Mutual Funds vs. ETFs

If you have a 401k or 403b retirement plan through your employer, then you probably have your funds invested in Mutual Funds, likely managed by the likes of Fidelity, Vanguard, or other well-known fund portfolio managers. If you have a regular “taxable” investment account, perhaps you own Exchange Traded Funds, such as an S&P 500 Index Funds. Mutual Funds and ETFs are both own baskets of stocks that are managed by either real human beings (likely for mutual funds) or even computers (possibly in the case of ETFs). However, there are important differences between the two types of investment vehicles. What are the differences and how do the differences impact the way you invest?

Who is the Counterparty?

The main difference is the counterparty to your purchase or sale. When you buy or sell a mutual fund, from whom do you buy or sell it, and same for an ETF? For a mutual fund, you buy and sell shares in the fund directly from the fund manager. A mutual fund has a ticker symbol and you might route an order through an exchange, but the seller or buyer of your order is the fund itself, not some other investor. With an ETF, however, you buy and sell shares over an exchange such as the NYSE, just like you would any other stock.


You buy mutual fund shares directly from the manager because a mutual fund is an Open-End fund, meaning there is no limit to the number of shares the fund can have outstanding. You buy shares in an ETF through a stock exchange because an ETF is a Closed-End fund, meaning the number of shares outstanding is finite and the price of the fund will fluctuate based on the demand for those shares – price goes up as demand goes up.

End of the Day vs. Any Time

Another difference that falls from the Open-End/Closed-End issue is that you can buy or sell ETF shares at any time during the trading day, but you can only buy or sell mutual fund shares at the end of each trading day, after the Net Asset Value for that day is calculated. That means you can’t “day-trade” mutual fund shares, nor can you dump them in the middle of the day if the market is crashing. You have to wait until the end of the day to buy or sell a mutual fund. This is not really a problem if you own mutual funds in your retirement account because they are long-term investments.


Mutual Funds typically are more expensive. They have higher “load” fees and/or management fees, typically because they are more hands-on in terms of management. Mutual Funds can be very specialized in terms of economic sectors or industries or even geographical regions, and so if you like any of these specialized areas to outperform, you can play that hunch more easily by using a mutual fund. ETF’s are less expensive because they typically are set to mirror an index that is out there, and they are therefore less management-intensive, even to the point of being run by an algorithm or a computer. ETF’s are more general, and so it is more difficult to play any specific industry or sector by using an ETF, although such specialized ETF’s are becoming more common.


As I alluded to at the start of this posting, holding mutual funds in your retirement account are fine, typically because that’s all you might be able to hold in that account as deemed by your retirement account trustee. ETF’s are getting a lot of ink because they have lower costs, are becoming more innovative and more specialized, and because they are more “liquid” because you don’t have to wait until the end of the trading day to transact. I am not taking sides in this debate. My only point is to inform you about the differences between mutual funds and ETF’s and help you understand what you can and cannot do with them.

Act Presidential!

Are you one of those people out there who is exhorting our current President to Act Presidential? If you are, and even if you are not, perhaps you should first look into the mirror and see if that person staring back at you also Acts Presidential. Because, you know the saying about those who live in glass houses.

George, Tom, Teddy and Abe

State of Mind

This discussion is topical because it is President’s Week. Acting “presidential” means different things to different people. But most can agree that it is a way of dealing with issues. It means taking control of a situation and acting with benevolence toward all involved. It means keeping your wits about you while others are losing theirs. It means getting others to agree with your wishes because of the strength of your character and your ability to persuade others of the merits of your thoughts or actions.

Don’t Be a Victim

Acting “presidential” does not mean accepting your fate without trying to do something about it. Specific to my field of financial planning, let’s take the example of someone who is behind financially and is falling deeper in the hole of debt. While it may in your mind not be on a par with the actions of those whose heads are sculpted into Mount Rushmore, if you are being slowly crushed by a mountain of debt, you can act presidential by right away cutting out expenses you don’t absolutely need and spend only what you make. The next step would be to spend less than you make and use that leftover to start to eat away at your debt. Take charge of your life and your financial situation! Pretty much every financial advice book ever written is some version of that imperative.


