Simplifying Finances: Recent Trades

The financial market had a small scare at the end of February. A 10% drop in the Chinese stock market induced a 400-point drop in the Dow. Recent turmoil in subprime lending had the market go down and then up. I don’t know or care where the market is going, but I did take the opportunity for some house cleaning trades. The goal is to simplify my finances in one small step at a time. I closed my ING and HSBC accounts last year under the same theme.

When the stock market is down, money flows to bonds, especially Treasury bonds. This is called “flight to quality.” Because bond prices are up, I sold my positions in iShares Lehman 1-3 Year Treasury Bond Fund (SHY) and iShares Lehman U.S. Treasury Inflation Protected Securities Bond Fund (TIP). I bought these bond ETFs when I had a Scottrade account a while ago. I don’t need them any more because I’m with Vanguard now. TIP was as low as $98 per share in January. I sold at $101. I parked the proceeds in 4-week Treasury Bills for now. I intend to invest the money in more 5-year TIPS notes at the next auction on April 24th if the yield is attractive then.

I also sold both Dodge & Cox International Stock Fund (DODFX) and Vanguard International Value Fund (VTRIX), and bought iShares MSCI EAFE Value Index Fund (EFV). This is a pure parallel move within the same asset class. Both the Dodge & Cox fund and the Vanguard fund are actively managed international value funds. When I bought the two funds, there was no index fund option for international value. There is nothing wrong with the two funds. Both performed well. Dodge & Cox has my respect for an honest asset management company. Their fees are very reasonable. If active management can add value, I think Dodge & Cox and Vanguard have the best chance of delivering value-add. However, because I don’t believe active management adds value beyond chance and luck, I switched over to an index fund ETF.

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Comments

  1. indexfundfan says

    Are the trades in tax-deferred accounts or taxable accounts? For a taxable account, one would usually get stuck with some holdings due to tax reasons.

  2. TFB says

    All sales were from tax deferred accounts. EFV was bought in taxable account. You do get stuck with some holdings in taxable accounts. I have iShares Emerging Market Fund (EEM) in my taxable account. I would like to explore either switching to VWO or just bundling it into the new Vanguard FTSE Ex-US fund (VEU), but with 100%+ built-in appreciation, by my calculation it will take more than 30 years to break even if I sell it and pay tax now. Oh well … I’m stuck, but not in a bad way.

  3. 与六 Yoroku says

    Hi tfb,

    I enjoy reading your blog. I am curious under what circumstances bond ETFs are more advantageous than Treasuries. Do Treasuries cost more than bond ETFs in case they need to be sold?

    My answer is no for Fidelity silver and bronze investors. Fidelity charges $19.95 for Treasuries ($0 for purchasing, $19.95 for selling) and $21.90 for ETFs ($10.95 each way if you are silver). Meanwhile, bond ETFs have an advantage at Zecco and other brokers where trading is free. Is this correct?

    Have you ever sold Treasuries before maturity at Fidelity? Any widened bid/ask spread or hidden fees?

    Thank you.
    Yoroku

  4. TFB says

    Yoroku,

    I’m glad you like my blog. As far as the cost of selling goes, I don’t think it’s going to be a big issue unless you *trade* bonds opportunistically. I’ve never sold Treasurys at Fidelity. I never had to because I’m a net buyer of everything. If I want to reduce my allocation to Treasurys, I just stop buying and direct my new investment elsewhere. Even if I must sell Treasurys though, I think Fidelity promises transparent pricing, which means it does not add a markup, but only charges the disclosed commission. The bid/ask spread on Treasurys is very small. For example here’s a quote on a random Treasury note from Fidelity: CUSIP 912828FD7 4/30/2011 @ 4.875% bid 101.014 ask 101.088. The difference is 0.07%.

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