I don’t know how everyone else does this, but whenever I buy shares of an ETF for my portfolio, I always use a limit order. But it’s usually a “lazy” limit order, because I am just aiming to buy immediately at roughly the market price and the limit order is simply insurance against a flash crash or similar anomaly that happens rarely, but still happens. So I look at the bid/ask prices, and add some wiggle room, and submit a limit order good until the end of day.

I’ve read advice elsewhere to place a limit order at the midpoint between bid and ask, but that makes it so there is a good chance the order will not fill that day, and may never fill if the market keeps moving. I don’t want to keep chasing the market price and staring at the order book on a trading screen. I just want a fair fill, and I want it done. My holding period will be decades, so consistently investing in the market is the most important.

However, on newer trading apps like Robinhood, the default option is always a market order. With smartphone user interfaces, all it takes is a quick swipe and off it goes. Sometimes it takes a little hunting around to even find the limit order option.

It turns out, Robinhood actually agrees that market orders are dangerous. Behind the scenes, Robinhood and many other brokers do something called “order collaring” and quietly turn your market order into a limit order with a 5% margin. For example, if the stock is trading around $100 and you put in a market order (that says you’ll pay whatever the best price is that the moment, even if it is $5,000 or something, technically) into a limit order for $105 max. Matt Levine wrote Money Stuff column about order collaring (gift article) that points out that there are trading bots that specifically take advantage of these 5% collared orders, especially on more thinly-traded stocks.

Here’s how I imagine Robinhood’s thinking:

“We gotta keep things simple and fun for these newbie investors, so we will just let them do market orders with a single swipe, no entering numbers or doing math required! Hmm… but market orders are kinda stupid and dangerous. So… let’s actually make them a +/- 5% limit order so they can’t really hurt themselves so badly that they’ll get mad at us. If they are careless enough to do a market order, then they won’t notice a 5% bad fill but they might notice something worse.”

According to Vanguard, the median bid-ask spread for their popular Vanguard Total Stock Market ETF (VTI) is 0.01%. That means roughly 3 cents a share at the current price of ~$270. Here’s a screenshot from my order screen today. The bid might be $268.83 and the ask might be $268.86. Here, I might just put in a limit order at $270 so that even if the market moves up a little quickly, I still get my order filled. It filled at $268.93, and a few minutes later it was at $269.29.

Meanwhile, 5% of $270 is $13.50 per share. That’s a lot! 500 times the usual spread, and something is usually wrong if it’s that much off. I know that VTI is not thinly-traded, and 99.9% of the time, it won’t matter what you put in for your limit. But once in a while, it will matter, and it only takes an extra few seconds to place a limit order instead of a market order.

My guess is perhaps people think that putting in a limit order will actually encourage the market maker to take advantage of them? It’s like if you say “I’ll pay up to $5 for that Pepsi”, and someone will charge you exactly $5. It’s better just to do a market order and not “show your hand”? But this information about order collaring reaffirms that market orders aren’t any better because they just get turned into very loose limit orders anyway. The bots will still see you as a potential sucker. You might as well set a tighter limit yourself.

I read far too many parenting books, and now I know it is important to acknowledge our feelings. That doesn’t mean we can respond however we want, be we should be conscious and identify the feelings when they arrive. Adults could extend this the stock market as well. We may try not to look, but it’s hard to completely ignore everything all the time. Even though stock market rises over time, it can still be frustrating to make a purchase, only to have the prices go down the very next day. Check out this chart from Cullen Roche of Discipline Funds:

This idea of constant and repeated regret reminded me of this chart outlining the investments of Isaac Newton in the famous bubble of the South Sea Company in the 1700s.

I can’t guarantee the accuracy of this chart as it was hard to follow the source trail, but anyone who has lived through a bubble can understand how this occurred, even to a genius like Newton. It must have drove him crazy. It may also explain why Newton is credited with the quote “I can calculate the movement of the stars, but not the madness of men”.