Here is another take: Are taxes crushing you because you live in a high-tax state and you no longer get the full benefit of State and Local Tax (SALT) deduction, and your state is raising taxes on you? Unless you are completely tied to your home and your state, and even then, you can Act Presidential and move to a different state, one with lower state taxes. Chances are this lower-tax state will have higher economic growth than the place you just left, as well as possibly warmer or better weather. Our ancestors back in the day uprooted from other continents and countries in order to get here, and without the benefit of nearly-supersonic air travel, and without really knowing what they would face. Nobody who arrived in the US ahead of them texted photos back to the old country to show what a great time they are having here in this great land. With that in mind, is moving say from the Northeast to Florida, Texas, or any number of other low-tax states such a really big ask? Don’t feel like you have grown roots in some place or situation that is causing you not to get ahead. Take charge, even if it means taking a chance.


There are any number of examples of turnaround stories of people who dug themselves out of a rut and set themselves straight. All of these stories started with someone deciding to Act Presidential and take charge of their own financial situation. And, once you decide to Act Presidential, re-elect yourself and continue to do so. At least you will feel better about yourself, and that is very important!

Cash Flow and Real Estate

Maybe you like to dabble in real estate, or maybe real estate is the main focus of your business. A good way to look at real estate, when you look at buying a property, is whether the property will require more capital for you to achieve your objective, or whether the property is already cash flow positive and will provide you with monthly cash flow through its excess rents from the first day you buy it. This is a continuation of the theme of cash flow that I introduced in last week’s two blog posts.


If you are a house flipper, you want to buy a house (or any other property) that is in some state of disrepair, or that just needs updating, develop a plan and complete the required repairs or updates, then put it back on the market and sell it, hopefully for a profit. Your “value added” is that you either bought the property at a better price than others could for whatever reason, or you have special design ideas or talents, or you have some ability to provide “sweat equity” and do some the work yourself, or some combination of all of these. At the macro or strategic level, however, you need to realize that to make money on this project you need to spend additional money through the process before you make your profit at the end by selling the asset. There probably will not be any cash flow through rents or tenants while you are doing the rehab or updating work. Even if you buy a multi-tenant property and decide to update each unit at it turns over, you will not receive rents on the unit being updated, even if you still earn rent for the remaining units. A “flip” property can be a good investment for someone who has the time and ability to put additional money into the project. However, it is probably not the best type of investment for someone looking to buy a property for its current cash flow.


If you are looking to be a landlord, however, from an investment perspective, you are looking to invest money into an asset that will generate current income. Hopefully, the income from rents will exceed the amount you need to spend on your loan payment, taxes, maintenance and insurance. If so, then you truly have positive cash flow. Maybe there is a temporary situation that you believe will rectify itself and you will have positive cash flow thereafter. Maybe you might sell the property down the road, but you are more concerned with maximizing rents in the property, and/or with stabilizing your tenant base, so that you maximize your current cash flow. This is the equivalent, in the stock market, of buying a utility or other high-dividend stock: It may go up in the future, but you really want the higher income it provides than does a bond or money market fund.


My only point is, if you are already a real estate investor or if you are thinking of investing in real estate, you need first to determine what your objectives are. If you like watching HGTV and want to emulate the likes of Chip and Joanna, then you must not need the current cash flow and you must have extra cash that you are willing to invest in the property over and above your initial down payment. If maybe you have some basic handy man talents and you like interacting with tenants and you want to retire and live on the rents you generate from investing in income properties, then you are a different type of investor and you may be looking to buy a different type of property, one that can provide income to you from Day 1 or close to it. Make sure you know what you want before you start looking.

A Different Way to Diversify

When you think about having a diverse portfolio, you think about diverse asset classes (such as a mixture of stocks and bonds). Alternatively, if you are just concerned with stocks, you might think diversity is a mixture of companies in different industries. I say there is another way to think about diversity, and that is the diversity of holdings among companies that are cash-flow-positive and cash-flow-negative.

