Indexfundfan\’s blog (new URL is

August 30, 2006

Ph.D. on Star Trek

Filed under: Just for fun — indexfundfan @ 12:02 am

It seems like these days, you can get a Ph.D. for just about in anything. According to this news article, a Ph.D. thesis, titled “Broadcast Space: TV Culture, Myth and Star Trek” has been written on Star Trek:

It’s the PhD thesis that boldly goes where no thesis has gone before. Djoymi Baker watched 700 episodes – 624 hours without ads – of Star Trek and its spin-offs, dating from 1966 to 2005, in the name of research.


August 29, 2006

Comparing Ameritrade Izone and Sogoinvest

Filed under: Investing — indexfundfan @ 11:27 am

Ameritrade Izone and Sogoinvest are two discount brokerages that I have accounts with. Both offer very low commissions, and this makes them very good candidates for investors who prefer to invest in ETFs rather than mutual funds. I compare these two brokerages because to me, they are good substitute products for each other. The following is the comparison table based on the factors that are important to me:


It is difficult to decide at this point which is better, especially when Sogoinvest is very new and still improving on its offering; although I must say that I am not particularly thrilled with Sogoinvest’s ACH and margin interest accruing timeline. I have already written comments about these in my previous Sogoinvest experience posts [1] [2].

August 25, 2006

Taylor’s great indexing post

Filed under: Investing — indexfundfan @ 1:36 pm

Once in a while, investors need to be reminded why index funds are the preferred choice for long term investments. I came across one of the many great posts made by Taylor in the Diehards forum recently. The one below, reproduced from post 52553, messages 7 through 9, stands out as one of the best post on the benefits of indexing:

1. Index funds (on average) have higher returns than managed funds. (play the odds).

2. Diversification: The increased diversification of index funds results in lower risk. Baer & Ginsler did a study of Standard Deviaton for actively managed funds vs. the total stock market over both 5 and 10-year periods. Their conclusion: “The returns of actively managed funds were 20 to 25% more volatile than the broad market.”

3. Consistancy: Vanguard’s Total Stock Market Index Fund ranked among the top 25% of large-blend funds in just two of the past 10 years. Nevertheless, because of it’s consistency, only twice falling below average, it outpaced 85% of all large-blend stocks after taxes.

4. Continuation: Of 355 actively managed equity mutual funds around in 1974, less than half survive today. Indexers do not have to worry that their fund will disappear.

5. No style drift: We know that asset allocation determines about 90% of portfolio performance. Managed fund allocations often change.

6. No overlap. It is almost inevitable that a portfolio of managed funds will have overlap. This is not a problem with index funds.

7. No manager changes: History tells us that the average manager leaves within five years. Index fund investors do not worry about manager changes.

8. No worry about underperforming a benchmark index: Many current best performing managed funds later seriously underperform (U.S. Growth, Magellan, Legg Mason Value Trust, etc.). It is much more important to avoid losses than to achieve extra gains.

9. No worry about “asset bloat” which often causes large successful funds to underperform (Magellan).

10. Less cash dilution. Index funds hold less cash than active funds.

11. Less worry that a manager has “lost his touch.” Index funds are expected to return to profitability.

12. Tax-Efficiency: Index funds are significantly more tax-efficient than most managed funds. It is after-tax return that counts.

13. Low maintenance: Index funds are simple, predictible, and easy to understand, explain, and maintain.

14. Peace of mind: Indexers know the averages are always working for them. The index investor has much less worry and more free time to spend with family and other more enjoyable endeavors.

Testimonials to indexing from leading investment experts:

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.” Warren Buffet

“Most investors would be better off in an index fund.” Peter Lynch

“Only about one out of every four equity funds outperforms the stock market. That’s why I’m a firm believer in the power of indexing.” Charles Schwab

“Index funds are perhaps the most underrated stock funds in existence.” “Mutual Funds for Dummies”

“The fund industry’s dirty little secret: most actively managed funds never do as well as their benchmark.” Arthur Levitt, Chairman, SEC

“The closest thing to a sure thing is that the Wilshire 5000 index will outperform actively-managed funds by l.5 to 2 percentage points a year over a sustained period.” Jack Bogle

“Over the long-term the superiority of indexing is a mathematical certainty.” Jason Zweig, senior writer for “Money”

“The media focuses on the temporarily winning active funds that score the more spectacular bull’s eyes, not index funds that score every year and accumulate less flashy, but ultimately winning, scores.” W. Scott Simon, author

“I love index funds.” William Sharpe, Nobel Laurete

“Indexing is for winners only.” Jane Bryant Quinn, author, syndicated columnist

“The most efficient way to diversify a stock portfolio is with a low fee index fund.” Paul Samuelson, Nobel Laurete

