My first foray into ETFs

I finally managed to move my Fidelity IRA money out of cash reserves and into funds -- just in time for the market's first down week in a month. So much for market timing.

Anyway, back to our saga of my IRA allocation. Having picked Fidelity Spartan Total Market Index (FSTMX) for my U.S. stock market index, I next needed an international index fund. Turing again to my trusty Money magazine list, I saw a few Fidelity and Vanguard recommendations.

But I also saw this thing called "ETFs" -- with lower expense fees! I'd heard of ETFs (exchange-traded funds) before but had no real idea what they were, so I started Googling, and found a nice primer.

Basically, for my purposes, it seemed to boil down to this: An ETF would have a lower expense fee than a fund. However, an ETF trades like a stock, which means buying one incurs a commission. At Fidelity, for my IRA, that would be $19.99. This made me leery, so I went back to looking at regular-old index mutual funds.

Usually, for my international fund, I buy something that tracks a total international stock index. But this time, I decided to be a little adventurous. It seems reasonable to speculate that emerging markets will do better over the next decade or two than developed ones -- there's a whole lot of room for growth there. So I decided that I wanted the Vanguard Emerging Markets Stock Index (VEIEX). It seemed like buying that, since it's a non-Fidelity fund, would probably incur the $75 fee that so annoyed me earlier, but I decided to suck it up and buy it.

... except when I tried, I got a notice that the fund was closed to new investors. Er? I don't know if that's actually true, or if for some reason it wasn't compatible with my Fidelity IRA -- remember, Fidelity's whole interface has been confusing the hell out of me -- but it seemed like this wasn't going to happen.

But having gotten it into my head that VEIEX was the fund I wanted, it was now the fund I really, really wanted. And lo, Vanguard's Emerging Markets ETF (VWO) tracked the same thing. And I could definitely buy that ... so I did. Commission be damned.

Buying a mutual fund, I could specify how much I wanted to invest. For a stock, or in this case the ETF, I had to put in an order for a number of shares, and take my chances with precisely how much that would cost at open. So I worked out what half the remaining money in my IRA would be, divided by Friday's closing price (I was doing this on a weekend), and put in an order for a batch of shares.

Happily, at work the next day I spotted an article on the upcoming story budget about ETFs. It's posted here: "ETF investing done right." It backs up what I'd hazily worked out for myself: Because you pay a commission on each trade, ETFs don't make sense for things like active 401(k)s, where each week you're putting in money money and immediately investing it. But my IRA is basically a one-shot deal -- I'm sinking in this chunk of cash once, investing it once, and then basically leaving things alone. If I do add more to this IRA, it'll only happen once a year or so. For that kind of investment, an ETF can be a little bit better than a mutual fund -- though really, it strikes me as pretty close to being just 'half a dozen of one or six of the other.'

Tackling the IRA

I finally sat down to allocate my Fidelity IRA balance. What a headache.

I knew I wanted to mimic my 401(k) allocation, which is pretty basic: 40% U.S. stock market index, 30% international stock index, 30% bond index.

In my 401(k) accounts, this has always been very easy to create. The provider generally only offers one or two choices available in each category, so I grab the one with the lowest fees (hence my allegiance to index funds). But with my IRA, I apparently had the whole universe of stocks, funds and exotic investment critters available to choose from. Aiee! Decision paralysis!

As a starting point, I typed "best index funds" into Google -- and the first result was a link back to my own company's site, for a list Money magazine apparently compiles annually of recommended mutual funds. Which is exactly the kind of thing I was after, hooray!

First step: Try to figure out what fees Fidelity is going to charge me for my purchases. Digging around in the "help" section on their "trade mutual funds" page, I found this in the FAQ:

Fidelity will charge a short-term redemption fee if you buy a non–Fidelity fund and sell it within 180 days. This would be in addition to any fees charged by the fund itself.

That was the only thing listed in their "fees" section aside from some boilerplate about purchase, expense and redemption fees, so I figured I was pretty much in the clear. I typed in a purchase order for a batch of VTSMX, Vanguard Total Stock Market Index.

.... and then hit a warning that this purchase would incur a $75 fee. Grump. Fidelity offered an alternative: check out their list of no-fee "similar" investments. I clicked to see that, and got a screenfull of 100+ funds that aren't at all the same as what I wanted. No index funds, many with higher management fees -- I bailed.

