Ask any financial advisor to list the building blocks of a good investment strategy, and you'll likely hear diversification. In the stock market, the most convenient and efficient way of achieving this has, until recently, been through mutual funds. But while mutual funds can be cheaper and easier than individual stock trading, they still typically cost investors upwards of two cents on the dollar per year (for management fees, marketing expenses, and embedded trading costs) plus unpredictable (and often hefty) capital gains distributions. So, for the price, what do you get? Hopefully, solid returns. But what you give up is control. Only a few funds disclose their holdings or trading activities at any time other than in SEC-mandated semi-annual reports. For active investors, the shroud of secrecy, combined with potentially substantial fees, can seem downright insulting.
Enter so-called "personal funds" or folios. Pioneered by one-year-old FolioFN, personal funds position themselves as a best-of-both-worlds solution, wedged somewhere between the control, opacity, and tax efficiency of individual stock trading, and the instant diversification and relatively low transaction costs of mutual funds.
FolioFN offers twice daily, no-commission trading for an annual flat fee of $295. Setting up a personal fund is as easy (or even easier) than choosing a mutual fund. The site walks potential investors through a "Folio Wizard," which asks questions about your tolerance for risk, investment time frame, and your financial goals. At the end, several portfolios are recommended, each featuring up to fifty stocks. An investor need only set an investment amount, and the system distributes the cash between the various securities in the folio. Either at the start, or anytime thereafter, investors can delete or add companies (from an available pool of 3,500), and rebalance investments at anytime. The $295 annual fee can also be charged to a credit card, meaning, in the case of Individual Retirement Accounts, the purchase and maintenance fees don't have to come out of your principle.
Do personal funds make sense in today's rough and tumble market? It depends on how self-assured you are as an investor, your attitude towards fees, and how much you enjoy tweaking your portfolio. The lower costs and greater tax efficiency of personal funds certainly help offset the losses that many mutual funds have experienced recently, and personal funds are almost invariably cheaper than actively managing a diversified stock portfolio through a traditional brokerage. But it's sometimes easy to forget what mutual fund managers do to earn the big bucks. Unless you're willing to do the research to make sure that you can match (or beat) a professional's overall results, you might do just as well to give up the control, swallow the fees, and learn to ride out the ups and downs of your mutual funds.