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Is Facebook the IPO of a generation? The much-anticipated initial public offering of the world’s most popular social networking site, Facebook, took place this morning on the NASDAQ. With it, the dreams and technologies of the millenial generation have taken root as a core part not only of American society – but of its formal economy.
Already, Facebook bears the distinction of having the largest market valuation of any US company at IPO at $104.1 Bn. That’s no small feat for a company that didn’t even exist eight years ago. The offering, which was originally priced at $38 per share, has “popped” to over $42/share as of the time of writing, creating over $16 Bn in value for the company. That could grow to $18.4 Bn, making it also the largest initial share offering in US history.
But all these big numbers aside, the Facebook IPO is also the hallmark of the new economy. Facebook doesn’t make anything, and its users aren’t even buying any products or servics (with the exception of some gaming functions), but most people still believe it has great value. The power of connectedness – and the technologies that enable us to share and display information across our network – has now taken root.
That, some analysts say, explains in part the $1 Bn Facebook paid for photo-sharing startup, Instagram last month: Sure, Facebook could’ve created a competitor, but Instagram was already growing to be hugely popular – and it’s a bit harder to convince an existing social network to migrate. It also helps explain the company’s big gains in advertising revenue (and its price to earnings value). It’s the network itself, that has value. Advertisers can use it to pinpoint people based on preferences in a more targeted fashion. It’s also a place where people are more tuned in; people care more about their friends’ lives than tv, and the power of social networking holds values for individuals and companies, alike. Ever heard of the term “going viral”?
In the end, we’re all part of social networks, whether we use applications like Facebook, or not. But it took a Harvard student in his dorm room to harness that power for the market.
What’s your take? Is Facebook the IPO of a generation? Will you “like” the social network by investing in its stock?
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Recently on the mint.com Facebook page, a reader asked a common question:
Any investments for people with very little money to invest?
Normally, my response to this is the one nobody wants to hear: put the money in a savings account or savings bond, check out a book about investing from the library, save more money while you read the book, and start investing once you have the $1000 minimum to open an account at a big mutual fund house like Schwab or Vanguard.
I stand by that advice. (My favorite introductory investing book is Elements of Investing, by Malkiel and Ellis.) But it doesn’t actually answer the question, does it? Maybe a kid wants to invest a $100 birthday check from Grandma, or maybe you want to get started on retirement savings right this second, before you change your mind.
Those are good reasons. Twenty years ago, the answer would have been depressing: you could buy a couple of shares of stock in a company or two, and pay a hefty brokerage fee for the privilege. You’d be down a few bucks from day one (thanks to the fee) and dangerously undiversified.
Technology and years of brokerage price wars have changed all that, to the point where, for less than fifty bucks, you can buy a fully diversified portfolio of thousands of stocks and pay pennies in expenses. So I went looking for an online brokerage that treats the low-dollar investor right. These were my criteria:
No minimum opening balance—in fact, no minimum balance, period.
Access to diversified, low-cost, commission-free stock and bond ETFs. (“Commission-free” means you can buy and sell them without paying a fee.)
No other fees. If you’re investing $100 and get slapped with an $8 fee, you’ve just lost 8% of your portfolio.
Choice of IRA, Roth IRA, or taxable account.
This is a pretty strict list of demands. There are a lot of discount brokerages out there, but this narrows them down to two. This is not to say these are the best brokerages overall, just that they’ll take you in and treat you right if you only have a single Benjamin.
Let’s go investment shopping
The two finalists are:
TD Ameritrade. Offers over 100 commission-free ETFs including top brands like iShares and Vanguard. For $100 you can buy two shares of Vanguard Total World StockETF (VT). When you buy a share of this ETF, you literally own a tiny slice of over 3500 stocks from companies the world over.
Want to add bonds? TD offers plenty of good bond funds, too, like iShares Treasury Inflation-Protected Securities ETF (TIP) and Vanguard Total Bond ETF (BND). Bond funds tend to cost a little more per share than stock funds, but still, for under $200, you could buy (prices as of May 2, 2012):
It would be hard to come up with a much better portfolio than that, even if you were investing a million dollars.
Firstrade. Offers 10 commission-free ETFs. Sure, TD has ten times as many free ETFs. But it only takes a couple of good ETFs to build a solid starter portfolio. Among Firstrade’s offerings, I like the iShares S&P 500 ETF (IVV), which holds the 500 biggest US companies, and the Vanguard Intermediate-Term Bond ETF (BIV), which invests in high-quality corporate and US government bonds.
Unfortunately, the iShares ETF breaks the bank: its share price is over $100. My second choice is the Vanguard Dividend Appreciation ETF (VIG). At only 134 stocks, it’s not as diversified as the iShares fund, but your portfolio isn’t going to be stuck at $100 forever, and VIG is a perfectly respectable introduction to the ups and downs of stock market investing.
