Our brokerage decision and a corresponding cash flow plan for 2009

December 21st, 2008 · No Comments

Last week I wrote about my wife’s and my thoughts regarding factors to consider when picking a brokerage to use for investing the initial funds we’ll dedicate to achieving our geographic independence goal.  I ended the last post about those factors with a promise to write about the result of our research and the decision we’ve made.   Well, we’ve made that decision, as well as a bit of a plan for moving money around, and I want to write it all down so we don’t get confused about what we’ve agreed to.

Gotta start somewhere

Gotta start somewhere

First, let me restate that we are just now launching our geographic independence goal and we are doing it without re-purposing any existing retirement savings or other post-tax investments.  If something goes wrong and we don’t succeed, we want to have the get-rich-slow plan of traditional retirement savings to fall back on.  (Though we may revisit that decision as we gain more experience.)  As a result, we need different accounts to keep these goals clear and separate.  This means opening a new account for any geographic independence funds, and what we need to start with is an investment account for asset growth.  We need asset growth because there just isn’t much else we can do to generate passive income without a larger asset base — we can’t really trade options, nor fund a business start-up, nor purchase real estate for rental cash flow, etc.  We could start to buy dividend producing stocks but we believe that is a bit too conservative for this goal.  And, yes, we believe that we’ll do better putting the money into the market now as opposed to keeping it in cash.   But that’s a whole other post…

One of the first things we discovered in researching different brokerage firms was that no brokerage account was currently paying a very high yield on un-invested cash.  Whether they paid direct interest or swept your cash into a money market account, we’d be better off to buffer our funds in a high-yield savings account until the amount got big enough to bring the investment transaction costs to the desired 1% level.  This is especially important because our existing monthly income from geographically independent activities is not exactly huge and may not be ‘investable’ each month.  (To help resolve that faster we have agreed to add whatever we can afford, without jeopardizing our 401k and IRA contributions, from our actively earned income.  For now, our monthly add-on will be no less than $100.)   Now, whenever we accumulate a large enough chunk of cash to make the transaction cost no higher than 1%, we’ll transfer the money into the brokerage account and invest it as our most recent analysis directs.  But note that until the monthly inflow into the savings account reliably exceeds that investment threshold, we will only transfer amounts that get the costs at exactly 1%.  The reason for this is that the leftover cash in the savings will allow us to exceed the next investment threshold sooner, thus putting our money into the market faster overall, and we believe, growing faster.

Having settled on the cash flow plan, we were now ready to finalize our analysis of brokerage firms and pick the one to actually open our new account at.  I’m sure it won’t surprise anyone to find out that the next thing we did, after having agreed upon the relative importance of the various brokerage features and associated fees, was to create a spreadsheet where we could summarize and easily compare the info from a number of brokerages.   It’s actually taken me more than a couple of hours of effort to track down what answers I could find online, plus a couple of round trip e-mails to customer support reps.  In fact, the spreadsheet is still not complete as I’ve had some difficulty getting my questions across to some customer service reps via e-mail.  That probably would have gone faster if I had called on the phone instead of e-mailing, but I haven’t had a chance to do that this past week due to my “active” job. I must admit that I’m surprised at some of the limited customer support hours but I guess that’s how they keep costs low.

Anyway, the resulting spreadsheet (which covers ETrade, Fidelity, Schwab, Scottrade, ShareBuilder, TD Ameritrade, TradeKing, and Zecco) is pretty specific to our situation and the programs we’d qualify to participate in — for example we’d get a 25% discount on transaction costs at ShareBuilder thanks to Costco, and our costs would be lower than standard at Fidelity due to our other accounts there — but I figured it might still be useful to others, so as soon as I figure out the right way to publish it publicly, I’ll update this post with a link to it.

EDIT: Here’s the link to my spreadsheet: http://spreadsheets.google.com/pub?key=p1sxuopgs1QGnDWrb8LanHg Note that the assumptions on the top are meant to describe at what point the gathered data is no longer relevant.  For example, if it says ‘<=10’ in the ‘Trades Per Month’ row, then as soon as you make your 11th trade, the transaction cost is higher than that shown in this sheet, and possibly other things will change too.

After doing a final comparison with our spreadsheet, it is clear that ShareBuilder comes out way ahead as the best fit to our plan.  The big wins are that we can purchase equities and ETFs for a $3.00 transaction cost, and we can always put a full $300 into the market with each transaction because of the ability to purchase fractional shares.  This gets us our spot-on 1% transaction cost target.   Further, while the transaction cost of a sell order is higher than it would be at Zecco, TradeKing, or Scottrade, the lowest total round-trip cost at any other place would be Zecco’s $9 versus ShareBuilder’s $10.46.  But averaging just two buys for each sell gives a total cost of $13.46 at ShareBuilder vs the next lowest of $13.50 (Zecco) — which means that suddenly ShareBuilder is cheaper overall.   We think we’ll do a much higher ratio of buys to sells so this is nice to find out.

That doesn’t mean we plan to stay with ShareBuilder forever though.  It’s easy to see that once our portfolio hits $2,500, Zecco suddenly looks better because of (a) the 10 free trades they offer per month (though sell orders still incur transaction costs), and (b) we may be able to start looking into some option strategies as Zecco’s transaction costs for options is much lower than anyone else’s including ShareBuilder’s.

We’ve already got a ShareBuilder account setup (as well as a Zecco one.)  Here’s hoping we’re ready to make the switch to Zecco before the end of 2009!

Tags: Brokerage · Geo Ind Goal

  1. There are no comments yet...Kick things off by filling out the form below.

Leave a Reply

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

 Subscribe in a reader