One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.

No doubt the majority of that loss in millionaire filings results from the recession. … And the Maryland state revenue office says it’s “way too early” to tell how many millionaires moved out of the state when the tax rates rose. But no one disputes that some rich filers did leave. It’s easier than the redistributionists think. Christopher Summers, president of the Maryland Public Policy Institute, notes: “Marylanders with high incomes typically own second homes in tax friendlier states like Florida, Delaware, South Carolina and Virginia. So it’s easy for them to change their residency.”

• Low expenses : the lower the expense ratio, the better.
• Diversification : for investment grade bond funds, generally the more holdings, the better.
• Amount of assets & trading volume : generally the larger the better (improves liquidity, smaller trading spreads).
• Duration : duration is a measure of the sensitivity of the fund price to interest rate changes. At this juncture in the economy, I would prefer not to go too long on duration.
• Credit quality : no junk bond fund for me.

The ETFs that I narrowed down to include BSV, CSJ, AGG, BIV, CIU and LQD. These are listed in the table below:

From the look of it, I would probably go with CSJ,  the iShares Barclays 1-3 year credit bond ETF.

Theoretically, the answer is that the fund price by itself does not give any information to any of the questions posed. And there should not be since the share price is simply the result of dividing the total assets of the mutual fund by the number of shares allocated.

Let’s illustrate with a simple example.

Suppose a mutual fund has 50 million dollars in assets. If it is allocated into one million shares, then each share would be worth $50. On the other hand if it is divided into 10 million shares, then each share would be worth only $5.

However, having said that, in the world of finite decimal precision, there are differences between a fund with a high price and one with a low price. This has to do with the way the number of shares is calculated when an investor makes (or redeems) an investment.

When an investor purchases a fund, there are two main sources of rounding error when the number of shares is allocated to the investor.

1. Share price : share prices are quoted up to the penny (step size = $0.01). For example, for a fund with a declared share price of $5.00, the “true” NAV could be anywhere between $4.995 to $5.005. In the worst case, the rounding error is half of the step size, i.e. $0.005 or about 0.1% for a share price of $5. For a fund with a share price of $100, the worst case rounding error is much less, at 0.005% (half of $0.01/$100).
2. Share quantity : the number of shares allocated to each investor is rounded to three decimal places. This step size is 0.1% per unit share, i.e. the worst case error due to share quantity rounding is 0.05%. For a fund with a share price of $5, the worst case error would be 0.05% x $5 = $0.0025; for a fund with a share price of $100, this error would be 0.05% x $100 = $0.05.

It is not difficult to calculate the overall worst case rounding error for funds of different prices and with different fund purchase (or redemption) amounts. This is shown in the table below.

The table shows that for a fund priced at $5, the worst case rounding error for a one-time investment amount of $1000 is $1.003. If the investment is $10,000, the worst case rounding error is $10.003.

On the other hand, if the fund is priced at $100, then the worst case rounding error for a one-time investment amount of $1000 is $0.10. If the investment is $10,000, the worst case rounding error is $0.55.

It is interesting to see how an improvement in one decimal-place precision (to four decimal places) in the calculation of the share quantity allocated will reduce the rounding error. The table below illustrates this. Interestingly the rounding error does not reduce significantly. Having a higher share price is actually still more important.

In conclusion, all other things being equal, a fund with a higher price helps to reduce the rounding error when the number of shares to be allocated is calculated. For this reason, a mutual fund share split simply does not make sense in my opinion.

eOption.com (affiliated with placetrade and investrade)

• BC + 1.5% = 3.5% for up to $50,000
• BC + 0.75% = 2.75% for $50,000 to $99,999
• BC + 0% = 2% for $100,000 to $249,999
• Interest @ 2.75% for $80k a month = $183.33, after tax = $100.83
• Interest @ 2% for $100k a month = $166.67, after tax = $91.67
• Trading fees : $3 per ticket
• ACH transfer limit = $50,000 a day

Just2trade

• BC + 0.75% = 2.75% for up to $100,000 (confirmed with them that there is a typo on their margin rates page)
• BC + 0.5% = 2.50% for $100,000 to $250,000
• Interest @2.75% for $80k a month = $183.33, after tax = $100.83
• Interest @2.50% for $100k a month = $208.33, after tax = $114.58
• Trading fees : $2.50 per ticket