One warning: when you buy a commission-free ETF at TD or Firstrade, you have to hold it for 30 days before selling or pay a hefty fee. Since you’re putting this money away for the future, and “the future” isn’t going to be here two weeks from now, I trust this won’t be a problem.
What are you waiting for?
You hear people complain that the deck is stacked against the small individual investor. Well, there has never before been a time when the small investor could get into a fully diversified portfolio for under $200 without paying a dime in brokerage fees. Plus, you can do it all in a few minutes in your pajamas.
Guess it’s time for me to update my advice.
Do you have a question for one of the MintLife experts? Head over to the mint.com Facebook page and ask away!
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
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Once a month, I meet up with some smart people in my neighborhood to drink coffee and try to stave off mental decline by talking about hard financial topics: macroeconomics, taxation, and sometimes even something useful, like investing. It’s like Facebook chat, only you can smell the other participants.
At our last meeting, the topic was active vs. passive investing. Before we could get into that debate, however, we had to define our terms. I was arguing the passive investing side, which meant I had to come up with a definition of passive investing. This proved to be a lot trickier than I thought, and more fun.
I’m not going to get into the passive vs. active debate in this column. I just want to see if I can figure out what we’re talking about before I wade into that debate in the near future.
“What is passive investing?” may seem like an arcane question that nobody but latte-fueled intellectuals should care about. On the contrary, pal: if you’re saving money for the future, deciding whether to take an active or passive approach is among the most important decisions you’ll make.
Who’s active?
Active investing, as I define it, means trying to beat the market over a particular time period using one or both of the following strategies:
Security selection. This is a fancy term for buying the right stocks (or bonds, or funds, or any other asset) and avoiding the wrong ones. It means having the foresight to buy Apple in the pre-iPod days and not to buy Netflix on the day after its IPO.
Market timing. Markets gyrate. If you can correctly predict those gyrations ahead of time, you can make a lot of money—or avoid losing it.
Passive investing means doing neither of those things. It means diversifying as much as possible by buying broad market index funds. It means owning the next Apple, but also the next Groupon. And it means not trying to time the market. That means staying in when stocks take a dive five days—or months, or years—in a row.
Passive investing also means making portfolio decisions based on personal circumstances, not on headlines or research.
Who’s passive?
With that definition in mind, let’s cook up a couple of hypothetical investors and see who’s passive and who’s active. (Aren’t these terms a little judgmental, by the way? That’s why MintLife columnist Dan Solin likes to refer to passive investing as “smart investing.”) This is my column, so I get to be the judge and jury. We’ll start out easy.
Alice owns a bunch of individual stocks and bonds and trades them regularly.
Verdict:Active.
Bob owns no individual stocks or bonds, only low-cost ETFs, but he trades them regularly in response to perceived market trends.
Verdict: Active.
Charlie buys mutual funds, holds them, and never trades. However, his mutual funds are actively managed, so the fund manager may be trading stocks within Charlie’s funds.
Verdict: Active.
Donna buys diversified index funds or ETFs, holds them, and never trades.
Verdict: Passive.
Rick Ferri, in his book The Power of Passive Investing, puts these four investors into a handy chart, which I’m going to simplify and reproduce here.
Uses actively managed funds or individual stocks
Uses index funds or ETFs
Trades
Alice
Bob
Doesn’t trade
Charlie
Donna
As you can see, only Donna meets Ferri’s (and my) definition of passive investing.
The hard cases
Now, let’s ask some tougher questions.
Emily owns only index funds and ETFs, but she has decided on a 50% stock/50% bond portfolio.
Verdict: Not enough information.
If Emily has chosen a 50/50 portfolio because it’s in line with her risk tolerance, she’s passive. If she believes this portfolio looks like a winner for the moment but intends to change it later when stocks look like a better bet, she’s active.
Frank owns only index funds and ETFs in a 50/50 stock/bond portfolio, but he trades once a year or more to bring his portfolio back in line with its original allocation. That is, if bonds go up and stocks go down, he sells off some bonds to buy more stocks until he’s back to 50/50. This is called rebalancing.
Verdict: Passive.
Rebalancing is about keeping your portfolio risk under control; it’s not about trying to time the market.
Gene used to have a portfolio of 75% stocks/25% bonds. Recently he received an inheritance. He checked his retirement savings calculator and found that with the new infusion of cash, he could take less stock market risk and still have an excellent chance of reaching his savings goal, so he switched his allocation to 50/50.
Verdict: Passive.
Gene is changing his portfolio based on a change in his circumstances, not anything to do with market trends.
Hailey is a buy/hold/rebalance type like Frank. A couple of years ago, however, during the financial crisis, she noticed that prices on certain bonds had plummeted. She took the opportunity to buy some highly-rated bonds at bargain prices and permanently reduced her allocation to stocks.
Verdict: Hmmm.
I’m not sure. It smells like market timing, but is it?
Get your Team Alice t-shirts here
Alice, our pure active investor, works hard at investing. She is up on the latest IPOs, valuations, interest rates, and market trends. She has a whole folder of investing apps on her phone.