A Diverse Way to Embrace Diversity

Previous Blog

In my previous blog that I posted on February 12, I said one way to analyze companies is to look at their cash flow and determine whether they generate and throw off cash flow from their operations, or if they require additional cash flow in order to continue to operate and to achieve their goals. You should look at your stock portfolio in the same way. At an even higher level, you should look at your overall portfolio in the same way.


Let’s first take an entire portfolio that is a mixture of stocks and bonds. The bonds are current cash flow to you, although the amount of cash flow may not be that great because interest rates are currently low, albeit rising. Stocks may be cash flow positive or negative, depending on where they are in their development cycle. If you have a larger percentage of your assets in bonds, should you balance that out by having a larger percentage of your stock portfolio invested in high-tech, high-beta companies that are early in their cycle and will require additional cash to be successful? That is certainly a viable asset mix strategy. Or should you avoid the risk of cash-flow-negative stocks altogether? It depends on your goals, wants and needs with respect to returns and your own cash flow. Your age of course plays a role. The older you are, the less time you have for a young company to come to fruition. You might not be around any more when it does.

Now, let’s take just a stock portfolio. If stocks are the entire universe of what you invest in, perhaps because you are young, have a job, and are willing to take a greater level of risk in your investing, then I would recommend that you make sure you have a good mixture of ownership of companies that are cash-flow-positive and cash-flow-negative. If you do so, you are diverse because the cash-flow-positive companies will probably provide support and downside protection for the companies earlier in their development cycle. If you are high-tech investor specialist, for example, for every new, innovative cloud-computing or cyber-security company that may have recently IPO’d, make sure you balance out by owning companies like Apple, Microsoft, and Intel that spin off buckets of cash flow. In the medical sector, for every biotech you own, make sure you also own a Merck, J&J, or Bristol-Myers, all of which generate cash flow and dividends. If you are excited about the upcoming IPO’s of Uber and Lyft, both of which are a long ways from being cash flow positive, go ahead and jump in, but don’t bet the farm.

Buffet Again

You will be able to keep up with the indexes only if you own some companies that are high-risk and high-reward. Warren Buffet can make money owning only cash-flow-positive companies because he can buy the entire company and therefore control its cash flow. You cannot. You need to give yourself a shot at some upside by making sure you own companies that have more upside than companies that are already established.


Looking at differing cash flow models as a way to diversify your portfolio is not necessarily a substitute for traditional models of diversity, such as having a mixture of stocks and bonds. However, it is another layer and another way to think about how you structure your portfolio, either among the general mixture of asset classes or among stocks specifically.

Companies and their Cash Flow

A good way for you to look at companies is to determine whether their cash flow generation is positive or negative. A company that generates positive cash flow is one that is probably self-funding, meaning that it does not need outside investment to continue to operate. It can stand on its own, thank you very much. Typically a company that generates positive cash flow is one that is well-established and that has a product or line of products that it sells that generates the cash that the company reinvests back into business operations. Kind of like a perpetual motion machine. Maybe these cash flow-positive companies have so much free cash flow from operations that they also pay dividends to their shareholders, which is an added bonus.

Cash Flow Positive

On the other hand, a company that has negative cash flow is one that needs additional outside cash infusions in order to continue to operate. These are usually young companies that have products that are in the research and development stages that have yet to be approved by the appropriate authorities (but which show high promise), or companies in the early stages of product sales that need to grow into their overhead. Think about a new pharmaceutical or medical device company with a great new innovation that needs money to get the innovation approved and/or brought to market.

Cash Flow Negative, then Positive

Warren Buffet

Given my description of these two types of companies, why would you invest in a company that continually needs additional capital in order to survive? Shouldn’t you just invest in companies that throw off excess cash flow? The Oracle of Omaha, Warren Buffet, would agree with you. Excess cash flow is an important part of his “margin of safety” and is also perhaps the main objective of his investments, which is to capture excess cash flow..


