Folio investing: Your fund manager is you
NEW YORK — Folio investing is on a roll.
Just ask Gene Walden, one of the leading experts on this approach, which allows investors to create their own customized, low-cost stock portfolios.
Folio investing began in earnest only a few years ago. Today, many investors who poured assets into discount brokerage or mutual-fund accounts in recent years are shifting into folio accounts.
The numbers are not huge yet. But folio investing is "now the fastest-growing sector of the brokerage industry," says Mr. Walden.
He guesses that less than $1 billion is currently invested in folio accounts. Aggregate figures have not yet been tallied. But the growth in the number of companies that offer folios suggests that more and more investors are using this investment tool.
Walden, a popular investment writer who pops up frequently on TV and radio, explains folios in detail in his new book, "The Folio Phenomenon" and on his website, www.allstarstocks.com.
Here's how they work: Suppose you have $4,000 to invest in the market. You turn the money over to a folio provider and request that it be split equally among, say, 40 stocks of your choosing.
This way "you don't have to settle for just having five or six stocks, because of costly commissions," Walden says. Instead, that money could be spread over hundreds of firms.
Folio companies charge annual fees of as little as $150. "At a typical full-service brokerage house, that $150 would have bought you, at most, maybe two stock purchases," Walden says. "Here, you get up to 500 or so trades for your money."
In picking your stocks, you will, of course, be on your own. "The investor is responsible for the research and selection," Walden says.
In the case of a mutual fund, a fund manager picks the stocks. In the case of a managed account with a brokerage firm, a broker advises you what stocks to buy and sell while presumably monitoring the account over time.
Currently, Walden notes, eight firms offer full-scale folio plans. They are Foliofn (foliofn.com), buyandhold.com, sharebuilder.com, freetrade.com, brokerageamerica.com, E*trade (etrade.com), Fidelity Investments (fidelity.com), and portfoliobuilder.net.
A number of major investment houses, Walden says, are starting to offer commission-based variations of the strategy although their programs are not yet full-fledged folio plans.
While the cost structure varies with each folio provider, perhaps the most extensive folio plan is offered by Foliofn, Walden says. It has several pricing plans. For a portfolio of 50 stocks, the fee is $14.95 a month or $149 annually. To manage three portfolios of up to 50 stocks, the cost is $29.95 monthly or $295 a year. Additional portfolios cost $95 a year.
Paying any of these flat fees entitles you to make as many as 500 free trades a month. Beyond that, trades are $1. The trades are made twice daily. If you want to execute real-time trades, the cost is $14.95 per trade.
In addition, Foliofn offers some 100 preselected portfolios.
Still, the ability to build and adjust your own low-cost portfolio for financial reasons or to better align your holdings with your values is really the beauty of folios, says Walden.
For people with less than $10,000 to invest, a folio may actually cost more than owning a mutual fund, Walden notes.
A no-load mutual fund, for example, typically has an expense ratio of about 1.5 percent. For $9,000, that means an expense of about $135 a year.
Taxes are another consideration. When you sell a stock inside a folio, it creates a taxable event.
Folios can be purchased within IRAs, and, in some cases, within company 401(k) plans.
Walden concedes that folio investing may be a tad easier for buyers of large companies than small companies, which are often harder to identify. (And this year, most major stock-market gains have come from smaller companies.)
If you create your own folio, Walden recommends you spread your investments across at least seven sectors: healthcare, financial institutions, corporate services, retail, energy, technology, and food and beverages.
Choice: Investors can choose nearly any stocks they want for their folio accounts based on their personal investment objectives and research, or they can invest in a variety of preselected "stock baskets."
Control and flexibility: Investors are in control of what they buy, when to buy, and when to sell. As with mutual funds, investors can buy and sell in dollars rather than in shares. For example, an investor could invest $300 per month across his or her entire portfolio.
Folios are inexpensive for all but the smallest stock traders. Unless you make fewer than 10 stock trades per year, folio investing is less expensive than investing through a full-service or discount broker.
No guidance: Investors are on their own. Folios are for do-it-yourself investors who are willing and able to decide which are the best stocks for their portfolios, when to buy, and when to sell.
Cost trap: More expensive for small investors and those who buy and hold stocks. For individuals with less than $25,000 to invest, folio accounts likely cost more than if the money were put into a no-load mutual fund.
Restricted trading: Folio companies make their trades in batches known as "window trades" to keep their costs down. Therefore, folios are not for investors who want to buy or sell a stock at a specific price, or for day traders.
Limited selection: Although most folio companies offer virtually all of the blue-chip and large-cap stocks, they may not offer smaller or newer stocks and lately, small caps have been the place to be.