Money Blue Book

Zecco is a discount broker that’s been generating a lot of buzz since they started offering free stock market trades last year as part of their very pink friendly trading platform. They currently offer 10 free market or limit trades per month, so long as you maintain $2,500 in total account equity (stocks and cash). There is no minimum balance requirement to open an account, but if you have under $2,500, trades will cost $4.50 each. There are no inactivity fees, which is quite a bonus for those who don’t trade too frequently. Your securities accounts are also insured and protected against loss by the Securities Investor Protection Corporation (SIPC).

Is There A Catch With Zecco?

According to the Zecco website:

There is no catch. We can give away free trades because the cost of executing a trade has become very low. And like other brokerages, we make money on interest income and option trades. Pretty simple right?

If you’re an active trader, the lure of free trades is tempting. However, keep in mind that free trades isn’t everything. Zecco has been around for only a year, which is still a relatively short amount of time in the brokerage world. Questions remain such as whether they will be around for the long haul. What about customer service and trust? Can they execute timely trades and can they offer trading platform services that can compete with those offered by other brokerages?

Moving Towards a Free Trades Market

It is interesting to note that Zecco may have signaled the start of a trend towards a free trades business model. Currently, many large brokerages are starting to diversify and make a larger portion of their income through mutual funds and cash balances than they do through trading. Many brokerages are now moving into more advisory services and into banking and lending.

But don’t expect customers to depart the big brokerages immediately. Larger brokerages such as Charles Schwab, Merrill Lynch, and Fidelity Investments have developed solid relationships with their customers over the years and many of the customers have come to rely on and expect a certain level of high class service from their investment brokers. These customers are not likely to move to a broker that has only been in existence for a year.

Despite that, Zecco and similar companies that offer free stock trades offer an interesting niche in the trading world. If you like to actively trade or even speculate a portion of your portfolio on the side, a free trading platform might be a very attractive alternative.

My Experience With Opening A Zecco Account and Trading

After doing my research, I decided to open a brokerage account with Zecco. The bulk of my investment money will remain with Fidelity, but I plan on taking advantage of Zecco’s free trades and using it to handle my “play money”. Basically I plan on using it to do a little speculating and riskier trading. But the key is that I’m only going to deposit a small sum – nothing more than $500 – $1,000.

The web based application process was quite straightforward and similar to that of most other brokers. The application was all online and did not involve any subsequent paperwork. The Zecco application has 3 parts:

1. Step one requires you to register for a mandatory myZecco account, which allows you to participate on their blog and post messages. Step one only took a minute.
2. Step two involves actually registering for a trading brokerage account. After submitting your online application, it may require an hour or so for the system to generate your account before you move to the next step.
3. Step three requires that you fund the account. I chose to set up an external ACH bank account to transfer funds to Zecco and make trades. Keep in mind that Zecco uses two small trial deposits to verify your ownership of the bank account that you are trying to connect to Zecco. After verification, the deposited amounts are automatically withdrawn.

Zecco’s trading interface is pretty basic with nothing fancy to blow you away. Their customer service is generally on par with other discount brokers. Obviously their biggest draw is the free trades so long as you can maintain the reasonable minimum balance requirement. I’ve made several trades without any problem. Since I’m using Zecco as my “play money” account involving small sums, it feels quite good not having to pay any commissions!

For those who want the complete and comprehensive evaluation of all that Zecco Trading has to offer, including not only its pros but also its cons, please check out my editorial review of Zecco Trading.

Are you like me? Do you keep idle cash sitting in your investment brokerage account while waiting for a juicy investing opportunity to come along? If so, you might want to make sure that idle cash is getting the best interest rate it can.

The stock market’s been volatile lately so I’ve chosen to park a sizable amount of cash in my primary investment account as I wait for the right buy opportunity. But if you’re like most people who adopt an old fashioned buy and hold strategy, you might not realize how low of a return you are getting on that idle cash. Your cash pile may be missing out on some great opportunities as it sits parked in your brokerage account. That’s because many brokerages only pay you a pitiful rate of return on idle cash by default. Oftentimes, brokerages pay an interest rate as low as 1%, while they make a bundle by investing your money for themselves.

