Stock Basket Services Make the Picking Cheap
by Sharon Rockey, Contributing Writer
For better or worse, the allure and immediacy of Internet technology has
granted investors new freedom and more choices for managing their money.
Quick and easy online stock trading has become increasingly popular, and as
the ranks of "click-and-buy" investors swell, so grows the number of dot-com
start-ups armed with services catering to investors in search of ultimate
portfolio control.
What do you get when you take the simplicity of a mutual fund, mix in the
decision-making control of an individual brokerage account, and subtract
broker commissions? The answer: baskets. Although online baskets offer the
option of investing quickly and easily, users of the service must not lose sight
of the principles of passive investing.
"One of the dangers with basket investors is that they trade way too much,"
says Gerard Michael, president, director, and cofounder of SmartLeaf, a site
that will be offering portfolio advice later this fall. "Our underlying
philosophy is always buy and hold. The Internet has brought the cost of
trading way down, but just because it's there, should they use it? If it's not
managed well the answer is no. If managed well, the answer is yes."
Whether you call them baskets, e-baskets, folios, or personal funds, this latest
do-it-yourself online investment management tool offers an alternative to the
infrequent portfolio activity reporting of mutual funds and the built-in
commissions of traditional brokerage accounts, and at seemingly lower costs.
Baskets, such as those being offered by FOLIO[fn] and Unx.com, do appear
to offer some real advantages for the right investor. But they may not be for
everyone and are not without their potential downsides.
At FOLIO[fn] and Unx.com, customers are invited to create their own baskets
of stocks, or mix and swap from ready-made baskets containing preselected
stocks from various industry sectors
An investor need not select a ready-made portfolio.
For example, FOLIO[fn] offers a selection of 2500
"window" stocks, but a maximum of 50 stocks can
be held in any one FOLIO.
How do the fees work?
FOLIO[fn] charges a flat fee of $29.95/month, or
$295.00/year for each FOLIO that is opened, which
is comparable to other online basket providers.
After an investor opens three FOLIOs, each
additional FOLIO costs $9.95/month, or
$95.00/year. Included in this fee is the ability to buy
or sell "window" stocks twice a day, once in the
morning and once in the afternoon. If FOLIO[fn]
cannot match the order, the order then goes to
market for execution.
Direct trades of stocks that are not "window" stocks
can be initiated through FOLIO[fn], with a charge of
$14.95 for each stock trade. With direct trades, the
order goes to the market immediately.
And like most online basket providers, FOLIO[fn]
offers tools whereby investors can track
performance and chart returns against benchmarks.
But in a rush to take hold of the reins, the less savvy
investor risks overlooking or ignoring some of the
subtle factors that are bound to affect their overall
return.
With the inherent price spread between a stock's bid
and ask price - the price the buyer has to pay versus
the price at which the seller is willing to sell - the
investor naturally comes away with a little bite
taken out, similar to the instant economic hit
absorbed when a new car rolls off the lot.
Another factor is slippage - the difference between
the best price available in the market at the time the
order is placed and the price when the purchase is
actually filled. This discrepancy can be the most
expensive part of a transaction. Unlike an
experienced day trader, most investors don't have
access to a real-time data feed and will not be privy
to the best bid and ask price at time the order is
placed. An order executed just 1/8 away from the
best price on 500 shares could cost the online
customer an extra $62.50 for the transaction.
Delays in the order being placed and trades that are
missed entirely because of price moves, all add up -
or rather, subtract from - an investor's return, not to
mention the tax consequences of frequent and short-
term trades versus long-term buy and hold.
"Passive" goes out the window when an overzealous
investor can initiate trades with a mouse click.
For compulsive traders, there is help waiting in the
wings. Companies like Netfolio and Smart Leaf
claim they will alleviate some of the temptation by
offering advice to basket investors on how to
manage their accounts, tips on reducing tax bills, and
ways to avoid - or at least be better informed of -
the costs and risks of online trades.
Relevant and timely online investment advice
notwithstanding, the bottom line is this: if an
investor wants to call all their own shots on stock
trades anytime and as often as they like, then
baskets might be a feasible alternative. But investors
would be wise to exercise vigilance and look beneath
the surface and see what else is hiding in that basket.
08/30/2000
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