Back to the list. Also recommended by Money was FSTMX, Fidelity Spartan Total Market Index. That had a $10,000 minimum investment, which was a few hundred dollars more than investing exactly 40% of my portfolio would call for.

Still, I figured Fidelity probably wouldn't charge me fees for investing in their own funds and decided to take the plunge. So I filled out the clickieboxes and successfully put in my order. One purchase down, two to go.

Next, for my international index-fund order, we come to the story of "Stacy learns what the hell an ETF is." Tune in tomorrow ...

Leaps of faith

I spend every day at work editing, assigning, vetting and too rarely writing about all the many ways being a small-business owner really bites it right now. The economy is belting the [redacted] out of almost everyone right now; being "your own boss" sounds peachy till you realise that then the one who's responsible for every single paycheck (and permit check and tax check and payroll check and expenses check and insurance check ...) is you. I'm a firm believer that the best way to "make a small fortune" is to take a larger fortune and use it to start a business.

And, as a moonlighting Muser on Personal Finance Matters, I'm aware that the #1 rule of investing is "don't invest what you aren't willing to lose."

So what's the first thing I did after David left his job earlier this year? Take a chunk of my scant available cash and sink it into investing in a small business. A restaurant. (BusinessWeek did a piece debunking the 'myth' of the high restaurant failure rate. Their cheery finding: It's not 90% of restaurants that fail! It's only 60%!)

I never intended to be a business "investor," and barring extraordinary circumstances, I doubt I will be again any time in the foreseeable. Some business journalists chafe against the professional stricture against buying stocks and making personal business investments; I always considered it something of a relief. Hooray, I have an excuse for never developing a "personal portfolio." I write a personal-finance blog because I'm philosophically fascinated by money, and the way how we get it and what we do with it cuts to the core of the individual choices each of us make. On a dollars-and-cents-and-actual-tangible-cash level, money bores me. Hence my laziness about allocating my IRA balance and my sanguine outlook on the giant suicide dive my 401k -- the only "savings" I have -- has taken in the past year. If I lost five figures in actual cash, I'd be a wreck. A five-figure loss in my 401k? Eh, it's supposed to be "long-term savings," right?, and so far, this whole "retirement savings" thing is just numbers on paper to me. I sock away the max my company matches every year, and have since I was 20 because it seems the sensible thing to do (free money? yes please!), but at no point has the "savings" in that account every felt tangible to me.

Which is a longwinded way of saying I can't see myself ever investing in a business because I've done a mathematical calculation and determined that doing so would work out in my financial favor. I invested in this one because the moment I heard it was being considered, I desperately wanted it to exist. I'm a pragmatist. I realise that most things require money to exist. So if I could move little financial bits around and help make this business real, in a tangible way? Hell yes.

Which is, I've realised after 18 months on the smallbiz beat, is the mentality entrepreneurs always have about their businesses. It's not a balance sheet. It's not a disembodied economic entity, or a way to generate cash. It's a service or a shop or a creation they passionately want to see made real.

As an editor, I genuinely admire the entrepreneurs who can take a step back and face bottom-line realities. As an employee, those are the business owners I want to work for. But as a writer, I'm more of a dreamer. I want to see amazing visions made real.

So when Chef Chris, who created one of the best meals I've ever had (and I'm a food lover; I've dragged David to recommended restaurants in 47 states so far) in a city I love, posted on his blog that he'd found a great space for a new restaurant and needed a few investors, I dove in. I'm a tiny, tiny stakeholder in this venture; financially, I'm a gnat among giraffes, and in terms of time invested, Chef Chris and Chef Paul and their crew are living this venture daily. I have every confidence they'll make it a success, and I'll get my money back with a profit, but I honestly don't care. Which is why I felt comfortable making the investment in the first place.

As a financial writer, the first piece of advice everyone (including me!) gives is "don't risk money you'll regret losing." I know the odds. I know investing in a new business right now seems bonkers. Running a small business in the best of times is murderously hard, and in a recession? Aiee.

