I finally found a new commission-free broker, M1 Finance, that offers everything loyal3 did, and more! Like loyal3, it offers automatic monthly investment with a fixed dollar amount to buy fractional shares of stocks. Even better than loyal3, you can buy virtually any publicly traded stock or ETF, and it offers automatic rebalancing.
No other broker I know of offers similar services. Automated investment is very valuable to me because I don't have to think about it. That saves valuable time, and I cannot forget about making the investment. Fractional share purchase is wonderful because it allows true dollar cost averaging. While loyal3 only offered dozens of stocks, M1 Finance offers all stocks and ETFs and even expert portfolios should one desire. Automatic rebalancing is simply icing on the cake to help buy stocks when they are low.
While all this is great, there are three distinct disadvantages. The biggest one, of course, is that M1 Finance is relatively new and a no-fee, commission free business model is hard to sustain. There is no guarantee that it will not go the way of loyal3 before it. And it can decide to change its fee structure and begin charging fees and/or commissions in the future.
Another disadvantage is a $100 fee for outgoing ACAT. So if it does decide to start charging fees, I would have to either pay $100 to transfer to another broker or sell my holdings and incur capital gains tax. Hopefully, the party will last for a while before that happens, and that when it does decide to charge fees or close, there will a period of time that I could sell off my holdings without commissions or accumulate a big enough portfolio so that the $100 fee would become insignificant. Less than 0.2% of portfolio size would be considered insignificant, which means I would need a portfolio size of $50,000 to make ACAT worthwhile. At a rate of $1000 per month and 10% annualized return, that should take about three and a half years to accumulate.
A third disadvantage to me is that this is a cash account and the stock holdings cannot be collateralized to buy more stocks on margin or use for other purposes. This limits liquidity and flexibility to buy more stocks when prices become low in a bear market.
The automatic rebalancing feature is both an advantage and a disadvantage. While it helps to buy more of the stocks selling at lower prices and less of stocks selling at higher prices, it breaks down when a particular holding falls toward zero and never recovers. To mitigate this potential for disaster, I would take these actions:
1. Invest only in wide-moat high quality stocks that will be around for decades.
2. Limit number of stock holdings so it is easier to monitor the overall portfolio.
3. Stay vigilent in monitoring for potential permanent material deterioration in the fundamentals of a stock and replace it as soon as such is identified.
Use of index funds only (instead of individual stocks) would complete eliminate this potential pitfall of automatic rebalancing, but I would rather save money on fees and taxes on dividends, as I plan to use this to invest solely in stocks paying no or little dividend.
Overall, I believe the pros significantly outweigh the cons and I am very excited to have found M1 Finance. Using it as a taxable account, I have picked ten high-quality stocks with low (less than 2%) or no dividend, all rated as "wide-moat" by Morningstar.
By high quality, I mean stocks with prominent size in its industry and good fundamentals to include generally increasing revenue, earnings, book value and cash flow over the past decade, generally decreasing shares outstanding, high ROE (>15%), high ROI (>10%), low debt, and good margins relative to its industry.
Five of the stocks do not pay a dividend, while the other five have dividend yields ranging from 0.66 to 1.56%. The overall portfolio yield is 0.50%, which is very low and will not contribute much to my tax liability. At a rate of $1000 monthly investment, this portfolio is expected to generate $5 dividend per month or $60 dividend per year.
This portfolio is not very well-diversfied by sector, as four of the ten stocks (40% of the portfolio) selected are in the healthcare sector. But healthcare is where the combination of wide-moat, high-quality, and low-yield is most abundant, and it is the best sector, so I am okay with it.
All of these stocks should be around for a long time, and I would be comfortable adding to them as they drop in price. These ten represent my currently highest conviction stocks that pay no or low dividend yield. However, nothing is fixed in stone in investing, so vigilence is still required.
Readers, do you have any experience with M1 Finance? If not, I strongly recommend that you give it a try. I'd love to hear what you think!
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