If you could run your own mutual fund, and do it cheaper and with more tax flexibility than you get with the funds you own today, would you do it?
Although still in nascent stages, there are now several services that offer some form of low-cost stock-buying/portfolio-building service. What’s more, industry watchers believe there are dozens of more options now getting up to launch speed.
Some do-it-yourself services aren’t true fund replacements. Buyandhold.com and Sharebuilder.com, for example, are a new breed of site that lets you participate in dividend reinvestment and direct-purchase stock plans. Depending on the service, minimum accounts are low (you can start at anywhere from zero to $50 with these firms) and trading costs vary.
Buyandhold, for example, charges $2.99 for every purchase or sale, while Sharebuilder charges $2 for regular, periodic purchases, $5 for one-time buys and $19.95 to sell. Each offers more than 1,500 of the stocks offering direct purchase.
But if you make a $50 investment regularly, that $2 regular-purchase fee on Sharebuilder acts like a 4 percent sales load.
Trading costs aside, these Web sites are a good alternative for anyone looking to put dribs and drabs of money into stocks.
But if you have serious dollars, the real alternative to funds may be something called “folio investing.”
FOLIOfn, launched in May and headed by former Securities and Exchange Commission bigwig Steven Wallman, is the first firm to offer custom baskets of stocks that, essentially, replace funds.
Here’s how it works:
You pay a $295 annual fee (or $29.95 per month), which lets you build up to three portfolios with as many as 50 stocks. You pick the stocks yourself or buy ready-made portfolios, ranging from a Dow 29, for the socially conscious investor who wants the Dow industrials minus cigarette maker Philip Morris, to a stock-car racing portfolio to more traditional options.
Trade whenever you want, as often as want, at no cost. One thing to be aware of: Unless you pay for premium service, trades are executed just twice a day, at 10:15 a.m. and 2:15 p.m.
Unlike a traditional fund, where capital gains generated by the manager’s trades become your annual headache, you control the folio’s tax bill. You can sell losers, hold winners and manage your money for maximum tax efficiency.
FOLIOfn’s next competitor may be Netfolio — stick .com after their names to find the Web sites — which will start offering “personal funds” this fall. Essentially, you plug in your financial data and Netfolio’s experts build a fund (or multiple folios, so long as each has $5,000 in it) just for you.
The cost is $200 per year or $20 per month. There are extra trading costs to worry about if tax efficiency is your aim, but Netfolio is more about personal guidance than trading options.
These services aren’t for everyone. A buy-and-hold index fund investor, for example, would need about $150,000 in FOLIOfn to realize any cost savings. With $10,000 in FOLIOfn , unless you use the free trading abilities, it’s like holding a fund with a 3 percent expense ratio, more than double the average fund.
But if you trade occasionally and want to control fund portfolios, FOLIOfn looks pretty good from $15,000 on up.
“We’re not right for everyone,” says Wallman, “but there’s a broad array of investors who would like what we do, either from a cost, ease of trading or a control of taxes standpoint.”
Clearly, additional competition will make personalized fund investing more mainstream and popular.
When the time comes to consider it on your own, however, keep in mind that personalized funds sound great, but you will have no one but yourself to blame if your investments don’t pan out.
Says Don Phillips of Morningstar Inc.: “These things are set up to allow investors to opt out of the management part of mutual funds, the theory being that’s what’s wrong with funds and you are better off on your own. I like the flexibility and applaud people who try it, but I suspect that some of the people who want these things instead of funds will find out that managing a portfolio and calculating real total return on a regular basis can be a very humbling activity.”
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Chuck Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.
