Our investment club just finished reevaluating our broker. We do this every couple years to make sure we’re getting the best service and the best rates. We decided to stay with Scottrade.

Scottrade Account Details

• Account Minimum: None
• Opening Account Minimum: $500
• Account Fees: None
• Trading Fees: $7 per trade (market or limit), which includes stock and ETF trades. Options have an additional $1.25 per contract. Mutual funds are free or $17 per trade depending on the fund.

Scottrade Details

Local Office. This comes in handy for an investment club, since we switch officers yearly. We still make all our trades online though.

Multiple Checks. Scottrade accepts deposits from multiple club members, something that many other brokers don’t allow. It becomes a hassle when you need to deposit checks at the bank and transfer the money monthly.

Integration with Software. We use Bivio for our club software, which is compatible with Scottrade to download our transactions. It makes the treasurer’s job much more manageable.

Cheap Trades. $7 trades work out well; it’s not the cheapest, but it is still inexpensive. We researched some of the low-cost brokers, but they didn’t offer all the services above, which are important for an investment club.

Individual and IRA Accounts. I also use Scottrade for some of my personal accounts and my family members, and my only complaint was when I ran into their silly fees to change my name.

Investment Clubs

I’ve been a member of our investment club since 2002. Here is more information about running an investment club:

• How to Start an Investment Club
• Investment Club Bylaws

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Series I Bonds offer a low cost, incremental, and low risk investment for your portfolio. I Bonds also protect your money against inflation, as their yield has both a fixed rate as well as a variable rate that changes every six months according to inflation and deflation.

I Bonds were once only available in paper form, but now the Government offers a buying and redemption process that takes place almost entirely online. In fact, the Government plans on making the purchasing of bonds only available electronically in the future. Below, I will discuss the ins and outs of purchasing these bonds.

I Bonds Current Rates

The current rate for I Bonds is 1.74%, and this will not be changed again until November 1, 2010. The fixed rate is 1.54%, and the variable rate is 0.20%.

Series I Bond Purchase Limits

A minimum of $25 is needed to purchase I-Bonds electronically, and a minimum of $50 is needed to purchase paper bonds. Each year, you are allowed to purchase up to $5,000 in Series I Bonds/Series EE Bonds electronically, as well as $5,000 paper issued bonds. That means you can purchase up to $10,000 in bonds annually.

Who Can Purchase I Bonds

The following are requirements for being able to purchase bonds: you must have a social security number, be a citizen of the United States, civilian employee working anywhere, or be a citizen living abroad. Minors can also purchase I Bonds.

Where to Buy I Bonds

You can purchase paper I Bonds in most financial institutions, including banks and credit unions. You can also buy Series I savings bonds online, a process that will streamline your purchasing experience for free. There are also many perks to purchasing bonds online, such as the ability to purchase your bonds 24/7, scheduling recurring investments for up to five years, have your details (such as purchase date and maturity date) automatically tracked for you, and online redemption.

The first step to purchasing bonds online is to open a TreasuryDirect account. You will need to have your social security number, the bank routing number and account number, driver’s license, and an email address. Once you fill out the application, an access card will be mailed to you to ensure you are the true holder of the account. You will need this card to access your account. Once in, you can purchase bonds online, and they will credit to your account within one business day.

Automatic Investments

The Treasury is eliminating the paper payroll savings bond program where employees used to be able to automatically purchase paper I Bonds through their employees in order to save the cost of running the Savings Bond program. As of September 30, 2010, federal employees will no longer have this option, and this option will be eliminated for all non-federal employees on January 1, 2010. However, automatically purchasing electronic I Bonds is available by having an account with TreasuryDirect.

Once you open your account and receive your access card, go to the ManageDirect – View My Funding Options tab for instructions on submitting a request to your employer for a payroll deduction. Just like a normal payroll deduction, the deducted money from your paycheck will be sent to your TreasuryDirect account, and will go into a Certificate of Indebtedness (C of I). The C of I is simply a non-interest bearing security to hold your money before you purchase your bonds. Once you accumulate enough money ($25 is the lowest denomination to purchase a bond electronically; $50 is needed for paper bonds), then you can purchase them through your account. Don’t forget, you can set up recurring purchases so that this process is done automatically.  