Meanwhile, Frank, our passive buy/hold/rebalance guy, doesn’t know anything about any of that stuff, and he spends a few minutes a year managing his portfolio.
You can probably guess whose team I’m on, but let’s talk about you: are you an Alice or a Frank or someone else from our cast of characters? And why?
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
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MintLife is continuing their contribution to Financial Literacy Month by tacking another personal finance topic: mutual funds. You can catch up on this ongoing series, by reading the first installment, “What are Equities?”
What is a Mutual Fund?
Investing can be pretty scary stuff. Financial fraud, volatile markets, crooked brokers, macroeconomic headwinds – we are constantly bombarded with news of investors losing their shirts after dipping their toes in the nebulous investment universe. But investing doesn’t have to be such a daunting task. There are a number of ways the average investor can distribute risk across their portfolio so that they can sleep easy at night. One of the most popular ways to do that is to invest in a mutual fund.
The mutual fund is the quintessential collective investing scheme. It is basically a variety of securities (stocks, bonds, etc), which are owned collectively by a large number of investors. The securities make up a single fund and shares are sold to investors based on their collective value. It is managed by a group of financial professionals who make all the investment decisions on the fund’s behalf. If the securities in the fund increase in value, then the value of your shares also rise, equating to a positive return on your initial investment.
The aim of a mutual fund is to yield a greater return for their investors than they would have normally received by investing their money alongside an index of some sort, known as a benchmark. For example, if a mutual fund is invested primarily in equities, which are stocks (see last week’s piece), then the fund managers will try to beat the performance of the Standard and Poor’s 500 index, which is a stock index that tracks the rise and fall of 500 stocks that trade in the US.
Which Mutual Funds Should I Invest In?
There are over 10,000 mutual funds available in the US for you to invest in. There are massive, multi-billion dollar funds and there are small boutique funds. There are funds that invest in higher-risk securities and some that invest in securities that have a very low risk profile. But for the most part, mutual funds tend to be divided into three main types: equity funds, fixed income funds and money market funds. Equity funds invest in stocks; fixed income funds invest in debt, like bonds; and money market funds invest in super safe short-term debt securities, like bonds issued by the US government.
Money market funds yield the lowest return for investors out of the three because it is very low risk. The equity and fixed income funds have varying levels of risk and returns based on what they are holding. When you go to invest in a fund, you will be able to see the risk level of the portfolio and can invest accordingly. Funds that are labeled as “growth” funds tend to be riskier than those that are “value” funds. Your risk tolerance is based on your comfort level and on how close you are to retirement.
Why Invest in a Mutual Fund?
Mutual funds are a solid option for people who don’t want to get their hands dirty investing, but who also aren’t keen on seeing their cash locked away in some low to no yield checking or savings accounts, either. There was a time that you could park your cash in a bank savings account or a bank certificate of deposit and receive a relatively decent return on your money. But with the Federal Reserve keeping interest rates so low due to the sluggish economy, chances are you would be better off just stuffing your cash under your mattress than locking it away in a bank.
By pooling your money with others in a mutual fund, you not only get to spread out the risk, but you also are able to take a lot of the guesswork out of investing. You don’t have to spend hours researching a particular stock or a bond – that work has been done for you (hopefully) by the fund managers. And you don’t have to pay the high brokerage fees to buy and sell a security – the fund manager can do that at a much cheaper rate. All you have to do is hand over your cash and go on your daily business. You’ll receive a statement in the mail every few months or every year updating you on how the fund has performed.
The Disadvantages of Investing in a Mutual Fund
But while there are many advantages in investing in a mutual fund, there are also several disadvantages as well. The one that always miffs investors is the fees. Generally, investors have to pay a fee to buy and/or sell their shares in the mutual fund. This fee is known as a “load” and it covers the sales and marketing expenses to the broker who sold you the fund.
When you are invested in a fund you need to pay a few other fees to maintain it. First, there is the management fee, which covers the salaries and personal expenses of the managers running the fund. This fee is usually worth 1% to 2% of the assets you have invested in your portfolio. The fee is paid daily, but is calculated on an annual basis. Some funds also have a marketing fee, known as a 12b-1 fee, which can cost investors around 0.5% to 1% annually. These two fees make up the firm’s management expense ratio. The lower the fees as a percentage of its assets, the more efficient the fund is at managing your money. Separate from those fees is another fee to cover all the trading expenses associated with the portfolio. This fee fluctuates based on the strategy of the fund. For example, if the fund buys and sells securities often, the fee will be higher than if the fund tends to buy and sit on securities for a while.
Beyond fees there is performance. Mutual fund managers aim to beat an index, not make you money. This means that if the S&P 500 index was down 20% last year, a mutual fund manager would be considered successful if the fund was only down 19%. An absolute return, which is making your money grow regardless of how the broader market performs, is not in a mutual fund manager’s mandate. Sure, the fund manager would like to make you money if they can, but they feel like they have done you a service, and earned their fee, if they were able to mitigate your losses compared to that of the broader market.
