Is it weird that I’m excited to switch into my new portfolio? I just have to settle on a brokerage. Now, you are not going to find an exhaustive broker comparison here. I’m just one guy and I just want to find the best broker for me. I’m just selfish like that 😉

First, let’s start with all the discount brokers I can think of: TradeKing, ChoiceTrade, CyberTrader, Etrade, Interactive Brokers, MB Trading, OptionsExpress, Scottrade, ThinkOrSwim, Schwab, Fidelity, TD Ameritrade, Ameritrade I-Zone, Harrisdirect, Muriel Siebert, Firstrade, WallStreetE, Vanguard Brokerage, Bank of America.

Let’s start the pruning.

1) My account will have $10,000 in it to start.
2) I want no inactivity fees.
3) I want a maximum commission of $10 for trading 1000 shares, even if I only make 1 trade a quarter.
4) I also want to be able to speak with a broker if needed.
5) I only want to trade stocks with cash. I don’t care about options, margin rates, mutual funds, etc.

That leaves us with:

TradeKing, ChoiceTrade, MB Trading, Scottrade, ThinkOrSwim, Firstrade.

So, I’ll have to decide between these brokers. I already have accounts with Tradeking and MB Trading. Tradeking seems alright (I opened the account mainly for the bonus), although the reports that their website is slow are true. I didn’t like my first impressions of MB Trading, and have taken my money out, but my account is still open since they have no minimum balance. But I may just be tempted back by their low stock trade commissions with trades starting at $1. Now to read up on the rest of these guys. Here are some reviews I dug up so far:

Next: Part 2

I’m still pondering my portfolio options (one, two, three), but a good question is why I’m not looking more seriously into using ETFs instead. To be sure, there are plenty of good reasons to go with either mutual funds or ETFs. Besides wanting to dollar-cost-average, I’ll admit that I have another reason against ETFs that isn’t fully logical, but is still important to me. I’ll throw it out here and see if I’m the only one.

Here it is: If I’m going to put a huge hunk of my money at a financial institution, I want it to be at a dependable place that I feel comfortable with. That’s why I like Vanguard and Fidelity. They have many differences, but they are both dependable companies that I feel are solid and have provided me with excellent customer service up until now.
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Apparently this is the big news today. Check out Google Finance for yourself. More evolutionary than revolutionary, but as always competition is good, and will lead to more improvements for all finance sites. Yay AJAX.

As mentioned before, our goal when investing is to maximize the potential return for the amount of risk we decide to take. But how do you find that out? It seems the traditional way to decide this is through what financial planners call a Risk Questionnaire. You answer a series of multiple choice questions, and in the end it suggests an approximate asset allocation, usually telling you how much to put into stocks and how much in bonds.

Having more stocks give you higher overall returns, but higher volatility. Having more bonds does the opposite – it gives you lower returns, but decrease the up and down swings of your overall portfolio. Let’s try out some online risk surveys and see what comes out…
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While continuing my reading, it seems like Dimensional Fund Advisors (DFA) mutual funds are the Porsche of index funds. They are sexy in that they index everything under the sun (including stuff Vanguard does not) such as having a SmallCap Emerging Markets fund. They are well-engineered, being based on the best academic research available and having famous professors Fama & French on their boards. DFA tries to take indexing to the next level. Finally, they are exclusive as their funds are only available through approved financial advisors. Of course, this also means you’ll also have to have at least $100,000 to play with and pay annual advisor fees. I believe this is to avoid the performance hit on their funds from any active trading by untrained investors.

I don’t know if the fees are worth it, but, just like a Porsche, I still have this mysterious instinctual urge to own some!
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Most people who have done some reading on investing have heard of the concept of Dollar Cost Averaging (DCA), which involves spending the same amount of money regularly buying their chosen investment, regardless of how the investment fluctuates. For example, I could commit to buying $100 of VFINX every month, no matter what the share price is. If it drops, I buy more shares at the lower price.

