By request, I’m posting a review of my opinions experiences with online discount broker TradeKing. I’ve actually had an account with them for over a year now. This will be done from the perspective of a buy-and-hold investor in stocks and ETFs, not an active trader.

Commission and Fee Schedule Overview
TradeKing offers $4.95 stocks trades across the board – market or limit, online or broker-assisted. $4.95 isn’t as low as it used to be, with brokers like Zecco.com offering free trades now, but it’s still much cheaper than the big discount brokers like E-Trade or TD Ameritrade for non-active traders. They also offer options for $0.65 per contract, also a competitive price.

There are no minimum opening balances, and also no maintenance or inactivity fees to worry about. (You need $2000 to open a margin account.) There are no annual maintenance fees for IRAs, but to transfer out or terminate one costs $50. Electronic statements are free, but paper statements cost $2.50 each.

Opening Process
The application seemed pretty standard, including having to sign off on all those long disclosures. It was all online and I did not have to mail anything in.

One thing to note is that if you want to fund your account via an online bank transfer, you’ll have to be very patient. After you provide them with the account and routing numbers, they require 5 business days to verify it. Then, every online transfer (max $10,000) takes 5 business days to complete. So if you choose this option like I did, you’re looking at two weeks minimum before you’ll be ready to trade. The quickest way to start is to perform a wire transfer into your new account.

Trading Interface
My first impression of the account several months ago was that the interface was a bit sluggish. But recently, the response time has been great and overall I like the interface. Here are some screenshots of the Account Summary and the Trading screen:

They offer trailing stops and contingent orders based on price triggers, as well as complex options trades like spread, straddle, strangle, combo, butterfly, collar, and condor.

Customer Service. They are actually very responsive on the customer service side. I can usually get someone on Live Chat within 5 minutes, and they are faster to pick up the phone than my previous calls to Ameritrade and E-Trade. I can’t speak as to how they handle complex questions, as I haven’t been faced with any real problems yet.

Dividend Reinvestment. They offer free automatic dividend reinvestment, with the ability to purchase fractional shares. This can be set for all your stock holdings, or just specific ones. This is nice if you have ETFs and you want to reinvest dividends like you used to with mutual funds.

Money Market Sweep. By default, only 1% interest is paid on cash balances. You can sign up for one of three money market sweep accounts (taxable, tax-exempt, treasury), with the taxable option is currently paying 4.22% and is FDIC-insured. I highly recommend signing up for this right away, it takes just a second to send them an e-mail message and you’re all set. No forms to fax or mail in.

Long Transfer Times. Again, ACH deposits are subject to a trading hold of 5 business days, and also cannot be withdrawn for 10 business days. This can be a pain if you have a hot idea and want to make a trade fast, so I would keep whatever money you want to invest in the money market sweep above.

Awards. TradeKing has many of their awards on their site, including getting ranking #1 in Customer Service from SmartMoney magazine in 2010.

Sign-up Bonuses. For new customers they will reimburse ACAT transfer fees charged by your existing broker up to $150 when moving your account over to TradeKing.

I hope this helps people make a decision! I like TradeKing, but it’s very hard to simply call any broker “the best” or “the worst” as everyone has different trading levels and preferences. What one person deems a critical feature, another cares nothing about.

More Broker Reviews
Scottrade Review – $7 Trades
Zecco Trading Review – 10 Free Trades/Month

I know I haven’t finished my 401k rollover series yet, but whenever a family friend asks where they should put their old retirement plan assets, I always say Vanguard. They certainly aren’t the only good company out there, but they do have a lot of things going for them:

• They are not a for-profit company, so their interests are better aligned with the common investor. For example, this way there are no shareholders who might want to raise mutual fund fees in order to increase profits.
• They don’t pay advisors to sell their funds through load commissions or 12b-1 fees.
• They offer a wide selection of low cost mutual funds that track many different asset classes.
• I also put my money where my mouth is, as I have all of my IRAs there. I am always pleased at the high level of customer service that I get from them.
• In the end, I feel they offer the best chance at superior performance and low-stress ownership over the long haul.

