"It's a stock picker's market."

I heard a guest say this in a recent episode of WealthTrack. Is it true?

Absolutely. If someone picks the right stocks, they will have a better performance than the market. There's no doubt about it. It's a tautology.

In any market, whether it's going up, down, or flat line, there will always be stocks that do better than others and stocks that do worse. There will be stocks that do much better than the market and there will be stocks that do much worse. That's what makes up a market. If you happen to have picked the stocks that do better, you will do really well. Therefore it's a stock picker's market. It always is and it always will be.

There's only one small problem. The right picks are defined by whether they do better after the fact. You can have a thousand good reasons why a stock should go up. Just going up is not enough. It has to go up more than the market does. That's the holy grail. Whoever know the secret are not speaking. They are busy making money.

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After rolling over my IRA to my solo 401k at Fidelity, I want invest a small sum in the solo 401k account in short-term fixed income. I went and looked at my  options.

Treasuries

I can buy Treasury notes from Treasury auctions. Fidelity doesn't charge me any fee for that. The problem is the yields are so low. According to Bloomberg, the current Treasury yields are:

If I buy an equal amount in these, my average yield will be 1.29%. I'd like to do a little better than that.

Bond Funds

Fidelity has a low cost short-term Treasury bond index fund. The problem is because it invests in Treasuries, the yield on the bond fund is also very low. A bond fund can't earn more than the underlying bonds do.

Fidelity also has a short-term bond fund which invests in Treasuries and government agency bonds (~40%), corporate bonds (~25%), and other bonds. It's more expensive. I'm also wary of the alphabet soup in the fund: MBS, ABS, CMBS, CMO.

Vanguard has a short-term investment grade bond fund. Fidelity charges $75 for the initial purchase and $5 for each subsequent purchase if I set up an automatic investment plan. The Vanguard fund invests less in Treasuries and government agency bonds (~10%) and more in corporate bonds (~60%). It also has about 20% in asset-backed and mortgage-backed bonds (securitized credit card and consumer loans). The yield on the Vanguard fund is little higher than the yield on the Fidelity fund because the Vanguard fund has less in Treasuries and more in corporate bonds, and because it's less expensive.

The duration of a bond portfolio indicates its sensitivity to interest changes and the amount of time it takes to recover from an interest rate increase. Because interest rates are low, I'd like to keep my duration low.

Bond ETFs

Like index funds, ETFs have low expense ratios. The commission on purchasing an ETF is a lot lower than the $75 Fidelity charges for buying a Vanguard fund. I already know a Treasury ETF can't do any better than Treasuries I can buy myself. If I buy an ETF, I'm only interested in a corporate bond ETF.

Vanguard Short-Term Bond ETF (BSV) is the ETF equivalent to its short-term bond index fund. It has 70% in Treasuries and agency bonds. iShares Barclays 1-3 Year Bond ETF (CSJ) invests primarily in corporate bonds. I like its portfolio. The problem is it trades at 1% premium to the underlying net asset value (NAV). If I put $10,000 in it, I'm paying an extra $100 plus a $11 commission. That's more than what I'd pay if I buy the Vanguard open-end fund.

CDs

CDs offer a unique advantage to retail savers. When you buy Treasuries or bonds, either directly or indirectly through mutual funds or ETFs, you are competing against institutional investors. They set the price; you follow. You may also pay a markup to some middlemen unless you buy in Treasury auctions.

Retail savers rule in CDs. Institutions with hundreds of millions to invest can't be bothered to open a $250,000 CD here and there. Treasuries will never be "on sale." On the other hand, different banks will have different eagerness to attract deposits at different times. When one bank wants money more badly than another, they will have a "sale" on their CD rates. As long as the CDs are FDIC insured, you don't care who's putting the CDs on sale.

If you don't mind the hassle of opening and closing accounts, you can shop the highest rates wherever they are. Bank Deals publishes a weekly summary of the best CD deals. Bank Deals is better than BankRate.com because Bank Deals does not limit itself to banks that pay its operator for the lead. As I'm writing this, the best deals I see on Bank Deals with a low minimum deposit requirement are:

If you compare these rates with the Treasury yields, you see the CD yields are much better. An equal amount in these CDs will earn an average yield of 2.86%, versus 1.28% in Treasuries. The best rate CDs have a higher yield and a lower risk than bond funds and ETFs that invest in corporate bonds.