These days, there is also a constant flow of articles predicting future wobbles or confidently explaining past wobbles. Yet, there are very, very few people who can say that their financial freedom was achieved by taking action in response to any of these market wobbles. At the same time, there are tons of people who have found their greatest feat was investing early and then leaving it alone for a long time (many times this works out via a steady mortgage payment).

I know that I’m personally much better at ignoring the wobbles now because I’m older and have seen firsthand the benefits of leaving stuff alone. Whenever I start worrying about how high valuations have gotten, I remind myself that so much of my wealth has been the result of sitting on my hands and letting these feelings pass.

Whether you are a Berkshire Hathaway shareholder or just curious about what Warren Buffett’s “masterpiece” looks like today, here is an interesting graphic from Sherwood News. Essentially, this is the asset allocation of BRK.B, broken down into wholly-owned operating businesses, shares of other publicly-traded companies, and cash (mostly Treasury Bills).

Some may be surprised to find that for every dollar you invest, this asset allocation is 70% into owning businesses and 30% into cash. Those that have tracked its history know that BRK has often had a significant cash pile relative to it’s total market cap. From Bloomberg (paywall):

There is also a bit of fuzziness as they own insurance companies and those insurance companies have roughly between $150 billion and $200 billion of float which can be invested (and considered an interest-free loan if the underwriting breaks even). Of course, this also means that Berkshire must be always be ready to pay out huge claims if certain events unfold.

The most recent discussion has focused on Buffett’s sale of half his Apple shares. I’m not really worried about it. As a shareholder, I have chosen to trust his management. When Buffett bought Apple stock, the P/E ratio was about 16. Today, Apple’s P/E ratio is over 32. Overall, the S&P 500 is also at higher P/E ratios relatively to historical averages. That makes these moves quite reasonable in terms of value investing.

Berkshire Hathaway makes up a very small percentage of my net worth, but remains a pseudo-actively-managed balanced fund with zero expense ratio that I love to watch. There are wholly-owned solid cash-spewing businesses. Shares of other solid cash-spewing businesses bought at fair prices. And just plain cash.

Professor Edward McQuarrie has recently published the final part in his 3-part series about long-term stock returns at the CFA Institute:

• Don’t Bank on the Equity Risk Premium
• What Price Risk? Unpacking the Equity Risk Premium (Part 2)
• Stocks for the Long Run? Setting the Record Straight (Part 3)

He spends a lot of time fighting back against other people putting words in his mouth, so I’ll try to be extra careful in my own interpretation of his articles.

“One country, one century”. If you look at the returns of the S&P 500 from 1926-2024, as is the widely-available dataset, then yes, US stocks look pretty great for the long run. But this is “one country, one century”. If you look at other countries and other centuries, the returns can look different.

Countries other than the US. If you look at other countries, you will find multiple historical examples of negative average returns even over a 20-year period.

19th century US returns. If you stay with US stocks but change the century, you’ll also discover different results. In the 1800s, the long-term average returns between stocks and bonds were much closer, with bonds even winning by a hair:

I don’t know if this wider set of data will make anyone change their minds, but perhaps it’ll add a little more context to the argument.

To be clear, McQuarrie still states that owning a good chunk of stocks remains the best bet available. It’s not just a sure thing. At the minimum, consider the possibility that the difference in future returns between stocks and bonds may not be as wide as in the past 10-20 years.

Because stocks remain risky regardless of the holding period, stocks often outperform, because investors get compensated for taking that risk. Stocks are a good wager over the long term, on favorable odds. But stocks remain a bet, one that can go bad for any randomly selected investor over their personal time horizon.

While it was welcome news that Fidelity now allows the Fidelity Government Money Market Fund (SPAXX) as a core position for their Cash Management Account as of June 2024, for many of us that reside in states with high state income tax rates, our net after-tax yield would still be much better if we were allowed to use the Fidelity Treasury Only Money Market Fund (FDLXX) as our core position instead.

This is because the interest from US government obligations like Treasury bills are exempt from state income taxes. (The Constitution declares that states are not allowed tax the Federal government.)

