| Stock
Basket Services Make the Picking Cheap
By Sharon Rockey
August 30, 2000 |
|
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 (see
tables below for ready-made stock portfolios from FOLIO[fn]).
All of the stocks in the Conservative FOLIO are included
in the S&P 500 index:
The stocks in the Small-Cap Value FOLIO were chosen with
market capitalization less than $1.7 billion and the lowest price-to-book
ratios:
| Company in Small-Cap Value FOLIO |
Ticker |
Proportion |
| ADECCO SA |
ADO |
3.33% |
| AMES DEPT STORES INC |
AMES |
3.33% |
| AURORA FOODS INC |
AOR |
3.33% |
| AZURIX CORP |
AZX |
3.33% |
| BLOCKBUSTER INC |
BBI |
3.33% |
| BUDGET GROUP INC |
BD |
3.33% |
| BETHLEHEM STL CORP |
BS |
3.33% |
| SIERRACITIES COM INC |
BTOB |
3.33% |
| CENTURY BUSINESS SVCS INC |
CBIZ |
3.33% |
| CENTRAL GARDEN & PET CO |
CENT |
3.34% |
| CKE RESTAURANTS INC |
CKR |
3.33% |
| FEDERAL MOGUL CORP |
FMO |
3.33% |
| FINOVA GROUP INC |
FNV |
3.33% |
| INSWEB CORP |
INSW |
3.33% |
| JAZZTEL P L C |
JAZZ |
3.33% |
| KANSAS CITY SOUTHN INDS INC |
KSU |
3.33% |
| MEDITRUST CORP |
MT |
3.33% |
| NBC INTERNET INC |
NBCI |
3.33% |
| ASIA PULP & PAPER LTD |
PAP |
3.33% |
| PEP BOYS MANNY MOE & JACK |
PBY |
3.33% |
| PERSONNEL GROUP AMER INC |
PGA |
3.33% |
| PTEK HLDGS INC |
PTEK |
3.33% |
| PRISON RLTY TR |
PZN |
3.33% |
| RYERSON TULL INC NEW |
RT |
3.33% |
| SERVICE CORP INTL |
SRV |
3.33% |
| STAMPS COM INC |
STMP |
3.33% |
| UNITED AUTO GROUP INC |
UAG |
3.33% |
| USEC INC |
USU |
3.33% |
| COMPANIA ANONIMA NACIONL TEL |
VNT |
3.33% |
| CHINA SOUTHN AIRLS LTD |
ZNH |
3.33% |
| |
|
|
| Company in Conservative FOLIO
|
Ticker |
Proportion |
| AMERADA HESS CORP |
AHC |
3.06% |
| APACHE CORP |
APA |
4.39% |
| AMSOUTH BANCORPORATION |
ASO |
2.72% |
| BECTON DICKINSON & CO |
BDX |
5.03% |
| BAKER HUGHES INC |
BHI |
3.83% |
| BURLINGTON RES INC |
BR |
2.00% |
| CONAGRA INC |
CAG |
2.80% |
| COLUMBIA ENERGY GROUP |
CG |
4.13% |
| DOVER CORP |
DOV |
4.20% |
| DELPHI AUTOMOTIVE SYS CORP |
DPH |
3.06% |
| EATON CORP |
ETN |
2.93% |
| GENERAL DYNAMICS CORP |
GD |
4.54% |
| GOLDEN WEST FINL CORP DEL |
GDW |
2.00% |
| JEFFERSON PILOT CORP |
JP |
2.21% |
| KNIGHT RIDDER INC |
KRI |
3.41% |
| LINCOLN NATL CORP IND |
LNC |
2.00% |
| MARRIOTT INTL INC NEW |
MAR |
4.07% |
| MATTEL INC |
MAT |
5.62% |
| MAY DEPT STORES CO |
MAY |
2.34% |
| MCKESSON HBOC INC |
MCK |
2.56% |
| NABISCO GROUP HLDG CORP |
NGH |
5.47% |
| NEWELL RUBBERMAID INC |
NWL |
2.36% |
| OCCIDENTAL PETE CORP DEL |
OXY |
2.00% |
| ROCKWELL INTL CORP NEW |
ROK |
2.66% |
| TENET HEALTHCARE CORP |
THC |
2.00% |
| TRIBUNE CO NEW |
TRB |
3.28% |
| UNOCAL CORP |
UCL |
5.13% |
| UNION CARBIDE CORP |
UK |
2.00% |
| VULCAN MATLS CO |
VMC |
5.49% |
| WASTE MGMT INC DEL |
WMI |
2.71% |
The stocks in the Large-Cap Growth FOLIO have a market
capitalization greater than $11 billion and the highest price-to-book
ratios:
| Company in Large-Cap Growth FOLIO |
Ticker |
Proportion |
| ABBOTT LABS |
ABT |
3.33% |
| AES CORP |
AES |
3.33% |
| KONINKLIJKE AHOLD N V |
AHO |
3.33% |
| AMERICAN EXPRESS CO |
AXP |
3.33% |
| ANHEUSER BUSCH COS INC |
BUD |
3.33% |
| COMMERCE ONE INC DEL |
CMRC |
3.33% |
| CADBURY SCHWEPPES PLC |
CSG |
3.33% |
| AMDOCS LTD |
DOX |
3.33% |
| ELECTRONIC DATA SYS NEW |
EDS |
3.33% |
| EXODUS COMMUNICATIONS INC |
EXDS |
3.33% |
| INTERNET CAP GROUP INC |
ICGE |
3.33% |
| INTUIT |
INTU |
3.33% |
| KLA-TENCOR CORP |
KLAC |
3.33% |
| KIMBERLY CLARK CORP |
KMB |
3.33% |
| KOHLS CORP |
KSS |
3.33% |
| LIBERTY DIGITAL INC |
LDIG |
3.33% |
| LSI LOGIC CORP |
LSI |
3.33% |
| METROMEDIA FIBER NETWORK INC |
MFNX |
3.33% |
| NOVL NOVELL INC |
NOVL |
3.33% |
| NEXTLINK COMMUNICATIONS INC |
NXLK |
3.33% |
| PITNEY BOWES INC |
PBI |
3.33% |
| PMC-SIERRA INC |
PMCS |
3.33% |
| PROVIDIAN FINL CORP |
PVN |
3.33% |
| SYCAMORE NETWORKS INC |
SCMR |
3.33% |
| SOLECTRON CORP |
SLR |
3.33% |
| SONY CORP |
SNE |
3.34% |
| SYSCO CORP |
SYY |
3.33% |
| VERISIGN INC |
VRSN |
3.33% |
| WALGREEN CO |
WAG |
3.33% |
| YAHOO INC |
YHOO |
3.33% |
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.