Brokered CDs

Unfortunately opening accounts wherever the best deals are is not an option for me in my solo 401k account. My money has to stay within Fidelity.

Fidelity sells brokered CDs. These CDs are also FDIC insured. Instead of selling directly to individual savers, some banks sell their CDs through brokers. There is no fee for buying brokered CDs, but the best rates on brokered CDs don't match the best rates on retail CDs. Here's what I see in Fidelity:

There's quite a gap between these yields and the yields on best available CDs. If I put an equal amount in these CDs, I will have an average yield of 1.96%, still higher than the Treasury yields. The yield is somewhat lower than that on corporate bond funds and ETFs, but CDs have less risk.

Secondary CDs

Fidelity also sells secondary CDs. These are CDs other investors wanted to get out of before the maturity date. If I buy them, I take over the remaining term, very much like when one buys a bond on the secondary market. They are still FDIC insured. Fidelity charges a fee of $1 per $1,000 (min. $8). If the interest rate on the CD is above market, I will also have to pay a premium. I see these secondary CDs in Fidelity:

When someone wanted to get out early, they will have to offer a better yield than comparable new issue CDs. If I put an equal amount in these four CDs, I will get an average yield of 2.66%, higher than the yield on new issue CDs, matching the yield on corporate bond funds and ETFs with lower risk.

There is one caveat in secondary CDs: the FDIC call. The CDs are insured by FDIC for their face value plus accrued interest. If the CD's interest rate is higher than market and I have to pay a premium, the premium I pay is not protected by the FDIC. In essence, I'm short a call option at par to the FDIC.

For example, paying $1,052.71 for a $1,000 CD from Capmark Bank with an interest rate of 4.7% will give me a yield of 2.87% if Capmark Bank doesn't fail before the CD matures on October 29, 2012. If it fails tomorrow, I only get back $1,000 from the FDIC, and I lose $52.71. That's a risk in buying secondary CDs.

If I buy secondary CDs, I will limit myself to CDs selling below 100 or CDs issued by well known too-big-to-fail banks.

Structured Products

Savers don't like low interest rates. That's for sure. I was waiting for someone outside a bank branch the other day and I saw some brochures and forms the in-branch investment advisors stacked by the window: index linked CDs and absolute return funds. They are targeted at people who are not satisfied with their CD rates. People want something for nothing. The advisors in the bank branches have a ready audience.

If you want safety, go with safety. If you want to take risks on the stock market for its higher expected return, go with the stock market. Blend the two and you will have a balanced portfolio. The structured products only enrich the producers and the advisors. I won't touch them with a ten-foot pole.

After weighing all my options, I decided to do a mix of new issue brokered CDs and secondary CDs. This CD ladder I put together will have an average yield comparable to corporate bond funds and ETFs, but the CDs will have lower risk. The FDIC insurance comes as close to a free lunch as it can get.

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"You come up with an asset allocation, open some accounts, pick a few index funds, and you are done. Once in a while you see if anything is out of whack and you redirect your new money to wherever is lagging. It's not complicated at all."

If investing is that simple, then why in the world are there so many talks about investing? There are many books, professional journals, newspapers, magazines, TV shows, radio programs, and now blogs about investing. The Bogleheads investing forum I participate in (user name "tfb") has more than 560,000 posts. If investing is simple, what can't possibly be exhausted in 560,000 posts?

What makes investing seem so hard?

1. The best strategy requires knowing the future. I think that is the root problem. At the bottom of every investing question, except ones that relate to facts (e.g. what's the IRA contribution limit this year?), people are really asking about the future. Because nobody knows the future, it's impossible to come up with a definitive answer.

Should I invest a lump sum now or dollar cost average over a period of  time? If the market goes up and never comes down over the period you are considering, you should invest the entire lump sum now. If the market goes down, you are better off with dollar cost averaging.