There have been many studies conducted over the years that try to track the long-term performance of mutual funds. The results mostly show that, net of fees, the mutual fund industry as a whole has not returned a lot of money to investors. Some blame the high fees, while others say that fund managers aren’t doing a good job. But it is sort of unfair to lump the entire industry together. There are, after all, thousands of funds invested in vastly different securities.
The Bottom Line
The key is to put your money in funds where you think have the best chance of growing over a set time. While you can invest and forget for a while with a mutual fund, you still need to rebalance your portfolio – at least yearly. So if there is a recession, in say, Asia, forecasted for the coming year, you might want to pull your money out of the mutual fund that owns a lot of Asian stocks and put it in one that invests in something else safe, like US debt. So while mutual funds are a great alternative for people who don’t want to follow the day-to-day drama of the market, it still doesn’t mean you can check out completely.
Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati
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Investing columnist Matthew Amster-Burton has been answering questions from the Mint.com Facebook page and Twitter. This week: questions about 401(k)s and other retirement plans.
Rolling over a 401(k) to a Roth IRA
Al asks: Can I roll my 401(k) into my Roth IRA when I leave my job?
Sort of. How’s that for a satisfying answer?
Here’s the deal. Unless you have a Roth 401(k) (a fairly new and rare beast), a 401(k) is like a traditional IRA, not a Roth IRA. You put pre-tax money into a 401(k): unlike the rest of your paycheck, your 401(k) contribution goes straight into the account without the IRS taking its share via withholding. Of course, you’ll still have to pay taxes later when you withdraw the money… or convert it to a Roth.
If you roll your 401(k) over to a Roth IRA, you have to pay income tax on the entire balance. Since you’re leaving the money in a retirement account, there’s no early withdrawal penalty, but the converted amount is considered income and you could end up in a higher tax bracket. Furthermore, the tax payment has to come from outside the account. For example, if you’re in the 25% bracket and you roll a $50,000 401(k) over to your IRA, you’ll need to cough up $12,500 cash.
The bottom line: Roll it over to a traditional IRA. You won’t pay any tax or penalty and you can look into doing partial Roth conversions, or none at all, depending on your tax situation.
Pros and cons of 401(k)s and 457(b)s
Robert asks: What are the pros and cons of a 401(k) vs. a 457(b)?
If you’ve never heard of a 457(b), you’re probably not eligible for one, but stay with me a minute, just in case.
A 457(b) is a pre-tax savings plan similar to a 401(k). While 401(k)s are widespread, only public employees and certain highly compensated employees in the private sector have access to a 457(b). (Isn’t “highly compensated employee” a great euphemism for your boss’s boss? It’s right up there with “high net-worth individual.”)
If you have access to a 401(k) and a 457(b), you can contribute $17,000 (if you’re under 50 years old) to either or both. Yes, that means $34,000 in total. The main difference between a 401(k) and a 457(b) is that with the 457(b), you can make withdrawals at any age without a penalty, as long as you’re no longer working for the employer where you signed up for the 457(b).
If you’re a public employee, therefore, it generally makes sense to contribute to a 457(b) before contributing to a 403(b) (the government employee equivalent of a 401(k), and I am so sorry for the alphabet soup), as long as you don’t forego a matching contribution.
There’s a special wrinkle to non-governmental 457(b)s, however: unlike a 401(k), the money isn’t entirely yours. Until you actually withdraw it, it’s an asset of your employer and could be turned over to creditors in bankruptcy. The actual risk of this happening is remote, but it’s scary enough that private sector employees should fill their 401(k)s before considering the 457(b).
The bottom line: A governmental 457(b) is excellent, so use it; a private 457(b) is good, but riskier, so use it only if you fill up your 401(k).
Rolling over 401(k) contributions
Craig asks: Can I annually, or even more regularly, roll over contributions I have made to my employer’s 401(k) into my Roth IRA? I am under 59.
No—except in one unusual situation.
Generally speaking, you have to leave 401(k) money in the 401(k) until you change jobs, retire, or quit in a huff and slide out the back of the plane.
Some employers, however, allow in-service distributions of after-tax contributions. What this means:
You contributed the full $17,000 maximum to your 401(k)
Your company allows you to contribute additional money, after tax
That additional money can be rolled over into a Roth IRA
Yes, this means you have to max out your 401(k) before there’s even a chance you can do this. (Actually, sometimes you can also get away with it if you’re over 59-1/2.) If you’re a highly compensated employee (yay!) and are contributing $17,000 already, by all means, ask your benefits office about in-service distributions.
There’s one other situation where you might be able to do rollovers without cleaning out your desk. If your employer’s plan is a SIMPLE IRA, rather than a 401(k) (yes, a SIMPLE IRA is yet another similar pre-tax retirement plan), you can roll over any money that’s been sitting in the plan for at least two years. And you probably should, because SIMPLE IRAs tend to charge high fees and offer lousy investment options.
