Easy Does It

May 1, 2004

At the end of April we made trades in three of our model portfolios. 

We don’t make changes to our model portfolios often, but when we do those changes generally fall into two camps: structural and clerical. Structural trades are those that change the allocation of a portfolio – when we shift our junk bond allocation from 15% to 10% or increase our small-cap exposure. Clerical changes are those that happen for reasons other than allocation - because a fund closes to new investors or converts to a load fund, or because the fund increases fees, changes managers, gets fat, changes strategy, etc. 

The April changes were mostly clerical in nature. We’re always striving to make the MAXadvisor Newsletter model portfolios as easy as possible for subscribers to follow. Doing so means choosing funds that are convenient to buy and sell.  Although subscribers can build our model portfolios by purchasing fund shares directly from the individual fund companies, it is easier to buy all the funds in one place using a discount broker’s fund supermarket. 

Each and every fund in each and every model portfolio can now be purchased on Scottrade’s no transaction fee (NTF) platform, which means that investors can buy and sell them without paying a fee of any kind. We synched our portfolios with Scottrade’s platform because Scottrade has the highest number of funds available for sale without transaction fees.

A close second choice to Scottrade is E*Trade, which has many of our funds for NTF and charges around $25 for the funds that are not available for NTF. E*trade also kicks back some 12b-1 fees to the customer, which to a certain extent makes up for the fact that investors will pay commissions to buy certain funds. 

We don’t recommend buying non-NTF funds at Schwab because of the excessive fees they charge. If you are a Schwab customer and don’t want to switch to Scottrade or E*Trade, we recommend that you use Schwab’s platform only for NTF funds and buy the other funds directly from the fund family.

<b>Should you always sell when we do?</b>

The last thing we want to do is over-complicate things, and if you feel more comfortable following our portfolios to the letter than please feel free to do so. The strategies we talk about below can help newsletter investors avoid some taxes and fees, but if you’re not the do-it-yourself type you’ll do just fine following our trading schedule exactly.

Generally if you’re following a portfolio you’ll want to do just that, follow the portfolio - buy when we buy, sell when we sell, rebalance when we rebalance. There are occasions, however, when an investor can avoid taxes or fees by temporarily holding off on a trade we make. 

A good example is the recent sale of Meridian Growth. If you joined us eleven months ago, you’re up almost 60% in the fund. If you own the fund in a taxable account and sell now, you may have to pay short term capital gains taxes. If you wait just one month you’ll be kicked down to the much lower long term capital gains tax rate.

Some of the changes we just made to our model portfolios are minor. In our Daredevil portfolio, for example, we sold our holding in the iShares Dow Jones US Utilities fund (IDU) and bought the slightly cheaper Utilities SPDR (XLU). For those subscribers who follow this portfolio and already own the iShares Dow Jones Utilities ETF, you might want to postpone this trade for a month or two if it means incurring taxable gains and/or commission charges.

The same logic applies when a model portfolio fund converts to load class. Over a year ago the Dreyfus Emerging Markets fund was in some of our model portfolios, but thereafter it began charging a front-end load. We replaced the fund in our model portfolios because all our portfolios are and will forever be 100% load free.  Investors who already own the fund didn’t necessarily need to sell it right away - they were grandfathered into a now closed no-load class and won’t be hit by any sort of retro-active load charge. If you can avoid a redemption fee or a capital gains charge by hanging onto the fund for another month or two, go ahead and do so. 

That said, we recommend making trades as soon as fees and taxes permit, as we cannot guarantee the ongoing quality of funds we trade out of our portfolios.