“Most people should simply have index funds so they can keep their fees low and their taxes down.” Jack Meyer, CEO, Harvard Management

“Four years ago I was a fan of index funds. Today I am a true believer.” Jonathan Clements, senior writer, Wall Street Journal

“We find that on average, active management reduces a portfolio’s returns and increases its volatility compared with a static index.” Vanguard Investment Counseling & Research Analysis

“They’re just not going to do it (beat the market). It’s just not going to happen. Daniel Kahneman, Nobel Laureate

“I was not always an obnoxious indexing zealot. Ten years of believing in and selling active management strategies in the brokerage industry made me this way.” Rick Ferri, CFA, author, financial adviser

“Active portfolio management thus tends to generate lower returns and higher taxes.” John Haslem, author, “Mutual Funds: Risk and Performance Analysis”

“Indexing virtually guarantees you superior performance. Bill Bernstein, author, financial adviser

“Index funds save on management and marketing expenses, reduce transacton costs, defer capital gain, and control risk — and in the process beat the vast majority of actively managed mutual funds.” Good & Hermansen, authors

“In every asset class where they are available. Index! Four of five funds will fail to meet or beat an appropriate index.” Frank Armstrong, author, financial adviser

“With an index fund–the certainty of keeping up with the market is a very worthwhile trade-off for the possibility of beating it.” Jack Brennan, CEO Vanguard

“Searching through a list of 234 domestic equity funds that have survived for 20 years, only 31 did better than the Vanguard 500 Index. That means the odds are really, really poor that any of us will do better than a low-cost broad index fund.” Scott Burns, syndicated columnist

“Choosing actively managed funds is the triumph of hope over reason and experience.” Larry Swedroe, author, financial adviser

“It’s just not true that you can’t beat the market. Every year about one-third do it. Of course, each year it is a different group.” Robert Stovall, investment manager

“Giving up the futile pursuit of beating the market is the surest way to increase your investment efficiency and enhance your financial peace of mind.” Ron Ross, author and adviser

“It is basically impossible to beat the market.” Prof. Eugene Fama

“Indexing is a marvelous technique, I wasn’t a true believer, I was just an ignoramus. Now I am a convert. Indexing is an extraordinarily sophisticated thing to do.” Douglas Dial, former CREF portfolio manager

“Simple buy-and-hold index investing is one of the best, most efficient ways to grow your money.” Michael Lebouf, Ph.D., author

“The best plan for most of us, is to commit to buying some index fundss and do nothing else.” Charles Ellis, author

“With the market beating 91% of surviving managers since the beginning of 1982, it looks pretty efficient to me.” Bill Miller, portfolio manager

“We should just forget about choosing fund managers and settle for index funds to mimic the market.” Pat Regnier, former Morningstar analyst

“Because active and passive returns are equal before cost, and because active managers bear greater cost, it follows that the after-cost return from active management MUST be lower than that from passive management.” William Sharpe, Nobel Laurete

“The most efficient way to diversify a stock portfolio is with a low fee index fund.” Paul Samuelson, Nobel Laurete

“We find that on average, active management reduces a portfolio’s returns and increases its volatility compared with a static index implementation of the portfolio’s asset allocation policy.” Vanguard study

“Buy and hold. Diversify. Put your money in Index Funds.” Justin Fox, Fortune senior writer

“Index funds save on management and marketing expenses, reduce transaction costs, defer capital-gain, and control risk–and in the process, beat the vast majority of actively manage mutual funds.” Good & Hermansen, authors

“You should switch all your investment in stocks to index funds as soon as possible, after giving proper consideration to any tax consequences.” Chandan Sengupta, author

“I am somewhat skeptical about anyone’s ability to consistently beat the market.” Moshe Milevsky, author

“With an index fund–the certainty of keeping up with the market is a very worthwhile trade-off for the possibility of beating it.” Jack Brennan, Vanguard CEO

“With a very simple and basic understanding of index funds, you can consistently beat 70% to 80% of all professionally managed index funds.” Tweddell & Pierce, authors

“Invest in a stock index mutual fund. What a brilliant, ingenious, common sense idea that I can’t take credit for, but can religiously pass along to those of you who want to unclutter your financial lives and own a sophisticated portfolio.” Bill Schultheis, author

“For most of us, trying to beat the market leads to disastrous results.” Prof. Jeremy Siegel, author

“The surest way to make money in the stock market is not to work very hard at it. Don’t try to outsmart the market; settle for matching it. Put most of your money in an index mutual fund.” Gary Belsky, author