The bottom line: You probably can’t do this.
Do you have an investing question for Matthew Amster-Burton? Head over to the Mint.com Facebook page or Twitter and ask away!
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
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Investors are always itchy to get on board with the hot new tech stock IPO – despite the rcent lackluster performance of some big names . So, how do you know the difference between a bull and a bear on IPO day?
Be Wary of Cash Outs
Some initial public offerings seem more about letting founders and other insiders vash out of their holdings than anything else. There’s one problem with this conspiracy theory, however: Securities and Exchange Commission (SEC) rules dictate that a company’s officers and employees hold their stock for a predetermined period of time known as a “lock-up period.” This is anywhere from 90 days to two years. Still, when doing your homework ask yourself this: Does the company have a sustainable business model that will make stock ownership an attractive option — or is it just trying to cash in on being the fad of the moment?
Watch Out For Irrational Exuberance
Because IPOs are such media-driven events, there’s often an initial period of euphoria before a crash. For example,one electric care company saw a 60 percent increase in the price of its stock during the first hour and a half of trading. When the initial buzz wore off, the stock’s value plummeted 43 percent over the next four days.. A more cautious investor would do well to sit back and see what the stock does for a few days, waiting for a dip, rather than buying at the initial asking price.
Look at the Underwriters
You don’t have a crystal ball to know whether a stock is going to do well. You can, however, look to experts who are intimately involved in the process and keep an eye on what they’re doing. Underwriters work in two ways: “best effort” and “firm commitment.” You’re going to want to buy stocks where the underwriters have made a firm commitment.
This means that, as part of their investment deal, they have to buy a certain amount of stock. They then attempt to resell this stock at something resembling the IPO price. This means their financial welfare is directly tied to the success or failure of the company. When an underwriter invests on a firm commitment basis, you know they have faith in the company.
“Best effort?” Not so much. If a company doesn’t have underwriters with full faith in it, why should you?
Investing In New Companies For The Extra Cautious
Perhaps the most cautious course of action you can take is to wait for the lock-up period to end. Even if the company is sound, with a good business plan and a product or service that people are interested in, the stock’s value might drop sharply after the lock-up period is over. This can be the ideal time to buy, as the excess stocks flood the market and depress the price.
Do Your Research
As with any investment instrument, you need to do your due diligence before you purchase a stock. A company’s prospectus is available for any potential investor to peruse prior to the IPO. In fact, you can find them online on the Securities and Exchange Commission’s website.
Don’t let your desire to get rich quick have you throwing your money down the toilet. Be patient, do research, see what other investors are doing – and then you’ll be better equipped to invest in an IPO.
“The Do’s and Don’ts of IPO Investing” was written by Nicholas Pell, a freelance writer living in Los Angeles.
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Are you a municipal government, a large business, or a homeowner with perfect credit and plenty of equity? If so, record-low interest rates are your friend. For savers, however, low interest rates are infuriating.
This week, NPR’s All Things Considered profiled a family of six with excellent credit that can’t refinance their home because it’s underwater; meanwhile, their savings account is paying 0.8%–less than the rate of inflation. Host Audie Cornish asked MintLife columnist Matthew Amster-Burton for his advice.
Unfortunately, said Amster-Burton, 0.8% APY is about as good as you’re going to get right now from an online savings account. But there are several other options to consider before putting the kids to work burying cash in the sandbox.
Series I US savings bonds (I-bonds for short) are great for any savings goal one year or more into the future. You can buy them directly from the government at TreasuryDirect.gov and they never pay less than the inflation rate.
Right now, for example, I-bonds pay 2.2%, which is better than most 5-year CDs, but much more flexible.
For Amster-Burton’s other recommendations and his attempt to find a silver lining on a very cloudy day for savers, listen to the NPR radio segment below (iOS and Android users can listen via the free NPR News app):
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Investing columnist Matthew Amster-Burton has been answering questions from the Mint.com Facebook page and Twitter. This week: questions about which funds to choose in your retirement plan.
Josh asks: I just received my 401(k) packet from my job; it has a lot of selections for my retirement. I don’t want to just pick any plan. Would my financial institution be able to sit down with me and instruct me on the best plan for my retirement?
Ah, what could be more fun than sitting by the fireplace with your significant other, a glass of wine, and a six-page printout of the mutual funds offered by your new 401(k)? Other than taking an icepick to your spleen, that is.
It’s hard to find intelligent, unbiased advice on how to choose investments for your retirement. Here’s why:
Most 401(k)s offer investment advice and, by law, the advice can’t be driven by what will make the advisor or your employer the most money. However, when I say “most” 401(k)s, I mean about 60% of them. Most workers don’t bother to take advantage of the advice, and who can blame them? There’s no reason to believe the advice will actually be unbiased or, more to the point, good.
Professional financial advisors charge professional-grade fees, typically a percentage of your assets or several hundred dollars an hour, depending on their fee model. Some advisors make money by selling commissioned products, but they’re not going to give you free 401(k) advice, because they can’t make any money on it. Instead, they’re going to encourage you to put less money into your 401(k) and more into their commissioned products.
