The Good News Is You Can Build Your Own Fund

The bad news is you may not get the best prices for your trades.
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Most people secretly believe they can do things just as well as the pros do. That's why high-end products fly off the shelves at

Home Depot

and the baseball diamonds are full every year at

Major League Baseball's

dream weeks.

Welcome to the Wall Street equivalent for the do-it-yourselfer: the folio mutual fund. Meet your portfolio manager: you.

Folios, or do-it-yourself mutual funds, are attracting a huge following among individual investors. They are even cheaper than an online broker and offer the ability to control the fund's tax efficiency as well as the opportunity to build a basket of securities for far less than it would cost to go out and buy individual stocks.

But there are some caveats. First, you lose the steady hand of a professional broker or fund manager -- which is more acutely felt during a tough market. And, because many of these folios have fairly small trading windows, you run the risk of not getting the best prices when you buy and sell.

The upshot: Folios' trading limitations make them ineffective for active traders. And because they don't provide enough of a professional safety net, they aren't advisable as the sole investment vehicle for the novice investor. But for someone who wants to put a little bit of his money management into his own hands and see how he stacks up against the pros, folios are just right.

David Arsenault, a senior program manager at

America Online

, has found it easy to take on the additional role of managing his own telecom mutual fund. The result? "I'm up 14% since I started early this summer."

Plenty of companies have rolled out or plan to introduce folios on the Web.

ShareBuilder.com

and

BuyandHold.com

began offering e-basket services in late 1999.

PersonalFund.com

began operation in August.

E*Trade

and

NetFolio

both plan to offer such do-it-yourself mutual fund services this spring.

But the leader of the e-basket craze so far is

FOLIOfn

. For $29.95 a month, FOLIOfn lets you assemble a portfolio of 150 stocks (up to 50 stocks in three funds) -- and trade each of these stocks up to twice a day.

Compared with online brokerages, which typically charge about $14.95 a trade, or $448.50 to assemble a portfolio of 30 stocks, FOLIOfn is a bargain.

But while e-baskets charge lower fees than online brokerages, they won't necessarily route your trade in a timely fashion to get you the best price, which a professional portfolio manager or an online brokerage would do. In the end, experts say, paying more for a stock can have greater effect on your portfolio's bottom line than bargain hunting for a bottom-of-the-barrel transaction fee.

FOLIOfn's basic fee, for example, doesn't allow you to place trades within seconds on the fly, as online brokerages do. Nor does it optimally time trades for you, as a professional portfolio manager would.

FOLIOfn handles trades only at twice a day, at 10:15 a.m. and at 2:45 p.m. That means you're locked into whatever price the market is offering then. Likewise, BuyandHold has two daily trading windows, at 10:30 a.m. and 2 p.m., while ShareBuilder places trades only once a week, Tuesdays at 10 a.m. Pacific time.

FOLIOfn, though, will cut its investors a break and for $14.95 a pop allow them to trade outside the 10:15 a.m. and 2:45 p.m. windows.

Best execution of a trade means looking beyond set windows of time, says Dorit Zeevi-Farrington, a vice president of trading research at the electronic trading network

Instinet

. A professional fund manager will pick the optimal time to place a trade, be it at a particular hour during a certain day or over the course of several days, adds Scott Berry, an analyst with

Morningstar

.

"Execution price is a vastly important part of investing that most investors are not aware of," says Jerry Michael, president of

Smartleaf

of Cambridge, Mass., which offers online asset management tools.

FOLIOfn and other e-baskets are designed for investors who intend to hold stocks for relatively long periods and they do offer some genuine benefits, foremost of which is tax efficiency, says David Loeper, chief executive of

financeware.com

. Instead of subjecting an investor to the capital gains and subsequent taxes brought about by other investors' redemptions from mutual funds, e-baskets give investors complete control over their own capital gains or losses, Loeper says.