You can also purchase I Bonds directly with money you receive as a tax return. Check out this article for more information on how to purchase I Bonds using your tax return.

How to Exchange Paper Bonds for Electronic

If you would like to open a TreasuryDirect account to purchase future bonds with, but still have some paper bonds, you can convert the paper bonds into electronic bonds using SmartExchange.

What to Do if Your Paper I-Bonds are Lost/Stolen/Destroyed

If your paper I Bonds are lost, stolen, or otherwise destroyed, you can get replacement ones by filling out Form 1048 and submitting it to the following address:

Bureau of the Public Debt
PO Box 7012 Parkesburg
West Virginia, 26106-7012

Next in the series on I bonds, we’ll discuss online redemption.

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Interest is, well, quite interesting. Instead of your money accumulating in your mattress or shoe box, it can now accumulate plus earn its own money. Money earning money—what a concept.

And there are multiple ways to achieve this: you can open a savings account or purchase certificates of deposits in order to earn interest, or invest in the stock market in order to earn dividends. When the interest paid to you begins to earn its own money, called compound interest, or your stocks earn you dividends purely because you own them, it becomes even more riveting.

It is commonly known that the riskier the vehicles for earning money that you choose, the more potential you have for both reward and loss. But what if you could go with the riskiest option without shouldering any of the risk, and with reaping all of the potential rewards?

Investing in the stock market—whether for short term gains or long term income replacement (IRAs)—offers the greatest amount of potential return, but then it also makes some people’s stomachs turn. Therefore, investing someone else’s money sounds like the solution for the weak-kneed investor because it will eliminate your personal risk all together.

Where to Find Money

So where can you find other people’s money? Most households in America have extra money that trickles in during the year from sources other than their paychecks. Perhaps you receive:

• A Christmas bonus
• Credit card or bank card offers
• Reward points for purchases that can be cashed in
• Monetary gifts from relatives for various occasions
• Online surveys that earn you money
• Bonuses from signing up for bank offers
• A good tax return in April that you weren’t banking on

This money is unaccounted for in your household, so it is generally a pleasant surprise. Why not make this money work for you?

How to Get Started

Open up a savings account where you can deposit all the extra cash that comes into your household throughout the year. Then choose a time frame for investing this money. Perhaps enough extra money will accumulate for you to invest it quarterly, or maybe you will have to wait until the end of the year. Remember, you can start investing at $4.00 on sites such as Sharebuilder where you can split stocks into half shares in order to afford them.  

Budget your bills with the salary that you know you can count on.  This way, you are not risking what you know you are working for, and will always have money to put food on the table. If at the end of this you lose everything (which is not likely if you choose investments with lower risks), you are not any worse for it. You have essentially taken away your investment risk. Any extra money you earn from your investments will be icing on the cake, and you can thank your boss, Uncle Sam, your relatives, or anyone else who has unknowingly contributed to your interest earnings.

This approach may not make you wealthy, or allow you to retire at your desired retirement age, but it will certainly get you in the investing game without feeling vulnerable to risk.

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ETFs versus index funds, which is better? Yesterday we determined what is an ETF?

In the overview, Jill mentioned that ETFs usually have lower expense ratios and are ideal for a one-time small investment that you will hold for a long time. They’re also good for trading a large group of assets at once. However, you have to account for the trading commissions both when you buy and adding money in the future.

That’s great… but just how do we actually figure out which one will have the lower cost in any given situation?

ETF and Index Fund Calculator

Luckily, Vanguard makes it really easy for us to compare the costs of an ETF or an index fund with their ETF calculator.

For example, I mentioned that I was moving a chunk of an old 401k to Vanguard this week. It’s $50,000 and I’d like to put some of it into the Vanguard Emerging Markets Index (VEIEX). Let’s compare it to the Vanguard Emerging Markets ETF (VWO).

The index has a 0.39% expense ratio and 0.25% purchase and redemption fees. The ETF has a 0.27% expense ratio and I would normally pay $7 per trade using Scottrade.