I’m not bashing all financial advisors, by any means. If you’re looking to build a relationship with a trusted financial advisor, that’s fine–just be prepared to pay what they’re worth.
But if you just want some 401(k) help and most of the advice out there is bad, expensive, or both, where should you turn? Is it possible to get inexpensive, quality advice that will apply to your 401(k) and your financial goals? Yes.
First, go ahead and sign up for the 401(k) and direct your contributions to the money market or stable value fund while you decide what to do next. This is a low-risk and low-return fund, like a savings account—a good place to get the employer match and park your money while you get educated:
You can read a short book on investing that will help you get started. It’s called Elements of Investing, by Malkiel and Ellis. It’s inexpensive, jargon-free, and to the point. Your public library probably has it.
Your 401(k) might be supported by FutureAdvisor, a free investment advice service I wrote about recently. Their recommended portfolios are pretty good and they’re adding more 401(k) support all the time.
The smartest investors on the net hang out at a site called Bogleheads, named for Vanguard founder John C. Bogle. Post your 401(k) options on the “Help with Personal Investments” forum and you’ll get solid, unbiased recommendations, most likely within an hour.
Diego asks: I’m 29 and got my first job while finishing my PhD. I have a 401(k) but don’t know how to distribute my contributions.
With current low interest rates, low capital gains taxes, baby boomers retiring, and technology companies moving abroad, US stocks don’t seem a good option in the long run.
U.S. bonds are too safe, giving barely to enough gains to compensate for inflation and international stock options are all in Europe, which seems rather unstable. Should I just stop contributing?
Diego, I like your outlook. Not because I particularly agree or disagree, but because it reminds me of the famous 1979 Business Week cover story called, “The Death of Equities.”
In 1979, a lot of people argued that the U.S. economy was toast. Recession? Check. Inflation? Obscenely high. Regular investors were getting out of the market in disgust. It all added up to an obvious conclusion: the U.S. stock market was poised for years of disappointing returns—perhaps a permanent bear market.
Over the next twenty years, U.S. stocks had their biggest, longest sustained bull market ever. By 2000, it looked like you couldn’t possibly lose money in stocks. Oops.
My point is: your market analysis could be correct. But the fact that everything looks bleak doesn’t mean it’s a bad time to invest. It could turn out to be a terrific time—or not.
Nobody can predict future market returns, least of all me, but you can always find an excuse not to invest. There’s no good excuse for giving up the instant tax break you get by contributing to your 401(k).
Jon asks: Is it pointless to invest in two target date retirement funds (of the same target year) at the same time?
Hmm, those last two answers were pretty long-winded. Let me see if I can rein it in for Jon’s sake. Here goes:
It doesn’t provide any diversification benefit. But if you have a good (meaning “cheap”) target-date fund in your 401(k) and another good one in your IRA, it’s fine. Go for it.
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Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
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With Fidelity and Vanguard, investors can access traditional, full-service investment platforms that allow you to individually manage your own account. Robinhood, by comparison, offers a very different experience geared towards mobile users. Here’s how they stack up. If you prefer hands-on investing advice, a financial advisor could help you create a financial plan for your investment goals.
Overview: Robinhood vs. Fidelity vs. Vanguard
Fidelity and Vanguard both offer standard, full-service platforms that support most mainstream financial products. They are individual trading platforms, meaning that you trade your own assets and manage your own portfolio. Fidelity tends to distinguish itself through its advisor services. With a brand that has long centered around its retail financial advisories, this platform offers particularly strong educational and advisor resources.
Vanguard, on the other hand, has long been associated with the firm’s mutual funds. It continues to build its identity around these long-term assets, offering more no-fee funds than most competitors and charging low fees for funds not on that list.
Robinhood offers an distinctly different product that is designed primarily for mobile and online trading users. Investors using the platform should be self-sufficient and tech savvy, since users will get limited information about financial products.
Fees: Robinhood vs. Fidelity vs. Vanguard
All three of these brokerages offer no-fee trading and require no minimum balances. This means that you don’t pay anything to sign up, don’t have to carry any amount of money in your account and can trade most of the platform’s assets for free.
Robinhood
Robinhood, on the other hand, charges nothing for most of its services. There are no fees or commissions on each trade. Nor does Robinhood charge inactivity fees or other transaction fees for the most common activities such as depositing or withdrawing money. The main fee that Robinhood charges is $5 per month to subscribe to Robinhood Gold, which allows margin trading at 7.5% interest rate and – as of April 2023 – 4.4% APY on idle cash.
Fidelity
Fidelity lets customers trade stocks, ETFs and bonds free of charge. There are several thousand no-fee mutual funds. Fidelity charges $49.95 to trade funds that aren’t on its no-fee list. Options trading costs $0.65 per contract. There is a zero expense ratio for four Fidelity funds. The Depository Foreign Trust Company foreign settlement fee is $50 per trade.
