

https://www.tdameritrade.com/tools-a.../features.page

I don't recommend any novice should trade stocks until you understand the risks that are involved as well as become familiar with what drives stock prices as well as many other things about stocks.

kodokan

Resurrecting this thread to update on how I'm doing with this. I'm about to pull the trigger on the investing, and thought I'd just run it by the knowledgables one last time...

So since we last 'spoke', I've done a full analysis of our portfolio of existing investments: zombie pensions held in the UK and hubby's 401k here. Turns out we are - and I don't know why this was a surprise to me - massively heavy in what the US would class as international stocks, as the UK pension holdings are focused on UK and European indices, with a smattering of US and Far East index holdings. The 401k is currently in a Target Date fund with an approximate 50% US, 25% foreign, 25% bond holding.

Overall, we're hugely out of whack on US domestic stock holdings, so this is what I'm going to concentrate on for now in our taxable holding. I'm going to go with Vanguard, probably the Admiral Total Stock fund (VTSAX) in the first instance. I have about $30k I can put in this, and am currently fretting over to just chuck it all in or do 2-3 chunks over the next few months; I'm fully aware this is an emotional rather than financial decision

This will be a long term buy-and-hold investment - it's primarily designed to fund living expenses when hubby retires in his mid-50s in 10 years' or so time, to fill the gap before the tax-deferred accounts kick in. So I've been looking at the best ways to both buy and sell, from a cost basis/ tax point of view.

So far, I'm thinking that if we buy in chunks, say $5-10k at a time, and don't have dividends reinvested, then we can use easily use specific identification for future sales, and just sell $5-10k self-contained chunks for living expenses, moving more or less into cash/ a CD ladder depending on how the fund is doing at the time and to minimise taxes depending on whatever other income we might have trickling in (hubby might semi-retire or get the odd contract, etc).

I'm trying to find a compromise between the ideal solution for tax efficiency, taking advantage of capital gains opportunities, tax loss harvesting, etc, and not making my reporting requirements too complicated. If I go for chunk buying, chunk selling, no DRIP, will that be ok and not too onerous? And what actually happens to the dividends in that case - will they just send them to my regular bank account?

Thanks for any comments on my approach you might have!

nun

I like the choice of VTSAX and that you are being diligent, but you are over thinking things. Also if this money is a long term investment why wouldn't you reinvest dividends? Vanguard makes doing your taxes very easy and will do all the calculations for you so you can just enter dividends and capital gains on your taxes. Why are you choosing to use specific costs when calculating cost basis? many people just use average cost basis and forget about tracking the cost of each individual buy as it quickly gets complicated. Also try to invest something every month through the automatic investing scheme.