Interactive Brokers - first issue with WebTrader

As you may have noticed from previous posts I recently signed up with Interactive Brokers and have been reviewing the product right from set up through to my discovery of all the pros and cons.

As a recap, the pros so far have included amazingly low transaction costs and the speed at which funds are credited to your account after the first transfer. The cons so far have included the time taken to set up the account, the fact that you can't invest in DRPs.

Unfortunately today I am adding another con to the list and this one is more of an issue with the acutal WebTrader platform. I tend to use WebTrader instead of the Trader Workstation because I mostly trade when I'm at work and am unable to download the software onto my computer. Yesterday I was attempting to put through a trade on the LSE and WebTrader would not give me any pricing data about the stock (not even the current market price). Given that I had only transfered a limited amount of money into GBP for the trade I wanted to make sure that the market had not gone against me (i.e. so I wasnt entering a trade where I did not have enough GBP) to cover it.

In the end I was forced to underestimate the number of shares that I could buy based on the delayed price from yahoo finance. Further the price had actually moved in my favour so I could have bough significantly more than I had originally anticipated. I was also forced to enter a market order and not a limit order as I didnt know how close to the market price the delayed data available elsewhere was. These combined to leave me with excess GBP which I can't invest in anything else (and the transaction costs mean there is no point moving them back to my home currency yet).

This is the first time that I have had this particular problem with WebTrader. I have traded stocks on the ASX and Xetra exchanges and have not had this issue before. I am surprised that it exists for an exchange as large as the LSE. Any comments on how to get around this issue would be much appreciated.

Investment decision: Part 2 (Shares cont'd)

Yesterday I posted on my proposed share allocation split on a month to month basis. Today I decided to go into more detail on the issues associated with both direct share and index fund investing.

Direct shares
One of the biggest dilemmas I find when debating which shares to invest directly into is whether to add to share positions that I already own, thereby getting the benefits of dollar cost averaging or whether to look at new opportunities which may have the potential for greater reward.

With dollar cost averaging you should know more about the company than a brand new company that you are looking at - this gives you an inherent advantage straight away. Further it allows / forces you to invest right through the cycle of share prices. The disadvantage however is that you may have a thesis about the company that is not playing out in the market (yet). Further investing in these companies feels like throwing good money after bad if the stock has been going down or buying in at a much higher price than your original thesis contained.

New opportunities are often the ones an investor gets most excited about. There is a new thesis associated with them and the returns often look better - however this is often just hubris. You get the benefits of diversification however you have the added disadvantage of having to keep track of even more stocks and you end up with a small amount in a great many stocks which is the purpose of the index funds (in my case) whereas the direct share investments are meant to provide the alpha return which typically comes from a concentrated portfolio of good investments.

Index funds
Index funds seem like the typically set and forget type investment so you may find it curious that I'm writing about allocations in it. The fact is that there is no perfect index funds. Although they remove stock specific risk they are still subject to country risk, market risk, currency risk, political risk. Some of these can be used to your advantage.

In my case the Australian dollar is currently very high against the USD, GBP and EUR so I have been looking at index funds in these countries. You then need to weigh it against the other types of risks and how you view those markets. Again the dilemma arises about re-investing in index funds that you already have or seeking new funds which may have different benefits. For example at different points in time a GBP FTSE fund may offer a better currency play vs a USD S&P500 fund. The best thing about index funds is that you can concentrate your efforts on what is going to happen to the currency as there is no alpha benefit from these funds.

Summary
There is no real solution to the above investor problems. Everyone faces them and each investor needs to decide how they will deal with them on a case by case basis.

Investment decisions: Part 1 (Shares)

In my new years financial goals I laid out my basic investment plan for the year. This involved:

• Paying down my loan by $2,500 each month


• Investing $3,300 each month in the stock market

I had also decided to limit the amounts I could invest in the market so that my investment plan stayed on track. In this series I'm going to post about exactly how I'm going to allocate my funds in the various asset classes.

In this part I will be covering my investment in the stock market. In a previous post I mentioned that the ability had arisen for me to participate in my employee share plan and that the returns available were outstanding. I have decided to participate in this plan to the maximum amount allowed ($730 per month) which leaves $2,570 left for the share market. Of the remaining amount I am allocating half to individual stock investments ($1,285) and half to low cost index funds ($1,285). Given the transaction costs on a circa. $1,000 investment can really start to add up I have decided to invest in these classes in alternating months.