Many states have an income tax, but if you live in California, Connecticut, and New York, you should know that in 2023 neither Fidelity Government Money Market Fund (SPAXX) nor Fidelity® Treasury Money Market Fund (FZFXX) met the minimum investment in U.S. government securities required to exempt the distribution from tax in California, Connecticut, and New York. (Despite having Treasury in the name, FZFXX only had about 20% in eligible Treasury interest.) These are the core positions available in the standard Fidelity Account. Meanwhile, Fidelity Treasury Only Money Market Fund (FDLXX) did meet those requirements in 2023 with roughly 90% of interest eligible for exemption. (Source)

As of 8/4/24, the SEC yield of SPAXX was 4.98% and FDLXX was 4.95%. Pretty close. But if you assume a 10% state income tax rate, SPAXX would have to yield at least about 5.50% to equal the after-tax yield of FDLXX. This is just a ballmark estimate, and you can use Fidelity’s Tax-Equivalent Yield Calculator to get a more accurate number for your specific household.

Now, you can manually purchase FDLXX at any time with your SPAXX balance with no transaction fees. Then, whenever your SPAXX is zero and you still need cash, Fidelity will sell FDLXX on demand to fund any cash needs (Billpay, ACH withdrawal, debit card purchase, stock purchase, etc). However, if you get any new money like a paycheck direct deposit or dividend payment, it will automatically be used to purchase the core position (i.e. SPAXX). You’ll then have to make another manual purchase of FDLXX to convert that SPAXX to FDLXX. This is tedious and easy to forget about.

A workaround to this solution is to set up an automatic recurring purchase of FDLXX. Thanks to a comment from reader Henry and also this r\Fidelity post (actually multiple posts) where an official Fidelity rep confirmed that the mechanics work.

You’re on the right track; auto-liquidation of the Fidelity Treasury Only Money Market Fund (FDLXX) will occur to fund your recurring investment plan in this situation. Fidelity will attempt to cover debit balances created, whether through trades, direct debits, checkwriting, or even BillPay, by first using funds in your core balance. Once the core balance is depleted, the system will turn to any eligible secondary money market funds to cover the transaction.

As a recurring investment plan falls under the blanket of trades, auto liquidation will still be at play.

It’s important to note that not all non-core money markets are eligible for automatic liquidation to cover purchases. It is best practice to sell non-core money markets in advance of expected purchases, but you can also ask us about specific money markets to confirm their eligibility. As I alluded to above, FDLXX is eligible for auto-liquidation.

The mechanics. Depending on your cashflow patterns, you might set up a $1,000 weekly recurring purchase of FDLXX. If you have $1,000 in SPAXX (core), that will be used to purchase $1,000 of FDLXX. If you only have $150 of SPAXX, then $150 of SPAXX will be sold first AND $850 of FDLXX will be sold, and that will be used to purchase $1,000 of FDLXX. This is because FDLXX is classified as an “eligible secondary money market fund” and will auto-liquidate to satisfy your $1,000 purchase request, even though it’s effectively “buying itself”. If you don’t have enough FDLXX or other funds available, your scheduled purchase will be skipped that instance, but the recurring purchase plan will stay in place. Importantly, things like your stock holdings are NOT eligible for such auto-liquidation.

(Note: If you hold multiple money market funds, there is an order in which Fidelity will liquidate your money markets will liquidate. First the core position, next any taxable money markets, then any tax-exempt money markets (munis). Within each category, Fidelity draw from the fund with the highest balance first. Not all non-core money markets are eligible for automatic liquidation to cover purchases. Source.)

Here’s how to set up a recurring investment at Fidelity.

If you decide to proceed, you can set up a recurring investment by following the steps below after logging in on the website:

Expand the “Accounts & Trade” tab
Choose “Account Features”
Click “Manage” next to Recurring Transfers
You can set up recurring investments on a weekly, biweekly, or monthly basis.

A few screenshots:

Set up properly, this should keep your SPAXX balance at a minimum and regularly shoveled into FDLXX. It’s still a little messy but it’s the best workaround currently available. I have been using my Fidelity CMA as my new primary checking account and it has been working out pretty well so far.