ETF and Index Fund Comparison

Compare a $50,000 investment over 20 years adding $5,000 per year, in the example outlined above, and the ETF is lower cost option, saving $5747. Here’s what the calculation looks like:

More ETF Factors

When you use the calculator, you’ll have to account for the following variables:

Free Trades. In the example, I used Scottrade. However, there are lower cost broker options like TradeKing and Zecco. Depending on which broker you are using, your results will vary.

Rebalancing Your Portfolio. One of the things that the calculator doesn’t take into account is the need to rebalance your portfolio. You’re going to have to determine how often you do this and the effect it will have on the expenses in your portfolio if you are using ETFs instead of index investing.

Admiral Shares. Once you have $100,000 in a Vanguard fund, you get admiral shares with lower expenses. You’ll have to compare the admiral shares to the ETF too, to make sure you’re still getting the lowest cost.

In the example with the emerging markets index, even if you compare the admiral share class (VEMAX), which has a lower expense ratio of 0.27%, the ETF still is the lower cost option, in large part to the purchase and redemption fees.

However, when you look at the total stock market, like when I started a young family member in a Vanguard ETF for her Roth IRA, the ETF is lower cost for the same example above, but the Total Stock Market Index Fund Admiral Shares (VTSAX) is the lower cost option using the admiral shares. This is mainly due to the difference in expense ratios. The total stock market index fund (VTSMX) has an expense ratio of 0.18% compared to the ETF (VTI) at 0.09% and the admiral share class at 0.09%.

Action Plan

Right now, I’m still using index funds for the majority of our portfolio. However, after doing some research with the emerging markets ETF, I’m considering using the ETF for a portion of our portfolio going forward.

Do you use index funds, ETFs, or a combination of both in your portfolio?

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Whether you are investing through tax-advantaged retirement accounts or in other taxable accounts, you might want to consider Exchange Traded Funds, or ETFs, as part of your long-term investment strategy. ETFs are one of several ways to invest in equities. Others include individual stocks, mutual funds, or index funds.

What is an ETF?

An ETF is simply a fund made up of multiple securities, somewhat like a mutual fund. ETFs differ from mutual funds in that they are continuously traded on the stock market (and thus revalued) throughout the day, making it easy to buy or sell at any time.

ETFs can be made up of securities that track a stock index (like the S&P 500) or instead choose to focus on a specific industry and/or country. ETFs are generally not actively managed – unlike a mutual fund the underlying stock investments remain the same from time to time. The price of an ETF is usually very close to the value of the underlying assets, but does not have to be.

ETFs also generate income from dividends and charge a management fee just like a mutual or index fund.

Why choose ETFs?

ETFs are good for you if you have a one-time small investment, as they do not have a minimum investment. Be aware, though, that ETFs charge flat trading commissions that can be costly, so they will eat up a larger percentage of your initial investment the smaller that investment is. Long term, ETFs have lower expense ratios than mutual funds that can make up for the up-front cost. Since ETFs can be sold through a broker throughout the day, they allow investors to use techniques previously reserved for individual stocks such as buying on margin and short-selling.

ETFs are an ideal vehicle for trading a large group of assets at once. However, because of trading commissions, ETFs should be used by those planning to hold the same group of underlying assets for a long period of time. If you rebalance your portfolio often, or plan to purchase small amounts of shares regularly (such as through dollar-cost averaging), index or traditional mutual funds may be a better option for you than ETFs. Bottom line, ETFs are good options for those making a one-time new investment or for those looking to simplify and consolidate several small existing investments.

Getting started with ETF investing

Individual investors can buy and sell ETFs on stock exchanges through any broker, much like individual stocks. If you want to invest some of your retirement funds in ETFs, check with your current 401(k) plan administrator or IRA broker.

If you simply want to begin investing in an ETF outside of a retirement account, check with any major broker such as Fidelity, Vanguard, or Sharebuilder. Make sure to compare several funds to review past performance, dividend payments, and expense ratios. Look for Money Magazine’s recommended ETFs on their Money70 list – there are one or two ETFs in every category.

Further Reading

For more details about ETFs, and how they are created and valued, check out Yahoo!Finance, the Investment Company Institute Factbook, or About.com.

Check back tomorrow for ETFs versus index funds!

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