But I also know I could lose every penny I've invested in this and wouldn't regret it, because I think this needs to exist, and the only thing I'd regret is if I'd not done everything I could to make that happen. Which is what the true-believer entrepreneurs I talk with for articles always say: They never really had a choice. They had to do this, had to start that business, because they needed to try. Some succeed, most fail, but everyone had to make the attempt and see the thing they'd envisioned made real.

So if you're in New Orleans, I recommend dropping by the Green Goddess. As a good journalist, I have to note that I have a financial conflict of interest in recommending it, but as this whole post was written to explain, I'm a fervent believer that you'll have a pretty amazing meal there.

I want a new acronym (or, Goodbye 401k, Hello IRA)

Two days before last month's cat trauma hit and most of my organizational planning ground to a temporary halt, I did manage to do what I'd promised to: Convert two abandoned 401(k) accounts (one each for me and David) into IRAs. Total elapsed workflow time: two weeks.

I could have left the accounts alone, or rolled my old 401(k) into my new one, but I wanted IRAs because I'd learned that you can withdraw up to $10,000 from them penalty-free (you'll still owe taxes) for a first-time real-estate purchase, which we may want to do at some point.

Initially, I'd planned to pick a financial provider and consolidate as many accounts as possible in one place. Technically there's no reason I shouldn't do that -- each of our accounts is well under FDIC insurance limits, and they're all housed at big financial services companies that are pretty unlikely to fail or seriously screw up. Plus, most of the money in the accounts is invested in mutual funds, which ought to tangibly own the underlying securities. If the brokerage makes a mistake or rips off the money, there's SPIC protection. That's a lot of backup.

And yet, still. With everything that's gone on in recent months with financal debacles, it felt like diversification would be a good idea. On the unlikely chance something goes wrong, not having all our retirement money parked at one company feels like a wise move. Besides, with my financial-services track record, my provider collapsing or my money being sucked out by hacker thieves doesn't seem so farfetched.

So I opted to set up an IRA for David at Vanguard, where his 401(k) already was, and I moved my old JPMorgan 401(k) to an IRA at Fidelity, the company that houses my current 401(k).

Doing David's was super-straightforward. He'd never registered with Vanguard's website, so I signed up and created his account there. After you do that for the first time, the site won't let you move money for seven days. I waited out the week, then went through the site's wizard-like steps for rolling a 401(k) to an IRA and reallocating the balance. If you want to keep your allocations exactly as they were for your 401(k), you can do that with one click. In total, the whole thing took me about 20 minutes (plus the one-week wait).

Because I was doing a transfer, mine was trickier. Fidelity let me open a rollover IRA online. But to get the cash into the account, I had to call JPMorgan to arrange a termination and transfer.

Calling JPMorgan revealed the sad truth behind the phantom vesting I'd been accumulating each year. Sure enough, it happened because my old company never actually told JPMorgan I'd left. To move my 401(k), they had to go back to the company and confirm my termination date -- and once they'd done that, poof went my two years of extra vesting. Drat.

JPMorgan took a week to sort that out, and then my account was free for transfer. To clean out my balance, JPMorgan sent me a check, payable to Fidelity Management Trust Company. Because the check was made out to Fidelity, not me, it was for my full balance -- no tax withholding that I'd later have to try to claw back.

It was extremely weird getting a check in the mail totaling about six months of my after-tax pay. It's definitely the largest check of "mine" I've ever held. Even though the check was bank-paper and not cash, walking around with it for a day was disconcerting. Reluctant to drop it back in the mail, I took advantage of Fidelity's Investor Centers to deposit it in person -- Fidelity has a branch right in the building I occasionally work out of.

Setting up David's IRA investment choices was easy; Vanguard's allocation options looked just like those I was used to from funding and allocating 401(k) contributions. Fidelity's, not so much. The interface looks more like what I'd imagine a traditional brokerage interface looks like. Instead of picking from a small batch of preselected mutual-fund options, I need to tell it what stocks or funds I want my IRA money invested in.

In the face of all these choices, I keep freezing up. I haven't yet summoned the willpower to work out what to do next, so for the moment, I am being an extremely bad long-term investor and leaving the giant lump sum parked in a "Fidelity Cash Reserves" account.

Oh well, it's not like stocks have done anything dramatic in recent weeks, right?