Creating Your Own Mutual Fund

Today is the day. Just over one year ago you had received a $500 bonus. There had been something you had your eye on which cost exactly $500. However, instead of spending the bonus you listened to your friends and family and deposited the money into an interest bearing savings account. After all, they made some really good points such as making your money work for you, developing a relationship with a bank, a year wait would also give you the opportunity to decide if you truly wanted the item, develop some personal discipline, and most of all you would earn the interest so if you still wanted the item you would have something left of your bonus.

A year has passed. You have managed to control yourself and had left the money in the account. Still desiring the item you approach the teller to claim your reward. You become slightly disappointed when you find out that in a year’s time even with compounding you have only earned $1.29 in interested. You withdraw your $500 because you still desire the item and you are happy that you still have $1.29 in the account. But your triumph is short lived when you get to the store and find out that the item is now $512. Not only do you have to report the interest as income on your taxes but even if you withdraw the interest you still can’t afford to buy what you could have bought a year ago. What happened? Didn’t you do the right thing? In the simplest of answers: Yes and No. When you chose to invest your money you were on the right path but the place of investment has a very low return.

Trust is the cornerstone of the banking industry. Banks need to demonstrate they can be trusted and instill confidence in potential customers to acquire the deposits they need to generate loans and other financial products from which the bank earns its profits. People need to know that their money is safe. In 1920’s this trust was tarnished and the confidence evaporated.

The banking industry was lightly regulated. The Federal Reserve was a fairly new institution having just been created in 1913. Banks seeking profits were making some very risky financial decisions such as using the majority of the deposits to generate loans. And why shouldn’t they? Business in the United States was on the upswing as the demand for American made products increased leading to an abundance of wealth which ushered in the Roaring Twenties. However, things came to an abrupt halt with the 1929 market crash. Many investors lost everything and businesses were forced to scale back greatly reducing their workforce. This in turn led to a decrease in consumer demand which led to further business failures and layoffs. People made a run on banks demanding their money but the bank didn’t have their money. It was out in loans. When the bank made recalls of their loans it only contributed to the problem causing more businesses to reduce production or close. A lot of the loans had been made to Europeans who were rebuilding their nations following the devastation of World War I. Recalling of the loans slowed their economies down as well further reducing the demand for American made products increasing the problems of American businesses.

When you first walk into a bank you will notice all the different levels of security. There are cameras pointing in almost every conceivable angle, tellers are behind tall counters which may even include bullet proof glass, there may be a security guard, and you will more than likely notice a safe which was obviously built to withstand a lot of punishment. You may also be required to remove sunglasses and hats. You will definitely be required to show identification. You may even notice that the tellers must make a record of all transactions of their drawer.

You will also notice the signs declaring that the bank is a member of the Federal Deposit Insurance Company or F.D.I.C. which was created along with similar programs for other bank like institutions such as credit unions by numerous regulations which had been created by the Federal Reserve and the Federal Government to reduce the chances of another financial disaster such as that which led to the Great Depression of the early 1930’s. Included with these policies were rules governing loans a bank was allowed to make to reduce the risks. This included making sure the bank retained a certain percentage of its deposits in reserve to cover potential withdraws. In order to obtain a loan from a bank you must provide the proof you are a low risks such as a great credit rating, ability to repay the loan, and have the collateral to back the loan. The easiest way to gain a loan from a bank is to prove you do not need it. All of this was done to help the populace regain their trust and confidence in banks and encourage the use of them for deposits and other financial products. Of course this security, regulations, and also close monitoring of the bank’s activities have greatly reduced the risks of banks and also the return you will get from them.

So what good are banks? Besides loans banks are instrumental in making sure needed assets are kept circulating in the economy. Banks are able to attract deposits and pool the money together that otherwise might be sitting idle in a lock box or mattress to be able to offer the sizeable loans needed to start a business, buy a car, or a house. If it weren’t for banks or bank like institution chances are you would have to go to hundreds of people and negotiate a hundred different terms in order to raise the money you need just to buy a car. In the same token though, because bank are able to make consumer and commercial loans is one of the reasons things tend to be expensive but that is all for another book. Also with the creation of debit and credit cards as well as checks individuals don’t have to risk carrying around any sums of money. It can stay safely in the bank.