Upgrade to a Higher Interest Rate Money Market Account

If you want a higher rate of return you must ask your brokerage because usually most deposits are automatically swept into a low interest holding account by default. If you don’t contact them and ask, they have no particular incentive to let you know that you have higher interest rate options for your idle funds. For starters:

1. Research higher yield money market accounts. Most brokerages have a selection of money market funds that will provide you a higher but stable rate of return while you decide on your next investment move.
2. Try thinking about putting the idle cash in a tax exempt municipal money market account. Depending on your tax bracket, you may want to consider moving your money into one of the many municipal money market accounts. There are two types – one type allows interest to be exempt from federal taxes and the other state-specific type allows earnings to qualify for state and local income tax exclusion. The pretax yields are usually lower than a taxable money market’s yield, but the tax savings may be worth it, depending on your marginal tax bracket.

Using Fidelity Investments’ Default Cash Account As An Example

For example, I use Fidelity as my primary brokerage account. Transactions and deposits to my account are automatically processed and cleared through the low interest core FCASH account by default. According to Fidelity, there is no way to automatically sweep funds from FCASH into a higher interest rate money market fund such as Fidelity Cash Reserves (FDRXX) for one time deposits. You have to manually buy into the money market fund.

The difference in rates of return can be quite remarkable though. The current yield for FCASH taxable interest bearing account, as of September 18, 2007 was only 1.50% for balances less than $50,000 (click here for current FCASH rate). Compare this to the much higher average seven day yield for FDRXX as of September 20, 2007, which was 5.09%.

Don’t let your money sit like a coach potato. Put it to work!

I am currently not a home owner, but just a few months ago I wanted to be one. But now with the housing bubble pop in full swing, I’ve decided to hold off on my original plans until the housing environment improved. The bubble correction is still rippling through the real estate market, and the effects from the mortgage and credit crisis are likely to last for a while.

The Funniest Prognosticator Of Them All

I have been following the real estate market for some time and try to track the various projections out there. Of all of the market opinions that I follow, there’s none funnier than the regularly issued opinion releases by the National Association of Realtors (NAR), the largest trade group in North America representing real estate agents.

Prior to and during the recent downturn of the housing market, NAR was represented by their chief economist David Lereah, who served as the association’s spokesman and cheerleader on forecasts and trends affecting the U.S. real estate market. He has been frequently criticized by many for his perpetually rosy and outlandish spins on the state of the housing market, and has even been accused of encouraging the rise of the real estate bubble. He finally stepped down from his position earlier this year and was replaced by the new chief economist Lawrence Yun.

I’ve always found NAR’s opinions to be very entertaining. As the real estate ship Titanic slowly sank, you could be sure the NAR’s chief spokesman was busy running the decks proclaiming how wonderful of a day it was and how nobody had anything to fear because the ship was running just fine. Before the pop, Lereah was busy calling bubble believers “Chicken Littles,” while trying to keep the hype going. The image and message displayed at the top right of this blog entry was even part of NAR’s $40 million “It’s A Great Time To Buy Or Sell A Home” advertising blitz campaign that started on November 2006, advising consumers to take buying or selling action now while conditions remained favorable. Such eternal optimists.

As CBS Marketwatch bluntly pointed out:

There are two universal truths at the National Association of Realtors: 1) It’s always a good time to buy or sell a home; and 2) We’ve seen the worst of the housing market correction.

Just for kicks, let’s take a look at the National Association of Realtors’ predictions and compare them to what actually happened:

December 2005 – NAR predicted the national median home price would rise about 6.1% in 2006. Over a full year, it “has never declined since good record keeping began in 1968,” NAR boldly stated.