I'm 40. How much should I invest in stocks? If stocks will do better than bonds over your investment timeframe, you should invest more in stocks. If stocks will do worse, you should invest less in stocks.

How much should I invest in international markets (value/growth, small cap stocks, emerging markets, real estate, …)? If they will do better, you should invest more. If they will do worse, you should invest less.

Should I invest in this actively managed fund X or an index fund? If fund X will do better than the index fund, you should invest in fund X.

Should I invest in a short-, intermediate-, or long-term bond fund? If interest rate goes up, you should stay short. If it stays the same or goes down, you should invest in an intermediate- or long-term bond fund.

I have these stocks …, should I dump them and buy mutual funds? If your stocks will do better than the mutual funds you pick, you should stay with your stocks. Otherwise buy mutual funds.

We have an inverted yield curve (current price crossed moving average, high unemployment number, Fed or China doing this or that, …). Will there be troubles ahead? Maybe, maybe not.

Nobody knows the future. Everybody wants to know the future, because knowing the future will answer all the investing questions. You can analyze the historical numbers however you want. It still will not tell you what lies ahead.

2. High stake with replay. Uncertainty isn't new in life. We face uncertainties in other ways. We must make decisions on which job to take and whom to have an intimate relationship with. Both of those decisions can have a big impact on our lives. However, I can't think of another decision that has both a high stake and an accurate replay.

If you choose to marry person A, you don't know whether you would be happier with person B. You take your chance and you move on. When you are investing, you know exactly how your alternatives would've played out after the fact.

If you had a high percentage of your portfolio in stocks and the market tanked, you can calculate exactly how much more you lost than if you had a low percentage in stocks. If you didn't invest much in emerging markets and emerging market soared, you can calculate exactly how much gains you missed.

At the height of last year's stock market volatility, the value of my portfolio dropped more in one day than my pre-tax salary in one month. To earn my salary, I had to get up every day, commute to work, work more than 8 hours a day, for an entire month. A simple failure to act (sell stocks the previous day) negated all that. If you think like that, it drives you crazy.

If the stake isn't as high, a suboptimal decision isn't too bad. If there isn't instant replay, you wouldn't second guess yourself as much. The high stake and replay make investing hard.

3. The disconnect between strategy and outcome. This one relates to #1 about knowing the future. A good strategy does not necessarily lead to a good outcome. A good outcome does not necessarily prove that the strategy is good. Luck plays a big role in the outcome.

The two most favorite phrases my econ professor used to say were ex ante and ex post. Ex ante means before the fact. Ex post means after the fact. You can analyze everything and come up with a best strategy ex ante. You see it has worked beautifully in the past. You do Monte Carlo simulations and you see a 90% success rate. But when you invest, you don't have the luxury of doing repeated experiments and taking the average result. You only have one shot. If your particular investing timeframe happens to be an outlier, you don't have a time machine to go back and roll the dice again.

When you see a strategy producing good ex post results, does it mean it will work well for you in the future? Remember you only have one shot. However sound a strategy looks now, the outcome may be poor. However great results were in the past, it does not prove it was a good strategy to begin with. How do you know you are not fooled by randomness?

Let me give an example. You read that you should diversify and not buy individual stocks. Warren Buffett invested $5 billion in Goldman Sachs in September 2008. If you followed Warren Buffett and bought Goldman Sachs' stock the next day after the news came out, you would beat both the S&P 500 and the SPDR Financial Sector ETF (XLF) by a long mile. Goldman Sachs up 40%. S&P 500 down nearly 20%. XLF down 30%. Next time you hear Warren Buffett invested in another public company, should you follow?

Let me give another example. After I sold PIMCO foreign bond fund, it went up 1.7% in two weeks. For a bond fund in this low yield environment, 1.7% equals interest for almost a full year. Was it a mistake to sell?

The lack of proof for anything in investing makes investing hard.

So, is investing simple or hard? No matter what you do, it's guaranteed that you will not have the best possible outcome ex post. In other words, there is this thing called risk. You can take your chances and make it complicated, or follow a simple, conservative, and sensible strategy. It's impossible to tell which way will win in the end. Remember you have only one shot. For me, I settle for good enough.