“Most investors should simply invest in index funds.” Robert Rubin, Secretary of the Treasury

“My strongest commitment in the mutual fund arena is to index funds.” Richard Young, editor

“I recommend that the long-term buy-and-hold portion of your equity portfolio be invested in equity mutual funds.” Sheldon Jacobs, author

“The smartest thing people can do if they want money in the equities market is buy an index fund that is run for 30 basis points a year and forget about it.” Elliot Spitzer, NY Attorney General

“The only consistent superior performer is the market itself and the only way to capture the superior consistency is to invest in a properly diversified portfolio of index funds.” Rex Sinquefield, researcher

“It’s extremely difficult to beat the market.” Peter Brimlow, Forbes senior editor

“There can be no question that indexing for most categories of taxable invesor and for most marketable conditions, will outperform conventional active management.” Robert Arnott, CEO First Quadrant

“A passive index fund managed by a not-for-profit investment management organization represents the combination most likely to satisfy investor aspirations.” David Swensen, author

“The S&P index benchmarks outperformed their active peer funds in all nine Morningstar style boxes over the past ten years.” Gus Sauter (1-25-05)

Additional articles of interest:

“The Index Fund Moves from Heresy to Dogma”

S&P Indices Versus Active Funds Scorecard

The Arithmetic of Active Management

The Difficulty of Selecting Superior Mutual Fund Performance

August 18, 2006

Impact of AMT on tax exempt funds

Filed under: Finance — indexfundfan @ 12:51 pm

In an earlier post, I wrote about the regressive tax brackets when evaluated under the AMT structure. In this post, we will consider how these AMT brackets affect the yield of various flavors of tax exempt money market funds, looking specifically at the case of an investor domiciled in California.

There are many different types of money market funds; they are listed below in the following broad types:

  1. Fully taxable at local, state and federal level, e.g. Vanguard’s Prime money market fund.
  2. Taxable only at federal level, e.g. Vanguard’s Treasury money market fund.
  3. Taxable only at local, state level, taxable at federal level if you are subject to AMT, e.g. Vanguard’s tax-exempt money market fund. (Note: The portion of the interest earned that comes from your state of residence is tax-exempt)
  4. Taxable only at federal level if you are subject to AMT, otherwise it is fully tax-exempt, e.g. Vanguard’s California tax-exempt money market fund (for California residents).
  5. Fully tax-exempt, e.g. Fidelity’s California AMT-free money market fund.

The following table summarizes the situation:


The reason why certain tax-exempt funds are subject to AMT is because they contain private activity bonds (e.g. bonds to build a shopping mall). Tax-exempt funds hold these bonds because they tend to have better yield.

Let’s calculate the net yield, with the effect of AMT considered, for an investor with the following tax situation:

State tax bracket 9.3% (California)
Federal tax bracket 28%
AMT bracket 32.5%

1) For a fully taxable fund, e.g. VG Prime MMF yields 5.10%
Net yield (no AMT) = 5.10% * (1 – 0.28 – 0.093*(1-0.28)) = 3.33%
Net yield (with AMT) = 5.10% * (1 – 0.325 – 0.093) = 2.97%

2) For a federal-taxable-only fund, e.g. VG Treasury MMF yields 4.69%
Net yield (no AMT) = 4.69% * (1 – 0.28) = 3.38%
Net yield (with AMT) = 4.69% * (1 – 0.325) = 3.17%

3) For a state-taxable-only fund, e.g. VG Tax exempt MMF yields 3.38%
This MMF has about 12.6% in CA and 17% subject to AMT
Net yield (no AMT) = 3.38% * (1 – 0.093*(1-0.17)) = 3.11%
Net yield (with AMT) = 3.38% * (1 – 0.093*(1-0.17)) * (1-0.126*0.325) = 2.93%

4) For a state-specific tax-exempt fund, e.g. VG CA tax exempt MMF yields 3.31%
This MMF has 100% in CA and about 18.2% subject to AMT
Net yield (no AMT) = 3.31%
Net yield (with AMT) = 3.31% * (1-0.182*0.325) = 3.11%

5) For a state-specific TE and AMT-free fund, e.g. Fidelity’s CA AMT-free MMF yields 3.19%
This MMF has 100% in CA and 0% subject to AMT
Net yield (no AMT) = 3.19%
Net yield (with AMT) = 3.19%

Interestingly, assuming my calculations are correct, Fidelity’s CA AMT-free fund turns out to be the best for an investor subject to AMT, despite the lower expenses of VG’s CA TE MMF.

The after-tax yields with and without AMT for the above scenario, and other scenarios for an investor in California are given below:

Note 1: The yields quoted are read from the respective website as of 2006-08-17.