Interactive Brokers

• BM + 1.5% = 1.65% for up to $100,000
• BM + 1% = 1.15% for $100,000 to $1,000,000
• BM = Feds fund rate = 0.15%
• Interest @1.65% for $80k a month = $110.00, after tax = $60.5 + $10 monthly fee
• Interest @1.15% for $100k a month = $95.83, after tax = $52.71 + $10 monthly fee
• Minimum fee $10 a month
• Trading fees : 0.005 per share, minimum $1
• 2nd withdrawal in the month : $1 by ACH, $4 by check, $10 by wire

Options House

• BC + 2.25% = 4.45% for up to $50,000
• BC + 1.45% = 3.45% for $50,000 to $499,999
• BC + 0.45% = 2.45% for over $500,000
• Interest @ 3.45% for $80k a month = $230, after tax = $126.5
• Trading fees = $2.95 per ticket

WellsTrade (Wells Fargo) (called 4/28/09 10.10am)

• WFI, Wells Fargo base rate = 4.00%
• WFI + 3% = 7% for up to $10k
• WFI + 2.75% = 6.75% for $10k to $25k
• WFI + 2.25% = 6.25% for $25k to $50k
• WFI + 1.75% = 5.75% for $50k to $100k
• WFI + 1.25% = 5.25% for $100k to $250k
• Trading fees : up to 100 free trades a year

Note: BC is the broker call rate, currently 2%. The “after tax” number reflects a 45% combined federal and state marginal income tax bracket.

Comments

The absolute lowest rates are from Interactive Brokers but they want to charge you a minimum of $10 in trade fees a month. If your trade fees do not add up to $10, they will deduct $10 anyway.

The next best rates are from eOption.com — at BC = 2% for amounts from $100k to $250k. This rate is lower than the interest rates from leading savings accounts, and is also cheaper than a HELOC loan.

I included the margin schedule at WellsTrade for comparison only because I have an account there. Their rates are not at all competitive.

I also looked at some other brokerages like Fidelity, VBS (Vanguard), TD Ameritrade, Scottrade, Firstrade, Tradeking, Etrade, Charles Schwab, Options Express, Sogotrade, MB Trading. Their rates are all higher.

Other resource(s)

[1] List from Broker Reviews.

With that in mind, investments that primarily throw off capital gains have become much more attractive to me (since my previously harvested tax-losses can be used to completely offset against these distributions, i.e. essentially tax-free). There are however very few investments that intrinsically throw off capital gains rather than dividends. (Note: Funds that actively turn over their portfolio, hereby producing capital gains, do not count.)

Nevertheless, there is a class of investments that do intrinsically produce capital gains. These are timber REITs. Generally, the dividends that timber REITs distribute are considered as long-term capital gains, instead of the more common dividend income distributed by general REITs.

The three most common timber REITs, all of which only produced distributions that were classified as capital-gains last year, are

• Potlatch Corporation (PCH).  Current dividend 9.3%.
• Plum Creek Timer (PCL). Current dividend 5.9%.
• Rayonier Inc. (RYN). Current divident 6.8%.

I always held an interest in timber investing. Several years ago, I had invested in PCL for a while before forgoing it. Given the new background scenario, I tweaked my portfolio last month to allocate a small portion into the above three timber REITs. (Disclaimer: Please do your own due diligence if you want to invest in the above securities.)

I shall not elaborate on the pros and cons of timber investing in this post. Instead, I shall leave the links to various discussions / resources on timber investing:

Introduction to investing in timber securities
Timber ETFs…Without the Timber?
Finding the Perfect Dividend Stock
Timber Investing: My articles on ETFs and REITs
Timber for the Individual Investor

Here’s the timeline:

After my complaint to Finra, Tradeking’s Chief Compliance Officer (CCO) contacted me to inform me that I would be able to withdraw my shares 60 days after the last ACH deposit to Tradeking.