To summarise my investment allocation in the stock market will be:

• 22% employee share plan ($730)


• 39% low cost index funds ($1,285)


• 39% individual stock investments ($1,285)

Profiting from your employee share plan

An option that became available to me for the first time last week was participation in my company's employee share acquisition plan which I looked into in a lot of depth. The terms were amazingly favourable so I thought I would be crazy not to sign up to the greatest extent possible. I therefore decided to put together a checklist for all those who are wondering whether to sign up to their employee share plans

There are several pieces of information you have to gather before deciding a) whether to participate and b) how much of your income to dedicate to the plan. These include

• The discount: The discount is the single most important number when considering whether to invest in your company's share plan. A 10 - 15% discount generally gives a great return and are relatively common for employee share plans


• The price the discount is applied to: The most optimal outcome is for the discount to be to the lowest share price over a period. This is unlikely however so another good outcome is for the discount to be the lower of the start or the end share price. If the discount is to the highest price in the period or the higher of the start or end share price then you are open to the possibility that you will be paying more for the shares than they are worth when they are issued to you


• How often you get the shares: Generally funds are taken out of your pay packet and then invested in the stocks every quarter / half year / year. The more frequent it is the better as it reduces the hold cost of the cash while you're waiting for the funds to be invested


• Your personal cost of funds: If you would ordinarily use the cash allocated to your share plan for savings at say 7% then this would be your cost of funds. Personally my cost of funds is lower as I would use it to offset a 7% cost of debt (after tax refund my cost of funds is more like 4.2%)


• Tax implications in your jurisdiction: I have no idea what the tax codes are like in the US / UK etc but in Australia if you hold an investment for 12 months you get a 50% discount on the capital gains. However if the shares are issued at a discount then you have an upfront tax liability associated with the discount. The incentive is to therefore cycle the shares straight away.

The best thing about employee share plans is that you can put in place a plan whereby you may get essentially a substantial riskfree return. For example if your discount is 15%, shares issued every six months, with a personal cost of funds of 2.5% p.a. and no tax benefits to holding the shares - everytime you get issued the shares you should sell them straight away and get an annualised pre-tax return of (15% - 2.5/2%)*2 = 27.5%. This is an outstanding return in it's own right however when you consider that it is essentially risk free it becomes an unbelievable return!

Most employers will limit how you can contribute to these schemes. If I had a choice I would be putting all my investment funds into it!

Interactive brokers - wire transfers - too easy!

In a previous post on interactive brokers I had mentioned how difficult it was to both set up the account and also that it took 3 days to fund the account which I viewed as a real downside to using the interactive brokers platform. However it turns out that I was wrong.

The 3 day transfer of funds period appears to only be for the first transfer into the account. I transferred in funds yesterday in the afternoon and found that it had already been credited to my account before open of business today which I was very impressed with. It takes away one of the biggest downsides to using interactive brokers.

For all the Australian readers of this blog - one of the things you need to get your head around is the terminology. Interactive brokers recommends using wire transfers to transfer money into your account. If you look up wire transfer with your bank (I checked NAB and CBA) they say that they will charge you $90. However this is only to transfer to interational banks. If you fund your account in AUD (as I do) then you only need to do a netbank transfer to Interactive Broker's Sydney branch (they give you the details after completing the pre-transfer form on the accounts management page).

Maintaining buying (or selling) discipline in the sharemarket

For the first time in my investing career I'm coming up against the problem of maintaining discipline in my investment approach. This is because I am completely convinced that this is a buyers market. As I am a long term investor the week to week and month to month movements in share prices do not bother me at all however against nearly all historical averages the markets look cheap.

The problem is that I have set my self investment goals outlined in my 2012 financial objectives which basically revolve around certain allocations on a monthly basis. Given my belief in the value in the market (which I may cover in greater detail in a later post) the temptation is to reallocate funds from my investment property loan into the stock market (effectively gearing up my portfolio).

There are real benefits to having an investment plan, not least being that it stops you from foolishly buying during periods where prices and sentiment are high and also forces you to buy when the market looks terrible and it is tempting to stay away. I confess that I have not always followed this plan. When the market was tanking in the second half of 2011, I was largely out of it and I lost out on buying at some of the lowest points there. The market is back at these low points and I want to be careful of not going too far the other way.

I have decided to largely stick to my investment goals. I have set myself a limit of 50% on the up and downside when it comes to new investment in the stock market every month (i.e. $1,650 - $5,000) with the requirement that I never be more than $5,000 away from my planned allocation.

2012 financial goals

For the first time in several years I sat down and wrote what my goals were for the year. Also for the first time they were not all with a career / advancement / get ahead type of flavour. When I thought about the last couple of years I realised how much I had not yet done from a personal point of view.

After taking into account all my personal goals I then looked at my financial goals for the year. What I realised was that to fund some of my personal goals my financial goals would suffer. I am still going to set aggressive financial goals however they have been scaled back significantly from what I originally had in mind.

With that in mind my 2012 financial goals are

• Invest a further $40,000 into the stock market (i.e. $3,300 per month)


• Pay down my investment property loan by a further $30,000 (i.e. $2,500 per month - note however that some of this repayment will go towards interest costs so the actual paydown will be ~$20,000)


• Limit my personal expenditure to $1,500 per month averaged over the year ($18,000)

While this accounts for most of my wage per month I get a significant amount of income each year from my bonus. This year, however, I have decided to spend my bonus on a sports car. Whilst this may seem like the silliest thing to (i.e. buy an expensive depreciating asset) I have come to realise that life is very short and I dont really want to be an old man driving a sports car. Any excess will be used to fund a reserve cash account which I have been meaning to set up for a while.

Going through this process was a very valuable experience. I cant recommend strongly enough the importance of going through this exercise, not only from a financial point of view but also from a personal perspective.