Note 2: Most equivalent-yield calculators available on the web DO NOT take into account of AMT.

August 17, 2006

For the American Pessimists

Filed under: Investing — indexfundfan @ 8:00 am

Due to the twin budget deficits and other problems in the U.S., many investors in Singapore seem to write off investing in the U.S, thinking that America is losing its global lead in technology.

The following is an article from, titled Venturesome Consumption, “in praise of America’s fearless consumers of new ideas and products”.

For a growing number of economists and policymakers, however, the greatest fear of all—not least because its long-term consequences may be so deep—is that America is losing its global lead in technology. In the battle to invent and innovate, China and India, in particular, with their gazillion-strong cohorts of engineering and science graduates, will soon overwhelm the dullards and liberal arts students churned out by America’s education system.

The most important part of innovation may be the willingness of consumers, whether individuals or firms, to try new products and services, says Mr Bhidé. In his view, it is America’s venturesome consumers that drive the country’s leadership in innovation. Particularly important has been the venturesome consumption of new innovations by American firms. Although America has a lowish overall investment rate compared with other rich countries, it has a very high rate of adoption of information technology (IT). Contrast that with Japan (the original technology bogeyman from the East) where, despite an abundance of inventive scientists and engineers, many firms remain primitive in their use of IT.

One reason why American firms are able to be so venturesome is that they have the managers capable of adapting their organisations to embrace innovation, says Mr Bhidé. Pressure to be venturesome may have come from America’s highly competitive markets. And America’s downstream firms are arguably the world’s leaders in finding ways to encourage consumers to try new things, not least through their enormous marketing arms and by ensuring that there is a lavish supply of credit.

PS. The title of this post is inspired by post 52278 from the Diehards forum.

August 12, 2006

Sogoinvest experience update

Filed under: Investing — indexfundfan @ 6:52 pm

[This post continues from my earlier post on my Sogoinvest experience.]

After having the Sogoinvest account opened for about one week, the following are my personal thoughts.


  • The order fills seemed to be quite good. Out of the five trades I placed last week (all were limit orders), two came back with slightly better price than the level 1 quotes. The fills were quick.
  • There were no major hiccups for a new brokerage. Account opening was relatively quick and easy.


  • The ACH transfer time is not transparent and inconsistent. The timeline for one instance was: ACH submitted on day T, 8/4 (Friday), bank debited on day T+1, 8/7 (Monday), money posted by morning of day T+2, 8/8 (Tuesday).
  • In the second instance, ACH was submitted on day T, 8/8 (Tuesday), bank debited on day T+1, 8/9 (Wednesday), but money was posted only on Friday night. This effectively means you can only use the funds on T+4.
  • I emailed customer service who told me the ACH timeline should be
    • Day 1 (before 5pm): fund transfer request.
    • Day 2: funds are withdrawn from your bank account
    • Day 3: funds are posted to your SogoInvest account
  • Customer service also told me that during the time that they are holding your money hostage, no interest is earned.
  • My first ACH instance meets the timeline given by customer service but the ACH time for the second instance was clearly late by two business days.
  • I asked customer service for an update of my second ACH transfer on Thursday afternoon but did not get a reply by the end of the week. This brings me to the second minus point that emails are sometimes not answered in a timely manner.
  • PS. My email was completely ignored. And I later learnt that Sogoinvest had subsequently lengthened the period of time they hold your ACH money hostage. See update below.

Minor irritations

  • Sogoinvest sends you an email with embedded links with every order submitted or cancelled.
  • If you want to change the price of a limit order, it is a manual two-step process (cancel then re-submit). Some other brokers let you change price and then with one click will perform the cancellation and re-submission of the order in the background.

Update 2006-08-15

I asked customer service about how margin interest is computed. I was quite shocked to learn of the method they are calculating margin interest and the new ACH timeline. Below are excerpts of the emails:


1. When I made a purchase using margin on day T, when would margin interest start accruing? Is it on the settlement day T+3?

2. To avoid margin interest, when is the latest that I can submit a ACH transfer from my bank to Sogoinvest? Is it on day T+2?