After the 60 days had passed, I submitted a request to the CCO to transfer out my shares using DTC. I am pleased to report that Tradeking had promptly transferred out my shares without issues. They also waived the DTC transfer out fees.

I guess with this, it closed my episode of issues with Tradeking.

Individual Asset Classes

As we can see from the chart below, the worst performance for the month came from US REITs (VNQ). This fund had a loss of about 18%. US LargeCap was a big “winner” in the month, losing “only” 8%. Other than that, the rest of the equity asset classes had losses ranging from 9% to 14%.

Portfolio

The allocation, as of the end of January, is shown below. The numbers within the parenthesis are the target values.

The YTD return of the benchmark, a 50:50 split between the Vanguard LifeStrategy Moderate Growth fund and the Vanguard LifeStrategy Gowth fund, is -30.45%.

Portfolio Movements

Sold PME (VGPMX) while adding to US SmallCaps and LargeCaps.

The allocation, as of the end of December, is shown below:

First of all, Tradeking has significantly increased its margin interest rates. Tradeking used to have quite competitive margin interest rates but no more. The following is an email from Tradeking sent earlier this month and their current margin interest rates:

Debit Balance                   Rate
$0 - $49,999                   6.5%     (Broker Call + 4.5%)
$50,000 - $249,999        5.5%     (Broker Call + 3.5%)
$250,000 +                      4.5%     (Broker Call + 2.5%)

If I remember correctly, their old margin interest rate schedule was

Debit Balance                   Rate
Any balance                    (Broker Call + 1.0%)

For comparison, the current margin interest rates at Just2Trade.com are just

Debit Balance                   Rate
under $10,000                 2.75%     (Broker Call + 0.75%)
$10,000 - $249,999        2.50%     (Broker Call + 0.50%)
$250,000 - $499,999      2.25%     (Broker Call + 0.25%)
$500,000 +                      1.50%     (Broker Call - 0.50%)

The second change is that Tradeking has quietly added annual maintenance fees to its check writing products (there was no notification email from Tradeking about this). The base “Gold” checking product now has an annual fee of $50 while “Platinum” check writing has an annual fee of $75. Check writing used to be offered free.

I do not track the other fees. Those might be changed as well.

The YTD return of the benchmark, a 50:50 split between the Vanguard LifeStrategy Moderate Growth fund and the Vanguard LifeStrategy Gowth fund, is -32.28%. For the first time this year, my portfolio’s performance is falling behind the benchmark (by a tiny 0.23%).

Individual Asset Classes

As we can see from the chart below, the worst performance for the month came from US REITs (VNQ). This fund had a loss of about 18%. Other than that, the rest of the equity asset classes had losses ranging from 5% to 10%.

Portfolio Movements

Sold fixed income and added US SmallCaps, US REITs, Emerging Markets Equity and PME (VGPMX).

The allocation, as of the end of November, is shown below:

The link to this annoucement is

https://invmnt.wellsfargo.com/whatsnew_wellstrade.html

Keywords : Wells Fargo PMA, Wellstrade.

Basically the issues started after I indicated my intention to transfer my business elsewhere. Tradeking started a lock-down on my account, restricted my account and then told me that any money that I transferred by ACH to them cannot be returned for 60 business days.

60 business days! That’s a minimum of 12 weeks or almost 3 months. I wouldn’t have ACH my money to any broker if I knew that my money is going to be stuck for 3 months!

Anyway, Tradeking sent me an email that pointed me to the following link:

http://content.tradeking.com/wiki/display/tkservice/Funds+Availability

[Link to screenshot]

The link states

ACH Deposits
- 5 business days to clear for trading
- 60 business days from date of deposit to release funds from the account - return funds via ACH only

From the wording in the email, it is intended to inform me that the ACH holding policy of 60 business days had been in place for a while. It’s my fault that I did not see it.

After I checked carefully, I noticed that the page in question was modified on 12/08/08 (see bottom of the page: 12/08/2008 Version 003) AFTER my issues with Tradeking started. I then hunted for the previous version. The previous version, which is still in Google’s cache currently (cache date Nov 24, 2008 12:44:48 GMT), stated a ACH holding time of 10 business days.