So what do you do when you wish to make your money work for you and earn more on it? Banks do offer higher paying products but in most cases these still are just barely at a rate that may cover the affects of inflation which greatly eroded the buying power of the $500 in the opening example. If you wish to earn a decent return on your money you must be willing to take more risk. Does this sound scary? Of course it does. You didn’t work all those hours giving up a sizeable portion of your life just to throw the fruits of it away. However, as you know from experience when you lend money to a very trustworthy friend or family member you may not require anything in return and can readily expect payment when it is promised. However, for a friend or family member who has had a track record proving to be less than reliable you may need something in return to be encouraged to make the loan. It is simple the higher the risk the more you expect in return. But how do you get the returns you desire but not incur the losses associated with those returns?

Truth is the markets all seem highly confusing and treacherous. This is a good thing for financial planners, managers, and banks. They want it to seem scary and dangerous so you come to them for your financial planning needs. However, there is an alternative to all of this. You could learn to do it yourself. In the following chapters you will learn:

• About various investments

• How to create a budget

• How to buy and sell stock which can be applied to other investments as well

• How to research stock

• To develop confidence as you learn about investing

• That investing is not a rocket science but is a discipline

• How to pull this all together in a simple strategy to create your own mutual fund

• We will also discuss some other financial pointers following the completion of learning about the strategy

Now, before you continue, I am sure you have two very important questions:

• Why would I just not go to a professional and have them do this for me?

• Who am I and what are my qualifications?

When you enter into a relationship with a financial manager you become dependent on this person to do what is in your best interests. For the most part they will but you must remember they have their own bottom line to keep in mind. Sure, trust and producing results are the cornerstones of their industry. They can and will be able to answer a lot of your questions. But they are highly trained salespersons who are motivated to push certain products which are in the perceived best interests of their firm. Remember the sign of being a great salesperson is getting your clients to buy what you want them.

Besides, what questions do you ask? One of the biggest problems with getting the answers you require to make the best decision is being able to ask the right question. This is possible as you gain experience in investing. With the strategy I am going to teach in this book you will be able to do it yourself and learn as you go. You will be able to learn the questions you need to ask. Having practical first hand experience with your money will help you to learn to manage it better for what fits your goals. Also you don’t have to waste time playing phone tag or doing meetings.

Several friends of mine remarked how nice it was when someone came into their office and knew what they were talking about. They also mentioned the frustration they had with individuals who had a very low understanding of how the market or economics worked. They mentioned how they would advise an individual to do this but instead that individual would do that because it was what they knew and understood. This individual would then try to blame my friends for giving them the wrong advice when they did not even do what my friend had advised. And again, how do you understand what a financial manager is advising if you are unfamiliar with the market or economics? It is a conundrum and one that could cause you missed opportunities as well as dear losses. It is good to learn all you can no matter which path you decide to take.

In response to the second question I could give you a long list of credentials and tell you of my practical experience and application. I could tell you that I made this amount of money from these investments. Truth is I could tell you anything I want and it is up to you to believe me. But I am certain that you will see that the strategy makes perfect sense and the math works. You can even try a dry run without actually buying any stocks but by tracking several and see how it works and that it does work before you put a cent into it. This is your money and you will be learning how to invest it for you.

I will tell you that I developed this strategy by taking a chance on a book a long time ago. I read it out of curiosity. As an investor you will find that it is always a good idea to keep an eye out for different strategies and thoughts on investing. It doesn’t mean you actually do it but it could help you gain a better understanding and learn how to improve upon your strategy. This is what I did. I learned the strategy in the book and tried it. From using it and gaining experience I developed the strategy in this book which has given me higher returns with far lower risks. When you read through this and try it with tracking a stock or two you will see the math, the strategy does work. Before you know it as you proceed and gain the experience you may even develop your own twist on it. You cannot do this if someone like a financial manager is doing it for you.

Before we proceed I will like to go over some basic ground rules:

1. All investing does carry a certain amount of risk. However, if you follow the basic ideas of the lessons in this strategy you will find they are greatly reduced.

2. Even though I will be giving examples and going over various investments and talking about applications which are available I will not mention any names and if I do mention one as an example you need to realize that it happened in the past and by the time you have read this book things could have greatly changed.

3. In the beginning when you are just starting always stick with well established companies with which you are familiar. As you gain experience and knowledge you can do as you will.

4. Even with following the strategy of this book you still should always ask questions and continue your education in investing. You can never learn too much.

5. Panic Kills—we will discuss this more in detail later.

6. Most of all have fun.

So, with this all in mind we must also realize that the market is alive and breathing and time is money so let’s get started.