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"… Fixed Income Instruments that are economically tied to foreign (non-U.S.) countries, … which may be represented by forwards or derivatives such as options, future contracts or swap agreements."

I bought this fund in late 2004. At the time, there were a lot of talks about the "twin deficits" of United States (budget deficit and trade deficit) and how they would weaken the U.S. dollar. A foreign bond fund protects against a weakening dollar.

When I bought the fund, the dollar already went down against the Euro. This is how the dollar looked versus Euro in 3 years before I bought the fund:

As soon as I bought the fund, the dollar stopped going down. Then it went up! In the first 2-1/2 years I owned the fund, it went nowhere. It returned less than money market funds.

Then the fun started. The dollar weakened again. The fund took off until April 2008. Then it crashed big time. Then it rose again, recovering all the losses and then some.

I'm fed up with the M-shaped yo-yo and I decided to sell. Through my entire holding period, with reinvested dividends, my average return is 5.02% a year, which isn't bad. It's probably better than what I got from my other investments. Nothing did well in the last five years. I sold because I don't want to speculate on currency movements.

The strength of the U.S. dollar dominates the performance of an unhedged foreign bond fund. When the dollar strengthens, the fund goes down. When the dollar weakens, the fund goes up. I don't know where the dollar is heading. I only know I don't want this kind of volatility in a bond fund.

One other reason I sold this fund is the opaqueness of its holdings. PIMCO is a reputable fund manager. I trust that they know what they're doing but I have no clue in what they're doing. By my calculation, the PIMCO fund returned higher than its competitors. I have no idea whether they did it by superior skills, excessive risk, or both.

The PIMCO fund's semi-annual reports only include a few short sentences about what helped performance and what didn't. The list of holdings includes many derivative contracts I have no hope to understand. If I ever invest in a foreign bond fund again, I would pick one that's more transparent or a hedged one.

Here are some other choices in the foreign bond category:

* All data retrieved on fund company's website on Sept. 23, 2009.

I distributed the proceeds from the sale into my other bond funds. What do I do about the dollar weakness? First I don't know it's a given that the dollar will go down. If everybody *knows* it will go down, it should go down now and not wait until next year. Next, if the dollar does go down, my international equity and inflation-indexed bonds will benefit. I'm not too worried.

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After the dot com debacle, people learned it's bad to speculate in stocks, but they also learned they can't lose money in real estate. We all know how that lesson worked out. Today, after another crisis, people are learning more lessons. Will all of them be the right lessons?

Sell at the first sign of trouble. An acquaintance told me she moved all her stock funds into money market in early 2008 because she got nervous from the news of mortgage writedowns. That move was brilliant. It saved her tens of thousands of dollars. She dodged the proverbial freight train. I'm sure she will take that to heart — "when you see trouble, sell." Is it the right lesson? I'm not so sure.

Follow the technical signals. 200-day simple moving average (200 SMA) is a simple technical indicator. A trading rule based on 200 SMA says sell when the price falls below 200 SMA and buy when the price goes above 200 SMA. A modified version of this rule adds a small cushion on either side: sell when the price falls x% below 200 SMA and buy when the price goes x% above 200 SMA, with x% being 1% to 3%.

This signal worked very nicely in the global financial crisis. Investors who followed this signal for S&P 500 sold in November 2007 when S&P 500 was about 1,400. They bought back in June 2009 when S&P 500 was about 950.

They didn't sell at the top. Nor did they buy at the bottom. But that wasn't necessary. Selling after stocks already went down and buying after stocks already went up still protected them from a 33% loss (950 / 1,400 – 1 = -33%).

The same 200 SMA signal also worked well in the 2000-2002 bear market. If an investor followed the signal, they would have sold in September 2001 when S&P 500 was 1,400 and bought back in April 2003 when S&P 500 was 900, avoiding a 36% loss.

Such a simple indicator worked miracles twice in a row. Math indicates that whenever there is a severe bear market, the 200 SMA signal will always protect the investor from big losses. I'm sure some investors will take the 200 SMA as a learned lesson from the financial crisis. I'm not sure it's a good lesson though.