ACH Deposits
5 business days to clear for trading.
Allow 10 business days from date of deposit to release funds from the account - return funds via ACH only.

To see this, type

site:content.tradeking.com ACH availability

into Google’s search box, and then click for the cache version in the first search result.

You can also access it via this DIRECT LINK. Note that since this is in Google’s cache, it will be overwritten in the next cache update and you might not be able to view it a few weeks after the date of this post. So I have kept a screenshot HERE.

I understand that Tradeking can probably change the terms and conditions at any time they like (most likely covered in the client signup agreement), but in this case, I don’t think that this is a fair or reasonable business practice, especially it appears that the modification were made to discriminate against me.

I also don’t consider it a reputable business practice to change the terms and conditions without advance notification to all other investors. I am now really getting concerned with the integrity of this brokerage firm.

For investors who already have an account with Tradeking, I urge you to consider carefully before you ACH new money to Tradeking. You might not be able to see your money again before waiting for 3 months. You probably might also want to evaluate if you want to continue using them.

By the way, the ACH holding time stated at the point of the ACH transfer page is still showing a 10-day holding period:

They should change this to 60 business days to avoid misleading investors.

Keywords: complain, complaints, sucks, issues, problems, cash balance, ACH, wire, review, overview, shady.

Because Tradeking has an ACH limitation of $10,000 per transaction, I had to split up my transfers into chunks of this size or smaller to have my money transferred. Tradeking happily accepted the money without complaints. According to their website, all incoming ACH transfers are subject to a 10-day hold before withdrawal:

After several rounds of ACH transfers, I found that trying to keep track of which ACH has gone through, which has not, and keeping a constant reminder to submit an ACH everyday is too much of a chore. I called their customer service to see if they could initiate a transfer in a larger amount. This was flatly denied, never mind this is what their website says:

Next, I checked to see if they could reimburse my wire transfer since before sign up, their customer told me that this could be arranged in an earlier email:

We would cover the banks wire fee for your first wire, and depending on how much you fund with perhaps future wires as well.

This was also denied.

Frustrated, and deciding not to deal with a company that says one thing in their statements but in reality does another, I decided to take my business elsewhere. I wrote out two checks from my account and starting withdrawing my money by ACH, back to the financial institution which originally funded the Tradeking account.

All this went OK for a while until the day when I called to ask about and then requested to DTC out a position I have with Tradeking (DTC is an electronic transfer of shares from one broker to another). In the same phone call, I indicated my intention to move my business out from Tradeking. BIG MISTAKE.

From that point onwards, Tradeking essentially placed a lock-down on my account. They cancelled my ACH withdrawal requests without any notice. The online ACH withdrawal requests would be marked “processed” but money was never transferred. They then told me that they are going to put a 60-day hold on any withdrawals from my account and would freeze my DTC transfer out. The stated reason was “risk management” but I suspect the main reason is that this is one of those brokers which would drag its feet and give hell to any clients trying to transfer their assets out to another firm.

My account is flagged as restricted.

I am stuck with a sizeable cash balance being held hostage at Tradeking. While being stuck at Tradeking, they will earn a miserable 0.05% APY (see below) whereas I could have easily gotten at least 3.5% from one of the many online savings accounts. Obviously, Tradeking will gain from this freeze on my cash balance at my expense because kick-backs / 12b-1 / rebate arrangements from the cash sweep firm back to the brokerage firm are fairly common.

Crappy Sweep Account Yield of 0.05% APY at Tradeking

I have already tried a few times to get Tradeking to at least return my cash balance but without success.

My only choice now seems to be to wait out the 60 days and then DTC out the position. I am wary however, because I don’t know what other tricks Tradeking will throw at me when I re-submit the transfer out request 60 days later.

If you are planning to sign up with Tradeking or even already have an account with them, I urge you to re-consider carefully because you might have to go through a lot of hassle getting your money back. When you ACH your money in, at the point of transfer, you are told that there is a 10-day hold before you can withdraw it. But if Tradeking do not like you in future, they will conveniently cite some “risk management” reason and hold your money hostage for a long time.