Vanguard
When trading Vanguard mutual funds and ETFs, you won’t face any commission fees on those trades. You also avoid commission charges on 1,800 non-Vanguard ETFs and mutual funds when you buy online. Trading individual stocks on Vanguard, which charges a $20 annual account service, will cost you $7 per trade. Minimum balances for mutual funds range from $1,000 to $100,000. The firm recently lowered the minimum investment on many low-cost Admiral Shares index mutual funds, from $10,000 to $3,000.
Services & Features: Robinhood vs. Fidelity vs. Vanguard
Fidelity and Vanguard both offer broadly similar products when it comes to services and features. These are, as noted above, full-service trading platforms. This means that you manage your own account and can personally buy and sell most mainstream financial products.
Both of these platforms support stocks, ETFs, bonds, mutual funds and options contracts, and neither allows you to trade futures contracts or forex. Both also provide a full suite of technical indicators, ranging from basic information like pricing and volatility indicators to more complex data sets. This makes either platform generally a good choice for long-term investors and short-term traders. However, neither offer some of the more specialized features, like high-speed transactions, that active day traders prefer.
Vanguard distinguishes itself somewhat for wealthier and passive investors. It offers better prices on both mutual funds and options contracts to investors who have at least $1 million invested in their Vanguard account, and it has a better selection of mutual funds for investors to choose from. Most investors won’t find much advantage in a large selection of mutual funds, since the average investor will only pursue a small number of funds that meet their personal risk criteria anyway. However, sophisticated investors may prefer this kind of selection.
Fidelity distinguishes itself with its education and advising services. The brokerage offers an impressive array of educational materials for new investors, and that’s particularly useful when it comes to understanding complex products and the range of technical data you can access. Relatively new investors will find this useful.
Robinhood, on the other hand, is focused around its app experience and the company’s design philosophy is to allow people to trade stocks at great convenience. They have achieved this, building an app that lets you buy and sell stocks and options contracts with a swipe.
You should note, however, that Robinhood offers very few tools for understanding your investments. Their technical data is minimal, with little more than basic information about pricing and trading history. This makes Robinhood far more accessible than any other trading platform, but investors should be self-sufficient in researching investments and the risks that come with trading equities and options.
Online & Mobile: Robinhood vs. Fidelity vs. Vanguard
Fidelity and Vanguard are both clearly designed for their website experience.
This is common among full-service trading platforms. Making investments requires a lot of data, and sophisticated investors will want even more. This can simply require a lot of screen space.
In that regard, both services are solid choices for an investor. Both have well designed interfaces that allow you to access your portfolio at a glance, and which let you find both financial assets and technical information relatively easily. As with their services and features, Vanguard’s site is a little more complex than Fidelity’s and will generally serve more sophisticated investors better, while new investors will generally prefer Fidelity’s web experience.
Both have apps that are generally well regarded as companions to the platform’s full-service web experience. The Fidelity app has high ratings on the Apple App Store (4.8 rating) and Google Play (4.2 rating). The Vanguard app also has a high rating on the Apple App Store (4.7 rating) but only a 2.0 rating on Google Play.
However, with both platforms, the apps do not offer the complete range of data and technical indicators that you can get through the web platform, and they are best considered useful add-ons for checking your portfolio.
Robinhood has the opposite design philosophy, with a 4.2 rating on the Apple App Store and a 3.9 rating on Google Play. This trading platform has a sleek, minimalist approach that works extremely well for users to access their portfolios quickly, and find and trade assets with ease. The platform also has a website-based interface, but it sacrifices much of the app’s clean design.
Which Should You Use? Robinhood vs. Fidelity vs. Vanguard
Both Fidelity and Vanguard are good choices for individual investors who want to manage their own portfolios. If you have a relationship with either company, you would be well served by using their platform.
Otherwise, new investors may find a small advantage with Fidelity because of the company’s generally excellent educational materials and access to the network of Fidelity financial advisors. Sophisticated investors may prefer Vanguard, as they will be better able to take advantage of the small, but important, differences among the platform’s many mutual funds.
Investors who are tech savvy and self-sufficient to research opportunities and risks for their investments could benefit from the convenience of Robinhood.
Bottom Line
Vanguard and Fidelity are full-service platforms that allow you to trade most mainstream financial assets. While they are largely comparable in terms of price and features, Vanguard has a slight edge for more sophisticated investors and Fidelity may be more useful for newcomers who are still learning about the market. Robinhood, on the other hand, offers a sleek, minimalist experience that requires investors to be more knowledgable about investments.
Tips for Investing
A financial advisor can help you develop an investment strategy that works for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
It’s important to know where your investments will stand over time. SmartAsset’s free investment calculator can help you get an estimate to keep your goals on track.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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Let’s say you want to build your own stock market index fund based on the S&P 500. Easy: download a list of all the companies in the index (from 3M to Zions Bancorp) and their market cap, and start investing. Every stock in the index will be easy to buy in whatever quantity you want.