According to this Wall Street Journal article, Few Firms Earn Loyalty of the Wealthy, I am far from alone. Some excerpts:

Affluent investors say they’re increasingly dissatisfied with their mutual funds’ long-term performance and inconsistent returns. In fact, only 11 of 38 top fund families manage to create meaningful customer loyalty, according to a report released by Cogent Research LLC. The Cambridge, Mass., market researcher surveyed 4,000 mutual-fund investors with at least $100,000 in investable assets.

The study showed Vanguard Group with a wide lead in investor loyalty.

The average score was minus-12. The high was Vanguard’s plus-44. Second place went to Dodge & Cox with a plus-29. Schwab came in with 26 points, and T. Rowe Price had 21.

I feel like my last post about rebalancing wasn’t as thorough as I’d have liked it to be, so here I go again, adding some quick definitions and including a review of several research articles about the subject.

What is Rebalancing?
Let say you examine your risk tolerance and decide to invest in a mixture of 70% stocks and 30% bonds. As the years go by, your portfolio will drift one way or another. You may drop down to 60% stocks or rise up to 90% stocks. The act of rebalancing involves selling or buying shares in order to return to your initial stock/bond ratio of 70%/30%.

Why Rebalance?
Rebalancing is a way to maintain the risk/reward ratio that you have chosen for your investments. In the example above, doing nothing may leave you with a 90% stock/10% bond portfolio, which is much more aggressive than your initial 70%/30% stock/bond mix.

In addition, rebalancing also forces you to buy temporarily under-performing assets and sell over-performing assets (buy low, sell high). This is the exact opposite behavior of what is shown by many investors, which is to buy in when something is hot and over-performing, only to sell when the same investment becomes out of style (buy high, sell low).

However, in taxable accounts, rebalancing will create capital gains/losses and therefore tax consequences. In some brokerage accounts, rebalancing will incur commission costs or trading fees. This is why, if possible, it is a good idea to redirect any new investment deposits in order to try and maintain your target ratios.

How Often Should I Rebalance My Portfolio?
Some people rebalance on a certain time-based schedule – for example, once every 6-months, every year, or every 2 years. Others wait until certain asset classes shift a certain amount away from their desired targets before taking any action. A good source of research articles about which method is optimal can be found at the AltruistFA Reading Room. I’ve been reading through them the past few days, and I’ll try to provide a very general overview of the articles here.

So what is best? You may be surprised by the fact that not only is there no clear agreement on the answer to this question, but many of the articles actually contradict each other! For instance, compare this Journal of Investing article:

Over this period, regular monthly rebalancing returns dominated less active approaches. Should one infer that daily rebalancing is better still? Our data cannot say, but it seems plausible.

with this excerpt from an Efficient Frontier article:

So, what can we conclude from all this? Monthly rebalancing is too frequent. There are small rewards to increasing one’s rebalancing frequency from quarterly up to several years, but this comes at the price of increased portfolio risk.

Eh? I believe that this is because their results vary significantly with the time period chosen and asset classes being used in their back-tested scenarios.

Then there is this paper from Financial Planning magazine, which used the 25 year period from Oct. 1977-Sept. 2002 and a 60% Stock (S&P 500 Index) and 40% Bond (Lehman Bros. Gov’t Index) as the starting/target allocation. Here are the results for various rebalancing frequencies:

The various rebalancing periods showed minimal performance differences, although annual rebalancing held a slight return margin and a higher risk margin.

Because the risk-adjusted performance differences among the portfolios were small, the answer to the question of when to rebalance–monthly, quarterly, semi-annually, or annually–depends mainly on the costs to the investor of rebalancing.

Efficient Frontier’s Bernstein also agreed in the this last respect, stating “The returns differences among various rebalancing strategies are quite small in the long run.”

In the “wait for a significant shift before taking action” camp is author Larry Swedroe, who I think also presents a very reasonable solution. From a WSJ article:

With major holdings like U.S. stocks, foreign stocks and high-quality U.S. bonds, consider rebalancing whenever your fund holdings get five percentage points above or below your targets, suggests Larry Swedroe, research director at Buckingham Asset Management in St. Louis. For instance, if you have 40% earmarked for bonds, you would rebalance if your bonds got above 45% or fell below 35%.