In my opinion, Tradeking should not mislead investors by stating a 10-day hold for ACH transfers. They should state clearly that there is a 60-day hold on ACH deposits before it can be withdrawn. At least investors would be able to decide for themselves beforehand if they want to ACH their money to Tradeking and do business with such a broker. If this 60-day hold statement was there, I wouldn’t touch Tradeking with a 10-foot pole.

Weblinks: [1] [2]

Keywords: complain, complaints, sucks, issues, problems, cash balance, ACH, wire, review, overview, shady.

Is there a recommended method of doing a TLH? I tend to like to TLH on market downturns if at all possible. Currently I start with the ETF that I would like to sell. I look at the bid/ask, and I generally choose the higher “ask” price to set as my limit order. Even though I’ve chosen a down day to sell this ETF, obviously I would like to get on the higher side of the bid/ask spread since I am selling. The moment the sale goes through I start working on buying the replacement ETF. At this point I do not like to miss the opportunity to complete the sale due to greed. I put my limit order at exactly the lower “bid” (not the higher ask) price. I observe it closely for a few minutes to half an hour to see what it’s doing. If it looks like it’s veering upwards I will raise my limit to the current bid price. If after a while it looks like I’m going to miss the boat, I simply raise my limit order to the ask price instead of the bid. Generally this will execute the order. Most of the time I execute both orders within a few minutes to half an hour without being hosed too serverely.

I thought it would be interesting to hear what people have to say. Anyway, the following is what I do:

I enter the two orders first, but with out-of-range prices using limit orders. I open two windows — one for the purchase, one for the sale.

At the point when I want to execute the TLH, I modify one of the existing order to the price which would complete the transaction. As soon as I verify that the order is completed, I modify the price of the second order (modifying an order’s price is much faster than entering the complete order).

Depending on the ETFs, sometimes I do the purchase first and sometimes I do the sale first. Generally, I like to complete the transaction with the lower liquidity / volume ETF first.

My preference for completing the transaction on the ETF with lower liquidity / volume first is because if I had done it the other way round, I might be unable to complete the second transaction at a reasonable trading transaction cost (due to undesirable bid-ask spread).

The YTD return of the benchmark, a 50:50 split between the Vanguard LifeStrategy Moderate Growth fund and the Vanguard LifeStrategy Gowth fund, is -28.87%.

Individual Asset Classes

As we can see from the chart below, the worst performance came from VGPMX/PME (Precious Metals and Mining equity). This fund had a whopping 40% loss for the month. Other than that, the rest of the equity asset classes also had substantial losses, losing from 17% to 33%. There was simply no place to hide in October!

Portfolio Movements

Sold a substantial amount of fixed income and bought equities to keep the portfolio in balance (notice that my fixed income asset is almost at the target of 32.0%). Like the previous month, I also continued with more tax loss harvesting. 

One major change was that I eliminated International Developed Markets SmallCaps. I distributed most of the assets into International Developed Markets (EAFE) LargeCaps, and with small portions into US LargeCaps, US SmallCaps and Emerging Markets equities. The absence of sufficiently liquid investment vehicles of this asset class for tax loss harvesting prompted this move.

The allocation, as of the end of October, is shown below:

These two brokers are very similar. They both clear through Legent Clearing and both offer the MaxIt tax manager system, which allows you to specify a certain tax strategy (”Minimum Tax”, “First-In First-Out”, “Last-In First-Out”, “Maximum Gain” or “Average Cost”) for every security trade. This system is great when you want to sell only specific tax lots to minimize on taxes.

In terms of commission costs, Just2Trade wins hands down. Their stock / ETF trading commission is only half that of TradeKing ($2.50 versus $4.95) and their margin interest rates is also at least 0.25% lower than TradeKing.

Margin interest rate is also lower at Just2Trade (by at least 0.25%). Current margin interest rate for amounts less than $10,000 is 3.50% at Just2Trade while is it 3.75% at TradeKing. For a margin balance between $10,000 to $250,000, Just2Trade’s margin interest rate drops to 3.5%. The margin interest rate at TradeKing is fixed at 3.75% for all balances.

At Just2Trade, you can also trade mutual funds cheaply for $2.50 per transaction. At TradeKing, the fee is 6 times more, at $14.95.