The right lessons are the simple ones that work all the time, not just in a financial crisis:

• Carry no debt except mortgage
• Live below your means
• Invest conservatively in a low cost, diversified portfolio

They are so simple they don't need any further explanation.

What lessons did you learn from the financial crisis?

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He was approached by a friend of a friend who works for WFG. WFG is World Financial Group. It's a financial services marketing company owned by Dutch insurance company Aegon. WFG operates under a multi-level marketing (MLM) scheme. Instead of selling household products like Amway distributors do, WFG salespeople sell financial products.

WFG's products of choice include variable universal life insurance (VUL), variable annuities (VA), and equity index annuity (EIA). Many of these products come from Western Reserve Life (WRL), WFG's sister company also owned by Aegon.

WFG's salespeople are officially independent contractors of WFG. The MLM scheme makes WFG different from other companies like Ameriprise which also push variable universal life insurance products. In addition to selling the expensive products to a prospect, the WFG salesperson also recruits the prospect as a "downline."

Unlike other companies which usually go after the wealthy, WFG specializes in selling to the middle class. Because of the MLM structure,  the middle class prospects are more inclined to become a downline than the wealthy.

It turned out that my coworker was already sold a variable universal life policy and a variable annuity several years ago. Because the funds in the sub-accounts did very poorly, and because index funds are receiving good press coverage, the "advisor" wanted him to switch to a new VUL policy with index funds in the sub-accounts. Switching, of course generates a new commission to the "advisor." The "advisor" also wanted to sell him an equity index annuity and recruit him as a downline.

My previous post $10,000 Lesson On Variable Universal Life (VUL) received some good comments. All the comments against VUL came from policy owners who were suckered into VUL. All the comments for VUL came from insurance agents who sell VUL. The insurance agents all argue that VUL policies are good for some people. I'm sure. Those some people are like needles in a haystack, when the entire haystack is sold VUL policies.

My co-worker contributes to our 401k plan only to the match. He does not contribute to an IRA. There's no way he can benefit from a VUL or a variable annuity. I told my co-worker "run, do not walk" way from this "advisor."

Becoming a WFG salesperson is a fast way to lose your friends.

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For 2008, rebalancing means buying stocks and selling bonds. At the onset of the bear market in July 2008, I put together a plan for overbalancing, which buys more stocks than what regular rebalancing would do. "If rebalancing is good, overbalancing must be better." I reasoned.

My plan laid out in the previous post Embrace the Bear Market with Overbalancing was:

1. After the stock market drops by 20% from its high, increase allocation to stocks by 5%. For each additional drop of 10 percentage points, increase stocks by another 5%.
2. After the stock market drops by 40% from its high, increase allocation to stocks by 5% for each additional drop of 5 percentage points until I reach 85% stocks, 15% bonds.
3. Take back the increased allocation to stocks if the stock market goes up by 10 percentage points from the point when the allocation was increased.

It's a crude form of "be greedy when others are fearful." Is it market timing? Yes, no doubt about it. "Be fearful when others are greedy, and be greedy when others are fearful" is market timing.

Now that the market has recovered somewhat, it's time to review the results. Did it work?

While I'd love to gloat about how I was able buy more and more shares as the stock market went lower and lower, I must say it didn't work, at least not yet.

What went wrong? I did carry out the plan. I didn't blink. 100% of my new cash in the last 12 months went into stocks. I did pick up some shares at very low prices. My entry into commodities was almost perfect. That fund is up 43% since I bought it in early December 2008. I tweeted about buying a chunk of S&P 500 fund on March 5, 2009, 2 trading days before S&P 500 hit the lowest point. It's up 46% now.

However, because the crash went very deep and because S&P 500 is still 35% below its all time high, some of my earlier overbalancing purchases are still under water. Those losses offset the gains from the later purchases.

