Getting Started

October 13, 2008

This Week: Getting Started

Choosing a Broker

Account Types

Investing in Funds

Club Portfolio

A Look at Core-Mark

Choosing a Broker

What to Look For

(Hidden) Fees

Commission Rates

Branch Offices vs. Online

Customer Service

Broker Comparison

Scottrade

TD Ameritrade

E*Trade TradeKing

Charles Schwab

Commission

$7.00 $9.99 $12.99 $4.95 $12.95

Minimum $500 $2,000 $1,000 None $1,000

Branches Yes Yes Yes No Yes

Pay Attention to Other Miscellaneous Fees

Pay attention to miscellaneous fees, especially those that you are likely to incur.

Pick a broker that fits your needs.

Scottrade

$7 Trades

No inactivity fees

Basic functional interface

Branch offices

Used by many CCIG members Help with referrals, questions

Placing a Trade

Limit Orders “This is an order to

buy or sell a set number of shares at a specified price or better. A Limit Order guarantees price, but not an execution.”

Account Types

Brokerage Basic Buying and Selling Stocks, Funds, etc. Margin, Options

Roth IRA Post-Tax Retirement Account Pay Tax Now Instead of Later Contribute up to $5,000 of Earned Income

IRA Pre-Tax Retirement Account Pay Tax on Withdrawal (during retirement)

Questions / Comments

Investing in Funds

What to Look For in Actively Managed Funds

Expense Ratio

Tax Efficiency

Investing Goals and Style

Management Incentives and Interests Ownership Fee Structure

Historical Returns But be careful because historical returns often aren’t

indicative of future returns!

Examples of Value-Oriented Funds

Fairholme (FAIRX)

Longleaf Partners (LLPFX)

Sequoia Fund (SEQUX)

Periods of underperformance when value is out of favor.

Relying on the decisions of management.

Exchange Traded Funds (ETFs)

If the ETF tracks an index, you don’t have to worry about tax efficiency, evaluating a manager, but do pay attention to expenses!

“A security that tracks an index, a commodity, or a basket of stocks like an index fund, but trades like a stock on an exchange.”

Pay same commission as a regular trade ($7 at Scottrade, remember to use limit orders).

Buy and sell anytime markets are open.

Keeping ETFs Fairly Priced: Arbitrage

ETFs have an underlying net asset value (NAV).

Depending on supply and demand, the price of an ETF may deviate from its NAV.

When trading at a discount, authorized arbitragers can buy ETF shares and exchange those shares for the underlying securities and sell those securities, or vise-versa if the ETF is trading at a premium.

This keeps the price of the ETF close to its NAV, and thus fairly valued.

Examples of ETFs

Sector-Specific

Country-Specific: EWZ, EWY, FXI

Commodities, Dynamic Indexes

Index Funds: VTI, VEU, VNQ, VWO, IVV, SPY

Simple Indexed ETF Portfolio

60% VTI – Vanguard Total Stock Market Index, ER 0.07%

40% VEU – Vanguard FTSE All World Ex-US Index, ER 0.25%

Add bonds later

Weighted ER of 0.14%

Holds Over 5,000 Stocks

Index Mutual Funds

Higher minimums.

Better for small, frequent purchases (DCA). Avoid trading costs by buying directly.

Only priced and traded at the close of the day.

Vanguard (generally $3,000 minimum).

MorningstarAvailable via OSU libraries and ccig.osu.edu:http://proxy.lib.ohio-state.edu/login?url=http://library.morningstar.com

Morningstar

Aggregates Fund Data Expenses Historical Returns After-Tax Returns Holdings Also Rating System and Analyst Reports

Portfolio X-Ray Displays data for a portfolio of funds

Sometimes more data than you really need…

Some Related Reading

A Random Walk Down Wall Street by Burton Malkiel

Common Sense on Mutual Funds by Jack Bogle

The Bogleheads’ Guide to Investing

Morningstar’s Guide to Mutual Funds

Summary

Do some research, read one or two books and you will be set.

Weigh the pros and cons of investing in active versus passive funds.

CCIG generally is not focused on investing in funds, but we can point you in the right direction.

Remember that enterprising investors may still choose ETFs for easy and inexpensive exposure to specific industries, countries, etc.

Questions?

Club Portfolio

Goals

Show by realistic example how to choose investments.

Provide a sample portfolio of value investments for a college-aged investor.

Learn about different stocks and companies and what makes them attractive investment opportunities.

Encourage discussion and debate.

Maintain records of the portfolio to learn from mistakes and successes.

Parameters

Start with $20,000 cash.

Trades cost $7 (Scottrade pricing).

Placing a trade requires that a majority of present and voting members approve the transaction.

Provide rationale and analysis (as well as continuing discussion) for each investment on the appropriate forum page.

Analysis

Reason for Buying

Selling Strategy / Expected Duration

Reason for Selling

Analysis (what went well, what didn’t)

ccig.osu.edu

October 13, 2008