My comments:

  • If you bought a security on margin, margin interest accrues on day T+1. This is very unlike most other brokerages which start charging margin interest only on day T+3, the settlement date. By charging margin interest starting from day T+1, clients are being “overcharged” for margin interest by two additional days.
  • When you submit a ACH into Sogoinvest on day T, your money gets deducted on day T+1 from your bank BUT the money will take another 3 more days before it posts to your Sogoinvest account, i.e. on day T+4. I specifically asked whether any interest is earned and the answer is no. So, Sogoinvest dings you of three days’ interest whenever you perform an ACH in. It does not look like the money held hostage can be used to reduce your margin balance.
  • The above amounts might be small but in principle, I do not like dealing with companies that think customers are fools and can tolerate unfair practices. It also reflects badly on the company management’s mentality.
  • My strategy has always been to have a margin account, and when I make a trade, to ACH in/out money to/from the brokerage when the trade settles. I do this because usually it does not make sense to keep cash in a brokerage account since the interest rates are very pathetic.
  • However, for Sogoinvest, this strategy does not work anymore. At a margin interest rate of 9.5%, a $10k balance in the account would accrue an interest of $2.60 daily. So the 3-day delay imposed by Sogoinvest on ACH-in money would net them $7.80 in margin interest, overwhelming any saving in commissions. For example, using Sogoinvest could potentially save me $4 per trade (or $2 per trade when the promotion ends in 90 days) compared to the $5 charged by Ameritrade Izone. But I have to pay $7.80 in margin interest!
  • The only saving grace now is that Sogoinvest is still currently offering free ACAT out (maybe to attract investors?). I am considering an ACAT of my holdings to Izone. At Izone, it is $5 per trade (unlimited shares) versus the $3 per trade (up to 5000 shares) at Sogoinvest after the promotion. The per trade fee might be $2 more but at least I have been treated fairly so far and the method of calculating margin interest and ACH credit are per industry norms and not stacked against the investor.

Update 2006-08-29

I added a post comparing Sogoinvest with Ameritrade Izone HERE.

Are you clueless about your CLUE report?

Filed under: Finance — indexfundfan @ 4:36 pm

2006-08-12-cluetitle.gifA CLUE (Comprehensive Loss Underwriting Exchange) report is the insurance equivalent of the credit history report. Information about your insurance history are collected by the firm ChoicePoint Asset Company and made available to insurance companies when you apply or renew your insurance, such as your auto insurance or homeowner insurance. This report could affect your insurance premiums adversely if information contained in the report is wrong.

Fortunately, thanks to the FACT (Fair and Accurate Credit Transactions) act, you are entitled to a free copy of your CLUE report. To get your CLUE report, use this LINK.

Note: The same act also entitles you to free credit reports from the three major credit bureas. Follow the link HERE.

August 7, 2006

The next wave of index investing (?)

Filed under: Investing — indexfundfan @ 1:19 pm

Prof. Jeremy Siegel, who is a Director of, and a Senior Strategy Adviser to, WisdomTree Investments, Inc., a company that develops fundamentally-weighted dividend indexes and products, argues in the article The Next Wave of Index Investing that while “capitalization-weighted indexes have been a great way to invest (in the past), increasing evidence suggests that capitalization-weighted indexes may not be the best way to index an investor’s portfolio”.

Siegel thinks that a growing body of evidence suggests that fundamentally-weighted indexes may offer investors an attractive alternative to traditional cap-weighted indexes.

His arguments against the retort by capitalization-weighed supporters are reproduced below:

Supporters of the traditional capitalization-weighted indexes have criticized the fundamentally-weighted approach. Most notably, John Bogle and Burton Malkiel recently claimed that the five-year period from 2000 to 2005 is responsible for a large part of the difference between the backtested performance of dividend-weighted indexes and comparable cap-weighted indexes. But the performance of these fundamentally-weighted indexes over the last five years simply helped make up for the underperformance of such indexes during the tech boom of the previous five years, when dividend-weighted indexes significantly underperformed capitalization-weighted indexes.

To take out the last five years distorts the data. Using the same logic would allow you to say that tech stocks have a good track record over the past 40 years if we ignore the data since 2000 when tech stocks crashed. By underweighting the speculative sectors of the market compared to their market-cap weighted peers, dividend-weighted indexes did not experience the roller coaster ride that capitalization-weighted indexes suffered during this time period.

Supporters of market-cap weighted indexes have also questioned whether fundamentally-weighted indexes would, like their cap-weighted brethren, exhibit relatively low turnover when compared to more actively managed portfolios. While this may be a criticism of some fundamentally-weighted indexes, I do not believe this criticism is valid with respect to the category as a whole. There is no theoretical reason why properly constructed fundamentally-weighted indexes could not have nearly the same relatively low turnover rates, particularly if such indexes are reconstituted only once a year like many cap-weighted indexes.

Note: Some familiar “capitalization-weighted indexes” include the S&P 500, Wilshire total market, Russell 2000 etc. Example of “fundamentally-weighted indexes” include for example the Dow Jones Select Dividend Index (DVY) and many of the ETFs introduced by WisdomTree.

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