Meanwhile, for smaller positions in sectors like emerging markets and real-estate investment trusts, Mr. Swedroe recommends a 25% trigger. So if you have 5% targeted for emerging-market stocks, you’d rebalance if emerging markets balloon above 6.25% or fall below 3.75%. “You definitely want to be rebalancing, but you don’t want to be doing it too often,” Mr. Swedroe says. “You want to let stocks go up a bit before you sell, but not so much that you lose control of risk.”

Summary
Since it seems that there is no concrete right answer, I think the most important thing is to just make sure you set up some way to rebalance that does not involve any emotions or market timing. Don’t worry about the details, but don’t let your portfolio run off on its own either. I think the subtitle of one of the articles above sums it up quite well… ‘Tis Better To Have Rebalanced Regularly Than Not At All.

I have personally chosen to rebalance annually. This method keeps it simple while still controlling risk and offering potential extra return. If I recall correctly, it is also recommended in Ferri’s book All About Asset Allocation (review).

It’s been over a year since I came up with my current asset allocation mix, and I should really rebalance my current portfolio to match those percentages again. It really should only take a few minutes of spreadsheet math and some clicking online, but I’ve been plotting out a few long-term asset allocation changes in the meantime and I’ve been putting it off. I really must do one or the other soon.

Rebalancing is a way to maintain the risk/reward balance that you have chosen for your investments, and also forces you to buy temporarily under-performing assets and sell over-performing assets (buy low, sell high). How often one should re-balance their portfolio depends on a few factors. In taxable accounts, rebalancing will create capital gains/losses and therefore tax consequences. In some brokerage accounts, rebalancing will incur commission costs or trading fees. As for me, the vast majority of my retirement portfolio is in tax-sheltered accounts and in mutual fund accounts which are not subject to transaction fees. Some of my funds have redemption fees, though.

After that, some people rebalance on a certain time-based schedule – for example, once every 6-months, every year, or every 2 years. Others wait until certain asset classes shift a certain amount away from their desired targets. I will dig up some good articles on this topic later (here is one math-intensive article to start), but after my previous research I had settled on an annual rebalancing schedule. Of course, that was almost 15 months ago. 😳

If you rebalance, what is your criteria?

You have probably heard of hedge funds, which are investment funds somewhat similar to mutual funds in they pool together money from different investors, but with the very important difference that they have virtually no limitations on what they can invest in, and also have no requirements to disclose their holdings.

In order to invest in a hedge fund, you are usually required to be an accredited investor, which means that you either have a net worth of at least $1 million or have made at least $200,000 each year for the last two years (or $300,000 joint combined). Supposedly this is to show that you are savvy enough to navigate these loosely-regulated waters, but to me it seems like they just want you to be able to lose a ton of money on these sexy-sounding investments and not make a big fuss about it.

I was reminded of this when reading about the most recent big-name hedge fund failures:

Investors in two troubled Bear Stearns Cos. hedge funds that made big bets on subprime mortgages have been practically wiped out, the Wall Street firm said yesterday, in more evidence of the turmoil in this corner of the bond market.

Bear said one of its funds was worth nothing and another worth less than a 10th of its value from a few months ago after its subprime trades went bad, according to a letter Bear circulated and to people briefed by the firm. The Wall Street investment bank — known for its bond-trading savvy — has had to put up $1.6 billion in rescue financing.

Oops! I guess they didn’t hedge their credit risk exposure very well. For more reading, just run a search for Long Term Capital Management or see the Wikipedia entry:

Initially enormously successful with annualized returns of over 40% in its first years, in 1998 it lost $4.6 billion in less than four months and became the most prominent example of the risk potential in the hedge fund industry. The fund folded in early 2000.

Here is an example of hedge fund fraud:

An Atlanta hedge fund manager under suspicion of defrauding a group of investors that included several NFL players now faces criminal charges in connection with the collapse of funds that investors believed held up to $180 million.

While I plan to meet the requirement to become a accredited investor, and wouldn’t mind working for a hedge fund, I’m pretty sure I’ll never sink a penny into one. I just don’t see the need to take such risks.