What if I didn't do anything and what if I just did regular rebalancing? With multiple funds and new cash going into the portfolio at different times, it's too complicated to reconstruct alternative realities. Instead, I tested this hypothetical scenario:

Suppose an investor had $10,000 on Jan. 2, 2008: 60% in Vanguard Total Stock Market Index Fund and 40% in Vanguard Total Bond Market Index Fund. What would have happened if this investor followed different rebalancing strategies?

The results are summarized in the table below. All data are between January 2, 2008 and July 31, 2009. For this 1-1/2 years, I ignored the small dividend and interest distributions from the two funds.

I tested four strategies:

1. Do Nothing. The investor held the funds throughout the entire period with no rebalancing.

2. Rebalance After End of the Year. The investor took a look at the portfolio at the end of 2008 and rebalanced back to 60% in stocks, 40% in bonds on Jan. 2, 2009.

3. Rebalance with a 5% Trigger. The investor rebalanced the portfolio back to 60% stocks 40% bonds whenever the actual composition of stocks went below 55% or above 65%.

4. Overbalance. My overbalancing plan.

In terms of the ending value on July 31, all four strategies produced similar results. The values are within 1.5% of each other. I wouldn't say one strategy is better than another. Not rebalancing when rebalancing is supposed to help the most turned out to be not a big deal. That's a surprise to me. Instead of being down 18% without rebalancing, you are down 17.4% or 16.8% with rebalancing, or down 17.5% with overbalancing. So?

In terms of the lowest point the portfolio reached, there is a big difference. Overbalancing is the worst. As the market went toward the March low, the overbalancing portfolio had more in stocks than the other portfolios. At the lowest point, it lost 41% since Jan. 2, 2008. The Do Nothing portfolio fared the best because it had the least in stocks at the March low. It lost "only" 33%. It takes a much stronger stomach to do overbalancing.

There is also a big difference in the current portfolio composition. Overbalancing had the most in stocks on July 31: 80%. The two rebalancing portfolios had 62% and 64% in stocks, respectively. The Do Nothing portfolio had 51% in stocks. If the stock market continues to recover, overbalancing will start to pay off.

At this time, overbalancing has taken on more downside without compensation on the upside (yet). The downward momentum of the stock market crash hurt it the most. It was too early in buying stocks. The two rebalancing strategies didn't do much to the bottom line either. If the so called "rebalancing bonus" is real, not just due to randomness in the data, it is very small. It also comes at a cost of a larger downside.

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Vanguard is a great choice for beginning investors (and seasoned investors!), but Vanguard is not a broker. It's a mutual fund company. Vanguard has a brokerage subsidiary, but it is primarily a mutual fund company.

What's the difference between a mutual fund company and a brokerage firm then?

People sometimes use "broker" when they refer to either a company or a person, depending on the context. I use "brokerage firm" when I refer to the company, and "broker" when I refer to an individual person who works at a brokerage firm. The official term for the company is broker-dealer. The official term for the broker-dealer's employee who takes customer's orders is registered representative, or "registered rep" in short.

When you open an account with a brokerage firm, you can buy stocks, bonds, mutual funds, and ETFs. The brokerage firm is your intermediary. It holds those investment on your behalf. When you open an account with a mutual fund company, you can only buy mutual funds, and only mutual funds from that same company. You are a shareholder of the mutual funds you buy.

Every mutual fund is a separate legal entity, just like GE and GM are separate companies. Although mutual funds in the same "family" share some of the same vendors (investment advisor, distributor, and transfer agent), the funds are officially independent of each other.

When you buy mutual funds directly from the mutual fund company, you actually have an account with each and every fund you buy. This is different from a brokerage account, where you hold all the assets in one account. That's why account statements from a mutual fund company always list the activities in each fund separately whereas statements from a brokerage firm interlace activities from different assets by date.

It becomes confusing when some mutual fund companies have a brokerage subsidiary while some brokerage firms have their own mutual funds. Still, companies are either primarily a mutual fund company or primarily a brokerage firm. Fidelity comes close to being equally strong in both. I list some of the popular companies and their primary roles here:

When a mutual fund company has a brokerage subsidiary, the accounts are distinct. You need a separate brokerage account for stocks, bonds, ETFs, and mutual funds from other fund families. When a brokerage firm has its own funds, the in-house funds are usually held in the same brokerage account together with your other assets.