I also tested their customer service with questions and requests using email, and both replied quickly (in 2 hours or less on a business day). However, unlike Ameritrade’s customer service, which you sometimes can get a break on certain fees or free trades, I found TradeKing’s customer service to be basically useless when you try to request for some concessions. They can only reply with a canned message that repeats their company policy. I have yet to try asking for any concessions from Just2Trade.

Looking beyond the fees, each broker has a severe shortcoming. For TradeKing, it is their online-ACH transfer limitation of $10,000 each day. I called them, and tried to reason with them to let me transfer in a larger sum of money for investment, but they were very stubborn about it and it was a no-go. In my opinion, their $10,000 transfer limit per day is way out-dated, as most brokers typically have $100,000 ACH transfer limit a day.

For Just2Trade, they do not have a $10,000 ACH transfer limitation per day; their disadvantage is in their cumbersome trading system. Specifically, it does not allow you to change the order once it is submitted. To change the order, the only way is to cancel it and re-submit. This means that if you want to change the price of a limit order, you have to first cancel it, and then re-key and submit all the order information again. This is a big swithc off for me.

In the end, I am inclined to stay with Tradeking for the moment. But if Just2Trade can update their traking system to include order modifications (customer service said that this improvement is in the pipeline), I would probably say good bye to TradeKing and move everything over to Just2Trade in a heart beat.

My portfolio lost 8.52% in September 2008, bringing the year-to-date (YTD) return to a loss of 14.54%. This makes it into another worst year to date (YTD) return record my portfolio has ever experienced since I started tracking monthly performances in Jan 2004.

The YTD return of the benchmark, a 50:50 split between the Vanguard LifeStrategy Moderate Growth fund and the Vanguard LifeStrategy Gowth fund, is -16.45%.

Individual Asset Classes

As we can see from the chart below, the worst performance came from VGPMX/PME (Precious Metals and Mining equity). This fund posted a loss of about 24% for the month. The rest of the equity asset classes also had substantial losses, ranging from 6% to 16%; only US REITs escaped relatively unscarthed, with a loss of less than 2%.

Portfolio Movements

Sold fixed income and bought international equities (INT EAFE LargeCap and Emerging Markets equity) as well as VGPMX / PME. I was also kept busy with tax loss harvesting.

The allocation, as of the end of September, is shown below:

Anyway, my portfolio lost 1.76% in August 2008, bringing the year-to-date (YTD) return to a loss of 6.58%. This makes it another worst year to date (YTD) return my portfolio has ever experienced since I started tracking monthly performances in Jan 2004.

The YTD return of the benchmark, a 50:50 split between the Vanguard LifeStrategy Moderate Growth fund and the Vanguard LifeStrategy Gowth fund, is -9.19%.

Individual Asset Classes

As we can see from the chart below, the worst performances came from VWO (Emerging Markets) and VGPMX/PME (Precious Metals and Mining equity). These posted losses of around 8% each. Foreign developed markets equity (VEA & VINEX) also did poorly, losing between 3% to 4%. What worked in August are US LargeCaps, SmallCaps and US REITs. These did relatively well in an otherwise dismal month. They gained between 2% to 4%.

Portfolio Movements

Sold US SmallCaps & US REITs. Added to PME, and foreign equity, including VEA, VWO and GWX.

The allocation, as of the end of August, is shown below:

The YTD return of the benchmark, a 50:50 split between the Vanguard LifeStrategy Moderate Growth fund and the Vanguard LifeStrategy Gowth fund, is -9.65%.

Individual Asset Classes

As we can see from the chart below, the worst performance came from PME. Vanguard’s Precious Metals and Mining fund post a loss of 18% in July. Foreign equity (VEA, VWO and VINEX) also did poorly, losing between 3% to 6%. What worked in July are US SmallCaps and US REITs. These did relatively well in an otherwise dismal month. They gained between 2% to 4%.

Portfolio Movements

Sold US REITs. Added to PME, and foreign equity, including VEA, VWO and GWX.

The allocation, as of the end of July, is shown below:

Reference: Madsinger’s monthly report.