Near the end of reading The Intelligent Asset Allocator, I ran across the concept of Value Averaging (VA), which is supposedly gives you a bit better returns than DCA. A simplified version of this method involves trying to increase the total value of your investment by the same amount every month. For instance, instead of my DCA plan above, I could decide to increase my total value of VFINX by $100 each month.
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An alternative to using mutual funds to split up my asset allocations is using ETFs. One of the perks of ETFs is that they often have lower expense ratios than similar mutual funds. An example is the Vanguard Total Stock Market Index Fund (VTSMX) vs. Vanguard Total Stock Market VIPERs (VTI). Both track the MSCI US Broad Market Index, but VTSMX has an expense ratio of 0.19% vs. VTI’s 0.07%. But, since I plan on dollar-cost-averaging, I must also consider transaction costs. If you meet the minimums, it costs nothing to buy VTSMX in a Vanguard account. But every time you buy VTI, you have to pay stock commissions.

The Motley Fool recommends that you keep your commission cost below 2% of your invested principle. I personally like to keep it under 1%. This means if you are paying $5 a trade, you should be buying at least $500 of shares at a time. Otherwise the stock will have to gain more than 1% just for you to break even.
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Of course, as soon as I say how simple my investing is I go and try to complicate it. I spent this weekend reading my new copy of The Intelligent Asset Allocator as part of my upcoming portfolio recontruction. Man, it is some dense stuff. Let’s just say it’s no Harry Potter.

In addition, for my portfolio research I will also be referring back to my two favorite investing books so far – The Four Pillars of Investing (same author) and A Random Walk Down Wall Street.
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Thanks to everyone who shared why they do or do not trade individual stocks. Here’s what I think. I believe there are market inefficiencies that can be taken advantage of. I also think that unless you understand how to read a company’s financial statements and investor psychology, it is highly unlikely you can beat the market over time. Since I don’t know either of those things, I have no business trading stocks until I do.

But! I think a more important question is whether spending all that time looking at stocks is worth it. Not only do you have to build up your knowledge overall, you then have to constantly monitor the markets for new developments. After all that, by how much are you really going to beat a well-balanced mutual fund portfolio? I personally feel that unless you have a real passion for it, most people would get a better return on their time pursuing other things like career advancement or more entreprenurial activities. So I think I’m gonna do that instead.

I’m conflicted. Lots of people trade individual stocks. I do. My friends do. Maybe you do. I used to dream of watching CNBC tickers, making quick trades on my PDA, getting in on IPOs. But so far, I’ve just made the occasional trade based on some loose predictions, a good story, or love for their product. But the more I read, the more I think – why bother at all? The average active mutual fund manager cannot beat the market over time. These people have finance degrees, experience, lots of underlings, and I’m sure some smidgen of intelligence for them to be managing millions of dollars in capital. I don’t see myself as any better.

So my question is – why do you do it? Is it entertainment value? Maybe you work in the industry so you know it better than the managers? Do you believe the articles from a $5 subscription to Forbes are actually cutting edge advice? Maybe everyone else just didn’t read enough Benjamin Graham or Berkshire Hathaway annual reports? What makes you think that you can beat the market? Even though I used some sarsasm back there, I really do want to know.

This is a pet peeve of mine, and I am seeing it more and more as the dot-com crash of 2001 fades into the distance. As I read various money magazines, I see mutual fund companies taking out full page ads touting their 1-, 3-, and 5-Year average annual returns. How they beat the S&P 500 Index or Lipper average to a pulp. Then, in the fine print below, you will always find these required words: ‘Past performance does not guarantee future results’. You know why? Because it’s true.

Sure, I could make up a MyMoneyBlog Alpha, Beta, Kappa, and Zeta Mutual Fund with different holdings, and one of them will probably beat the market too just by the odds. Heck, I have personally beaten the S&P 500 since I started trading stocks five years ago, even neglecting dividends. Does that mean you should trust me with your money? If so, please send it to… Historically, just because a mutual fund has beaten the averages for a recent time period, it does not mean it will in the future. In fact, due to mean reversion it is likely to do even worse than average.
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Welcome to the 10th edition of the Carnival of Investing. Whew, with hosting my Reverse Carnival last week and then putting this one together, I forgot how much time it takes. Thanks to all the submitters, and then also all previous Carnival hosts! Without further ado, here are the entries this week that relate to stocks, bonds, mutual funds, derivatives, and other investments:

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