A cash-flow-positive company is great, but newer companies that are in the earlier stages offer potentially much greater returns. It used to be that companies didn’t IPO until they were cash-flow-positive, but that changed with the initial Dot Com boom 20-25 years ago (!!?? can it be that many years ago?) Although the trend has eased in the last 5 years, companies are IPO’ing earlier and earlier in their life cycles, as their managers see the public markets as the best way to mainline the blood that they need, namely, more and more cash. With more potential comes more risk, however, so you really need to be careful when you invest in companies that are cash-flow-negative. Either have some familiarity with their business or industry sector, or invest through an intermediary such as a mutual fund or a high-tech sector ETF so that you are inherently diversified.


My main point with this blog post is to encourage you to analyze companies in an effort to answer the question of whether the company is cash-flow-positive or cash-flow-negative. This high-level determination will give you further insight as to how the company operates its business and what you might expect in the future if you decide to buy stock in that company. In my next post, I will draw on this positive vs. negative cash flow concept to show you how you can diversify your portfolio in ways that are different than you might currently think about diversity.

Two Factor Authentication

Security is a major issue. Now that most of our bank and brokerage accounts are online and have online portals, it is more important than ever now to ensure that your accounts are secure and that nobody can hack in and steal your identity, or, worse yet, steal your money.

Use your phone or a card key for Two Factor Authentication

Two Factor Authentication

One method that is increasingly popular because it is effective is Two Factor Authentication. Maybe you already have it for your accounts, and if you don’t already, you should. What is it? With Two Factor Authentication, you have your traditional user ID and Password when you log into your account on a financial website. Then, after you have input your ID and Password, the site will ask you for further information. In the case of one of my accounts, it asks for information from a Key Card, which is a credit card-sized card with numbers and letters. This particular site will give me two numbers, and I must provide the characters that correspond to those two numbers in order to log into my account. This makes it much more difficult, if not impossible, for a bad guy to hack into my account.

Face ID

Now that more cell phones have the face id feature, this makes it much more convenient to implement Two Factor Authentication. Once you input your ID and Password, instead of asking for information from a Key Card that the bank has given you, the website will ask you to log into your cell phone. This means you have to have your cell phone with you when you log in on your computer, but that is probably not a stretch for most people. If you are using the app portal on your cell phone, all the better, because you have already provided the 2nd Factor by logging into your phone with your Face ID. If you don’t have Face ID, an alternative is that the website will send you a (usually) 6 digit Authentication Code in a text, and you will have to type in those 6 digits. You have probably had this experience already in some capacity. It’s pretty easy.


Though not yet mandatory, most banks and brokerages are moving toward the Two Factor Authentication model because it is that much more secure. If you are logging in to any site that doesn’t have to do with your money, such as social media sites, then you can decide if Two Factor Authentication is worth the hassle. However, when it comes to any site that links to any of your money, including your credit card accounts, then I highly recommend that you protect yourself and upgrade your security so that you have Two Factor Authentication. Once you get used to using it, it is really not any hassle to use it. Don’t continue to put yourself and your money at risk – sign up for Two Factor Authentication for your bank, credit card, and brokerage accounts today!

Best Online Brokers

In its Week of January 28, 2019 edition, Investors Business Daily published its list of Best Online Brokers. You are welcome to click the link and read for yourself, and there is some great information on each company. Spoiler alert: The 3 Best are Schwab, Fidelity, and Interactive Brokers. All are good, and you should be satisfied with an account at any of these. Here is my take on each of these fine companies and why you might decide to have an account there as opposed to the others:


If you want easy access to Fidelity products – their large stable of mutual funds, sector funds, and ETF’s, and you want to have your money in a large, well-established institution, then you should have a Fidelity account. In the IBD survey, Fidelity also scores high marks for its website performance and for its strong customer service. Fidelity provides some financial planning tools free of charge, and provides more hands-on financial planning for a relatively small charge. Commissions are $4.95 per trade for stocks and are less or even $0 for mutual funds, although mutual funds charge a fee. You can invest in any number of asset classes, strategies, and time horizons and still stay within the Fidelity family, and that’s why you would opt for Fidelity.


