Strategies

A relook at cash investment options at WellsTrade

I have a Wells Fargo PMA / Wellstrade account package to take advantage of their 100 free trades a year offer. When the account was first opened, Wellstrade offers several reasonable money market funds (MMF) as cash sweep options. These MMFs were however discontinued at the end of July 30, 2007, and the new cash sweep option has a very lousy yield (1.01% APY for amounts less than $100,000) unless you are keeping a lot of cash in it.

I responded by manually buying into WFGXX (Wells Fargo Government MMF), which is listed as an NTF (no-transaction-fee) mutual fund. This fund has an expense ratio of 0.64%, with a current 7-day yield of 3.87%. This is definitely better than the 1.01% APY from the default cash sweep option.

Recently, I became aware that there is another option. According to this post from FWF, Wellstrade also offers the RMMXX (Frank Russell Institutional) MMF for no transaction fee. This MMF has an expense ratio of 0.15% and a current 7-day yield of 5.05%. This yield is an improvement of almost 1.2% from WFGXX. A buy or sale transaction also does not appear to count towards using one of the free trades (see the messages that follow from the FWF link).

One issue in general with using MMFs in the above fashion for non-margin or IRA accounts is that since MMF trades typically settle on the next business day, I cannot purchase a stock or ETF on any day I want. I always need to plan ahead by liquidating the MMF one business day before the planned purchase. This could sometimes be inconvenient. However, the interesting thing is that unlike MMF sales, the proceeds from a stock or ETF sale is available immediately to purchase another stock or ETF.

With the above in mind, I think my new strategy will be to keep most of the cash balance in RMMXX. I will however keep a small portion in a very short term bond ETF, like SHV (iShares Lehman Short Treasury Bond ETF). This ETF can be liquidated whenever needed to allow me to purchase a stock / ETF on any day I want. The income distributions from SHV will be reinvested into RMMXX once a month. The minimum initial and subsequent investment for RMMXX appears to be just $1.

One possible issue is the trading cost associated with this short-term ETF. It appears however that the impact on any trading spread of this ETF is very small. Currently, the spread is only one cent out of ~$110, giving a spread of less than 1 basis point (0.01%). With a spread this small, I would not worry about it. However, nevertheless, there is a disadvantage; and that is it will use up one of the free trades.

Oh, well, you have to give up something. 😉

2007-12-21-shv-spread.png

Investing smart is a ‘no-brainer’

Investing smart is a ‘no-brainer’, according to William Bernstein, a neurologist by trade but who also happens to be one of the more lucid and influential of market thinkers. He has explained his philosophy in such important books as The Four Pillars of Investing and The Intelligent Asset Allocator.

Dr. Bernstein was quoted in several comments in “The Globe and Mail” article “Investing smart is a ‘no-brainer,’ at least to this neurologist”. The following are some of the interesting excerpts from the article:

Smart investors ignore the economy, market sentiment and all strategists employed by investment firms, said Dr. Bernstein, who has long been a thorn in the side of active fund managers, Street analysts and peddlers of exotic exchange-traded funds and other vehicles designed more to enrich their architects than to reward their investors.

“I recommend a passive approach,” he said the other day in an e-mail exchange. “That is, I do not believe that there’s such a thing as skill in security selection, and I favour vehicles that transact as little as possible.”

His “no-brainer” portfolio of indexed funds regularly beats the market by a wide margin. Why? “Because it’s well-diversified, biased towards small and value stocks and passive.”

He doesn’t pull any punches when talking about such pet peeves as hedge fund managers and investment bankers, prospects for commodities or the current mania for the BRIC countries – Brazil, Russia, India and China.

On hedge funds: “The best vehicle known to man for separating country club members from their wealth.”

On bankers: “Bankers seem to have the attention span of a kindergarten class. I give them another five years before they’re back to playing the same melody with different instruments.”

On BRIC investing: “A wire-house gimmick. The correlations of these four nations to the returns of U.S. equities aren’t any different from Argentina, Turkey, Indonesia, Malaysia or the Philippines. If someone makes the point that the BRIC nations have high growth rates, they might as well be wearing a bright red neon sign on their foreheads that flashes ‘I can’t read,’ since the correlation between economic growth and stock returns is negative.”

On commodities: In theory, a good portfolio diversifier. “But in practice, I don’t trust any of the vehicles currently available, and I’m also generally skeptical of any ‘asset class du jour,’ which commodities certainly are. The time to expose yourself to an asset class is when no one else is interested.”

I tend to agree with him. His book — “The Four Pillars of Investing” remains my all-time favorite investing book.

Liquidated half of my municipal reset bonds

This morning, I placed a call to the Fidelity Fixed Income desk and requested them to liquidate half of my municipal reset bonds. The rep was very friendly and helpful. I read out the CUSIP numbers to him, he repeated them back to me and the sale orders were submitted.

Three hours later when I logon to the Fidelity website, I noticed that the bonds were succesfully sold. The trades will settle tomorrow. There were no transaction fees.

What prompted my sale was partly due to the recent troubles with the bond insurers, but the main reason was that I am getting closer to the time when I need to use the money. I will be moving the sale proceeds into the Fidelity CA AMT-tax free money market fund in the mean time. I intend to sell off the rest of the bonds when they reset next week.

Update 12/06/07:  All my municipal reset bonds have been liquidated. There were no issues with “failed auction”.