• The Reality: Through October 2006, the median price of residential properties was down 3.5% from a year earlier. The median price decline is even worse if you take into account all the extra cash and financing incentives that were thrown on new home buyers.

January 2006 – David Lereah’s forecast: The market is in the process of normalization and “The level of home sales activity is now at a sustainable level, and is likely to pick up a bit in the months ahead.

• The Reality: Fourth quarter sales fell at an annual rate of 12.6% to 6.94 million annualized.

April 2006 – NAR’s forecast: Home sales will move up and down somewhat over the remainder of the year but stay at a high plateau.

• The Reality: First quarter sales fell at an annual rate of 8.6% to 6.79 million. Lereah’s explanation: This is additional evidence that we’re experiencing a soft landing.

July 2006 – NAR’s forecast: The market should even out just below present levels.

• The Reality: Second quarter sales fell at an annual rate of 6% to 6.69 million. Lereah’s explanation: The market is stabilizing.

October 2006 – NAR’s forecast: We expect sales activity to pick up early next year.

• The Reality: Third quarter sales fell at an annual rate of 22.2% to 6.28 million. Lereah’s explanation: This is likely the trough in sales.

January 2007 - Lereah announced: “After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing home sales to gradually rise all this year and well into 2008″

• The Reality: Fourth quarter sales fell at an annual rate of 2.3% to 6.24 million. Lereah’s explanation: It appears we have established a bottom.

September 2007 – NAR’s new chief economist Lawrence Yun confidently proclaimed: “Mortgage disruptions will hold back sales over the short term, but long term fundamentals are favorable. A modest upturn is projected for existing home sales toward the end of the year, with broader improvement to include the new home market by the middle of 2008.”

Let the games begin.

As was expected, the Federal Reserve cut a key short term interest rate yesterday by a half percentage point to 4.75%, sending investors into a frenzy. Investors went bonkers and jubilantly bought shares, sending the U.S. and world stock markets soaring. The Fed also indicated that more rate cuts could be on the way. Interestingly, federal funds futures on the Chicago Board of Trade are now pricing in a 100 percent chance that the Fed will cut rates at least one more time before the end of the year.

I have to applaud the Fed for being gutsy enough to take aggressive action amid the credit and mortgage market meltdown. While this certainly won’t solve the sub prime mortgage mess immediately, at least it’s a move in the right direction. I personally think the housing recession still has a long ways to go before recovering. But why am I still very skeptical that this resurgence is for real? That’s probably why I still have un-invested cash on the sidelines, waiting for the right opportunity.

My Current Investment Portfolio for 9-19-07

I logged onto my Fidelity Investment account at the close of trading and took a peek at my gains for the day. My portfolio was up 5% due to the Fed’s announcement, a remarkable one day gain with impending recession fears only a few weeks ago. With today’s Fed announcement, I think now is a good time to evaluate my investment portfolio and financial strategy. And it’s a doozy.

Looking at my portfolio it’s plain to see that I have a very un-diversified and growth oriented mix. I have indeed enjoyed a very profitable year to date as my funds have performed exceedingly well. My approximate rate of return on the year is nearly 25%. However, I still have a ways to go in properly planning out my financial future. My portfolio is rather risky as all of my investments (including 401k and Roth IRA) are currently in foreign stocks.

Approximately 68% is in the Fidelity South East Asia Fund (FSEAX), 16% is in the Fidelity Latin America Fund (FLATX), and the remaining 16% is being held in Fidelity Cash Reserves (FDRXX). What can I say? At my stage in life I am willing to tolerate a lot of risk for the opportunity to rake in a high rate of return. I stick with mutual funds though to minimize the potentially disastrous effects of a single stock getting hit by unforeseen bad news.

As I previous indicated, given a long enough investment horizon, the stock market has always cumulatively trended upwards. The greatest growth potential can be found in Asia and so that is where I have chosen to invest my money.

However, in the coming months and years, as my investment horizon naturally shortens and my life priorities change, I will begin diversifying and reallocating my investment holdings to minimize my risk exposure.