Now, after the success of your first index fund, you decide to create an emerging market fund, concentrating on the world’s up-and-coming economies. Again, no problem. We have the internet, after all, and we can just print off a list of all the stocks in China, India, Chile, Hungary, and so on, pull out a pile of Benjamins, and go to town.
That won’t work, says Raman Subramanian, Executive Director of Index Research at MSCI. Subramanian oversees the index underlying the the two largest emerging markets: ETFs, from Vanguard (VWO) and iShares (EEM). “You can go to any of the emerging markets and download the listed stocks there,” says Subramian. “But there can be some potential issues.”
So how do you build an emerging markets index, anyway? And, can it shed any light on how you should invest your money?
Who’s emerging?
The first order of business for Subramanian, or any emerging markets indexer, is to decide which countries count as emerging markets. This is not as easy as it sounds: no two indexes agree on which countries are emerging.
MSCI uses three criteria to classify a country as developed, emerging, or frontier (“frontier” is an euphemism for “not really emerging yet”).
Wealth. A country has to have a GDP per capita above a certain threshold to be considered developed; below that, it’s emerging or frontier.
Market structure. In order to be included in the index, a country has to have an active stock market with many companies listed and few or no limits on foreign ownership.
Accessibility. How easy is it to participate in country’s market? “If you’re a US investor and want to invest in India, how do you go about setting up that account?” says Subramanian. “What are the regulations?” To determine market accessibility, MSCI surveys market participants about their experience.
A wealthy country with market structure or accessibility issues might be classified as “emerging.” MSCI puts Taiwan and South Korea in this category. (They redo the list annually.)
Pick of the list
Now that we have a list of economies to put on our index, we just go out and buy all the stocks, and…. Wait, that won’t work, either, because some stocks are hard to buy. They might be stocks of very small companies or companies closely held by a small number of shareholders, with few shares trading freely. If you include those stocks in your index, it makes it harder to invest in the entire index and drives up the cost of trying.
So MSCI excludes companies that it considers insufficiently “investable.” To be investable, your stock has to trade on at least 4 out of 5 days, and at least 15% of the stock has to trade freely, not be held by controlling interests or otherwise out of circulation.
How much are investors in VWO or EEM missing out on by not owning these companies? Not much. The MSCI index captures almost 98% of the total market cap of the listed countries. “What is excluded is basically very small companies, illiquid companies,” says Subramanian.
In short, emerging markets indexes aren’t easy to build, but they’re constructed on a simple principle: own the most liquid securities in the most accessible markets.
How to beat the index
I became interested in this question of how to build an emerging market index because (a) I am a huge nerd, and (b) recently I interviewed an investment guru who argued that there is great opportunity for active managers to outperform in emerging markets because the markets are inefficient.
That argument doesn’t hold up, because, as I explained, the record of active managers in emerging markets is the same as it is everywhere else: ludicrously bad. Most managers underperform the index; the ones who outperform are an annually rotating cast whose good fortune is mostly indistinguishable from luck.
But learning how the MSCI index is constructed gave me a new idea: couldn’t I start an active fund specializing in those unloved securities that MSCI and the other indexes won’t touch? Small companies, illiquid stocks, frontier markets. Sure, they’re risky. That’s the point: you have to take risks to get higher returns.
Bad idea, says Larry Swedroe, director of research at Buckingham Asset Management and author of the Wise Investing series. “The more inefficient the market is, the higher the trading costs are,” says Swedroe, who has written frequently about active management in emerging markets. “The round-trip in emerging markets is extremely expensive.”
In other words, to pull off my trick, I have to outperform by a margin big enough to cover my costs—the curse of every active manager. Vanguard’s ETF, VWO, charges an expense ratio of 0.2%. I don’t even want to think about what my expenses would be.
Subramanian agrees. “Sometimes active managers will try to capture that illiquidity premium by going into those stocks,” he says. “But then the question becomes, can they sell it?” The big problem is market impact: if my illiquid stocks do well and I try to sell them, I’ll depress the market price, causing a hefty chunk of my gains to vanish.
As for those frontier markets, Swedroe steers clear. “The reason they’re called frontier markets is because generally they don’t have the rule of law and international investors are not well protected,” he says. “If those things are not present, you shouldn’t invest no matter what the risk premium is.”
The bottom line
Costs matter in investing: they compound just as surely as gains, and for this reason, low cost is an excellent predictor of above-average mutual fund performance. If you want to invest in emerging markets, there is no way to do so at low cost other than by using an index fund (or, to be scrupulous, a passive index-like fund such as those from Dimensional Fund Advisors).
Vanguard’s ETF, remember, charges 0.2% annually. Its actively managed competitors tend to charge between 1.5% and 2%. This, more than any arcane argument about market efficiency, is why indexing works in emerging markets: it doesn’t involve throwing away 1.5% of your money every year in pursuit of elusive market-beating strategies.
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
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