Introduction to Folios Investment

There's a new investment vehicle on the horizon, a cross between mutual funds and discount brokerage. That new vehicle is called folio investing. You may to check it out.

The Folio Phenomenon: New Freedom to Customize Your Investments and Increase Your Wealth by Gene Walden Discusses everything investors need to know and constructs a number of sample folios, including: Powering up with a utility folio Selecting a folio of blue chip all-star stocks Investing

Here's how it works:
You purchase in a single transaction a folio of the stocks you select. You can allocate your investment among anywhere from one to 50 stocks. You can invest an equal number of dollars in all the stocks or specify the percentages. The company then invests according to your instructions.

Folio companies have model folios that you can invest in or modify. For example, you can select a folio based on a major index, such as the S&P 500. You can select a pre-made folio based on large cap growth stocks or mid cap value stocks.

If you see a model folio that almost fits your needs that you want to modify, that's no problem. If, for example, you like a particular folio, but don't like the tobacco stock in the folio, you don't have to own that stock. Just instruct the company not to purchase that stock for you and it won't.

You also are free to ignore the model portfolios and allocate your stocks according to your own criteria.

With folio investing, you can make changes in your portfolio any time you want--daily if you wish--by giving instructions online. You can send in more money and have it invested in the same proportion as your existing folio and you can withdraw part of your investment and keep the remainder invested in the same proportion. You can change your allocation as often as you want.

You can have an IRA inside a folio account.

One thing you cannot do with a folio is day trade using limit orders. To achieve economies of scale, the folio companies trade only a limited number of times each day. Therefore, you may or may not get a pre-determined price of the day either when you buy or sell. Folio companies do allow you to instruct them to cancel a trade automatically if the price of a stock rises or falls by a predetermined amount.

Folios charge a flat fee--usually about $300 a year. That fee allows an unlimited number of trades and changes in folios. Second and subsequent folios have lower costs.

To keep costs down, folio companies use the Internet rather than telephone or postal mail for many of their communications with you. Statements, trade confirmations, and other communications are sent by e-mail. You  send in all your instructions through the Internet as well.

At the end of the year, folio companies will send you a statement of trades that you can use with your tax program. IRA's are available.

As with any investment vehicle, folios are better for some investors than others. Here are the types of investors that would appear to benefit from folios.

If you have large holdings in mutual funds, the expense fees of the mutual funds may be more than the flat fee you would pay to the folio company. Look at your fund's expense ratio and how much you are paying for your holdings.  If it is significantly more than the folio fee, you might want to look at a folio.

If you have a diversified portfolio of stocks which you trade occasionally and are a "hands on" investor who buys and sells stocks on a somewhat regular basis, you might find that the annual fee for the folio is noticeably less than the fees that a discount broker charges.

You probably would not want to own a folio, however if the size of your portfolio would make the fees prohibitive. If you have, for example, only $5,000 in mutual funds, the annual fee would be more than your current expense ratio.

Also, if you trade very frequently to take advantage of small price fluctuations folios may not be for you. Since folios only trade at preset times, you may or may not get that extra 1/8 point. You are better off with a discount broker if you want to do that kind of frequent trading.

Folios investing are not for everyone, but for the right person, they can provide diversification and an opportunity to get diversification and control over your portfolio at an affordable price.

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