Schwab is less known than Fidelity for its proprietary products. Schwab is thought of more as a pure brokerage than Fidelity. In the IBD survey, Schwab scores highly for its trade execution, and Schwab prides itself on getting the best price for its clients. Opportunities for investor education and research tools are other reasons to go with Schwab. If you work with an independent financial adviser, there is a good chance you will have an account at Schwab because Schwab openly courts independent advisers and their reporting systems work well.

Interactive Brokers

IB is the smallest of the 3, with only about 3% of the number of accounts that Fidelity has. Nevertheless, IB has carved out a niche for more experienced traders with the high quality of its trading platform. IB is going for the “low cost provider” strategy, as their commissions are lower than Fidelity or Schwab for stock trades. IB does not have the level of investor education or portfolio management tools that Fidelity or Schwab. If you are looking to be somewhat hand-held, don’t go with IB. However, if you want to be a part of a cutting-edge trading community and platform and if you can chart your own path, and if you want the lowest commissions and lowest margin interest cost, then IB is your place.


The only other companies IBD considered for this survey were TradeStation, ETrade, and TD Ameritrade. All of these are smaller companies that appeal to different niches of traders. None scored as high on customer service as Fidelity or Schwab. Vanguard was not considered because Vanguard’s actual brokerage capabilities are much more limited than Fidelity or Schwab. Vanguard is more of an asset manager than a brokerage, and its trading platform is not nearly as good as any of the big 3.


Fidelity, Schwab and Interactive Brokers are all good companies and your satisfaction will be a function of how much work you put into your own portfolio. If you are looking for a great website and high customer service and want in on Fidelity’s proprietary products, then Fidelity is your place. If you want access to a wide array of investment products and desire the best trade execution to go along with good service, then go with Schwab. If you are a self-motivated trader and want the lowest commissions, then open an Interactive Brokers account. If you are still confused, then please contact me and I can work with you at any of these brokerage houses.

Coach Belichick

In case you haven’t heard, it is Super Bowl Weekend, and, once again the New England Patriots coached by Bill Belichick and quarterbacked by Tom Brady will be representing the American Football Conference. It will be the 9th time since 2001 that the Belichick/Brady duo has made it to the SB. Love them or hate them, it is a remarkable record of success and stability.

Coach Bill Belichick of the New England Patriots

On To (The Next Opponent)

There are many reasons for Coach Belichick’s long string of success, but one of them is that he is always looking ahead and not backward. Belichick is famous for his post-game press conferences, which are short on emotion. During these press conferences, he is asked about his team’s performance. Win or lose, Belichick answers this question by saying, “We’re on to (whoever the next opponent is).” If they just played Buffalo and are playing Miami next, at the post-Buffalo press conference, Belichick will say, “We’re on to Miami.” He is telling the press that he and his team are focused on the future, not the past. The game that just finished is just that, finished. There is nothing he or his team can do about the game that is over. They can watch film and learn from it, of course, but the focus needs to be 100% on how to beat the next opponent.


Reporters and fans marvel at how resilient the Patriots have been over the years, and this “On to the next opponent” mentality is precisely why. The same applies to every other endeavor that anyone undertakes, including and especially investing and financial planning. Perhaps you have made mistakes in the past. Perhaps the markets are more volatile now than they have been in some time. Maybe you got burned in the process. There may have been some personal issues that you have had to deal with that set you back financially. Regardless, at the end of a day on a random Wednesday, if you have your own personal Post-Game Press Conference, you should tell the invisible reporters there that you are On to Thursday. Then, when you wake up Thursday morning, you should be raring to go with the past squarely in the rearview mirror. This is how you build your own resilience. This is how you build optimism and the feeling that you are under control of your own life.


Who is going to win the Super Bowl? As much as I want the Rams to win, the Patriots look like they have really gotten their act together especially with their running game during the playoffs. So I think the Pats will win. Will they cover? The Patriots are currently favored by 3 points. In their 5 previous Super Bowl victories, their margins of victory have been 3, 3, 3, 4, and 6 points in overtime. So, Patriot Super Bowls are close games. If the spread moves below 3, even to 2.5, then I like the Pats. If it moves above 3, then I like the Rams to cover. I think it will be that close – a 3 point game, which will be fun for the viewers.