Although the first question is often "Which broker?" in most cases people who just start investing don't need a brokerage account. A mutual fund company like Vanguard will serve them well.

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I think the 3.75% tax free yield together with the short maturity (< 3 months) make these IOUs attractive even at face value. Yet no brokerage firms I have account with buy them from the IOU holders, let alone sell them to customers. I'm guessing that's because these IOUs are in paper form, which makes them difficult to buy, sell, and transfer. The brokerage firms' computer systems are just not set up for these.

A legit broker-dealer called SecondMarket* has set up a process for buying and selling these IOUs. It looks quite convoluted to me.

SecondMarket: So How Does It Work?

Sellers:

• Enter IOU into the system. Wait 48 hours for verification with the state.
• Fax or e-mail copy of IOU and government issued ID
• Listing appears at the price seller sets
• Review and accept bids
• Sign documents. Mail in original IOU.
• Receive money from SecondMarket

Buyers

• Sign up. Wait 48 hours for qualification check. A buyer must have a net worth of at least $1 million or an income of at least $300,000 in the last two years.
• Bid on IOUs
• Sign documents. Send money to SecondMarket. Buyer also pays a 1% fee.
• Receive IOU from SecondMarket

* SecondMarket is regulated by FINRA (BrokerCheck). It's also a member of SIPC (membership search) and Municipal Securities Rulemaking Board (MSRB membership list).

For the time being, California IOUs remain off limit for small investors like me. Even if I qualify, the 1% transaction fee makes them not worthwhile unless the IOUs can be bought at a discount to face value.

What are the alternatives if I'm interested in muni bonds? There are mutual funds and ETFs that invest in short-term municipal bonds in many states across the country. The yield, however, is less than half of that on the California IOUs.

There are also mutual funds and ETFs that invest only in California, where the yield is the highest in the country, but these are of longer maturity, which involve more risk.

None of these is as good as the California IOUs. Too bad I can't buy them easily.

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Proposal 1 – Elect Trustees for Each Fund. I have nothing against the trustees. I don't know exactly what they did but the funds are doing alright. I'm going to vote for all of them.

Proposal 2 – Update and Standardize the Funds' Fundamental Policies. Each mutual fund is actually a separate legal entity. It has its own policies. Vanguard wants to adopt a set of policies that apply consistently to all the funds. This way they don't have to worry about the minor differences in different funds. I like simplicity and consistency. But the proposed new policies all go toward the lowest common denominator. They impose the least restriction. Basically as long as it's legal, the funds are permitted to do it. That's not cool. Other than inconsistency, I don't see how the funds have been limited by the policies currently in place. I don't see any good reason to relax the policies. If Vanguard had gone to the most restrictive policy, I would vote for the proposal. This proposal has seven sub-proposals:

Proposal 2a – Purchasing and selling real estate. I'm voting against it.

Proposal 2b – Issuing senior securities. I'm voting against it.

Proposal 2c – Borrowing money. I'm voting against it.

Proposal 2d – Making loans. I'm voting against it.

Proposal 2e – Purchasing and selling commodities. I'm voting against it.

Proposal 2f – Concentrating investments in a particular industry or group of industries. I'm voting for this sub-proposal because some Vanguard funds are sector funds and they need to concentrate in some industries and because this sub-proposal didn't leave any backdoor like "except permitted by law."

Proposal 2g – Elimination of outdated fundamental policies not required by law. I'm voting against it. Those policies may not be required by law but they are still good safeguards. I'm not ready to ditch them just because they are not required by law.

Proposal 3 – [paraphrasing] Do not invest in companies that substantially contribute to genocide or crimes against humanity. I'm voting against this proposal, not because I support genocide or crimes against humanity, but because I believe this should be handled at the investor level, not at the mutual fund level. If an investor wants to invest in a socially responsible fund, he or she can choose one from many socially responsible funds on the market. If an investor doesn't want to invest in a specific company in a fund's portfolio, he or she can short that company.

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• Reforming the 401k: Good Ideas and Bad Ideas