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Creating Your Own Mutual Fund

Lesson Seven: Putting It All Together by Devlin Bronte Rachele

By V. H. EberlePublished 3 years ago 15 min read
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Now that we have covered the main points of why you should learn to create your own mutual fund, the importance of investing responsibly to stave off panic, how panic kills, how a mutual fund works, what various investments are, how to buy stock, and when to sell let’s head in a different direction. For this lesson let’s take all we have gone over and focus on putting it all together.

When I purchased and read that book in a grocery store in Ithaca, NY all those years ago it just talked about why a mutual was superior to any other investment and gave a similar strategy of buying stock to the strategy we discussed earlier. It didn’t really tell you how to determine when to sell. It didn’t really give you a way of how to run your mutual fund. It just emphasized how to buy stock and how it was a great idea to buy stocks from different companies and industries. But how do you run it to maximize returns? It can be a little complicated and may be hard to just explain so the best way I can think of to help you understand and get the idea is to just run you through a few months of an example mutual fund and take time to explain why.

Again, this is a strategy I had developed over the years through trial and error. I have worked it out and it works very well for me and my goals. I do strongly encourage you to learn as much as you can about the market and investing. Use my strategy as a springboard to get you started and familiar with investing but who knows? As you become highly familiar and develop an understanding you may develop an even better strategy. You could actually become the teacher of future students. You will become sensei. I should mention here as well that being the teacher of others will help you to learn even more. Let’s get going.

First thing we need to go over my mutual which I have set up for myself. Of course this is not my actual mutual fund I have developed but one made just to help instruct. I have displayed it below. For the sake of simplicity there are only four investments. As I have mentioned to you before my actual mutual is far larger but four is a good number for someone starting out. You don’t want to inundate and overwhelm yourself. You want to create a mutual you are able to easily handle, have fun, and make some money. As you learn and gain a great feel for the whole strategy you can add to your mutual as you feel comfortable. Remember it is your money and it is your life.

Now let’s take a look. Each one is listed with their respective 52 Week High and Low. I should mention that as you track real investments the 52 Week High and Low can and will change as time goes on as they are only a record of what has occurred within the last 52 weeks. However in this example the 52 Week High and Low will remain the same for the most part. This example also will not include transfer fees or other costs as these are different for each investment application or investment firm. There will be no splits or dividends either. The entire point of this lesson is to convey to you how the strategy works. But remember, costs, taxes, dividends, and splits are all a part of the investment world.

Alpha Beta Charlie Delta

10 – 40 20 – 55 5 – 30 10 - 20

Each of these investments could be a commodity, a stock, a bond, or a mutual. But in this example they are all stocks from various industries. I would take a special note of investment Delta. This is what I call an income investment. As you can see from the 52 Week High and Low the price range is rather small. This is because it is more than likely a bank or utility which is highly predictable and it price varies very little but it does payout dependable dividends to its shareholders. Regardless of what mix you decide on for your mutual it is a great idea to have at least one investment such as this. You will see why later as we go on with my example.

Okay, so this is the first day I wish to make an investment. As I had said, I only do this once a month. I have saved up my $25 a week and now have $100. I look at each of my investments and see what their current prices are.

Investment Alpha Beta Charlie Delta

Hi/Lo 10 – 40 20 – 55 5 – 30 10 – 20

Current Price $15 $30 $25 $20

I notice that the current price for Alpha is closest to its 52 Week Low so this will be the one I put my $100. After all is said and done I now have $100 of Alpha and at $15 a share this gives me 6.667 shares. Next month on the investment day this is what the prices look like.

Investment Alpha Beta Charlie Delta

Hi/Lo 10 – 40 20 -55 5 – 30 10 – 20

Current Price $10 $25 $30 $20

Shares Accumulated 6.667 0 0 0

Total Invested $100 0 0 0

After looking at the prices I quickly determine that Alpha is still the closest to its 52 Week Low. Again, I purchase $100 of Alpha. This gives me an additional 10 shares. Which adds up to a total of 16.667 shares at a cost of $200 or an average cost of $11.9998 a share or roughly $12. During the next investment day I see the following prices.

Investment Alpha Beta Charlie Delta

Hi/Lo 10 – 40 20 – 55 5 – 30 10 -20

Current Price $15 $20 $25 $20

Accumulated Shares 16.667 0 0 0

Total Invested $200 0 0 0

Current Value $250.005 0 0 0

First thing we notice is that our stock had increased in value to $250. Again, we have not realized this yet because we have not sold the stock but if we were to sell it we would make $50 so far. However, looking at the stock we notice that Beta is now the closest to its 52 Week Low so this is the one I will purchase. This gives us 5 shares of Beta.

Investments Alpha Beta Charlie Delta

Hi/Lo 10 – 40 20 – 55 5 – 30 10 – 20

Current Price $20 $30 $15 $20

Accumulated Shares 16.667 5 0 0

Total Invested $200 $100 0 0

Current Value $333.34 $150 0 0

Looking over the current prices we notice that we have a bit of a predicament. If you noticed Alpha, Beta, Charlie, and Delta are all exactly $10 above their respective 52 Week Low. So in which one do you place your investment this month? Well it’s your money and you can just choose. Perhaps you know that a certain one may be coming upon its normal time to declare dividends or something else a company is doing which will drive up the price? If I don’t see any news or pattern alerting me to a particular investment I use the following method.

For each investment I find the range of its 52 Week High/Low. For Alpha this would be 30 which was calculated by subtracting $10 from $40. I then subtract the 52 Week Low from the current price and this leaves me with 10 which I then divide by the range. In Alpha’s case this gives me an answer of .333. Doing the same thing for Beta I end up with .286. Performing this function on Charlie I come to the answer of .6 while Delta’s information gives me an answer of 1 or 100%.

What this tells me is that according to the distance of each investment’s 52 Week High/Low range Beta is actually closest to its Low and offers the highest potential because .286 is lower than the other results. Another way of looking at this is according to Beta’s result it has only gone up 28.6% of its 52 Week High/Low range meaning it still has 71.4% of it range as potential for increasing while Alpha has moved to the 33.3% point of its range leaving it with a potential of 66.7% of the range. Charlie is past the 50% mark of its range while Delta is at the top of its range.

Using this method of statistical inquiry I decide to put this month’s investment into Beta. After placing my order with my application I have acquired 3.333 more shares of Beta. This gives me a total of 8.333 shares of Beta at an average cost of $24 a share. So far, I have bought $583.34 worth of stock at its current price for $400. If I were to sell at this moment I could earn a return of 45.8% on my investment. But my investments according to this exercise I did with the range still have a lot of potential and I don’t need the money. However, the next month doesn’t go as planned.

Investments Alpha Beta Charlie Delta

Hi/Lo 10 – 40 15 -55 5 – 30 10 – 20

Current Price $20 $15 $20 $20

Accumulated Shares 16.667 8.333 0 0

Total Invested $200 $200 0 0

Current Value $333.34 $125.00 0 0

Beta’s price has dropped to a point of creating a new 52 Week Low. What had been a $200 investment is now only worth $125. If I was to sell at this moment I would take a $75 loss. However, I am investing responsibly and this isn’t money I need tomorrow or even this year. Doing some due diligence I find that the price has tumbled because of a recall which the company has done voluntarily. I understand it is a problem and they are taking care of it. Besides, this is exactly why I recommend sticking with well established companies. They are large and have more than enough assets to reverse a problem. So, in short I am putting my money in Beta this time around.

This gives me another 6.667 shares at a low price. This gives me a total of 15 shares (again, there is some rounding of numbers due to never ending and repeating decimals.) This results in an average cost per share of $20. Remember, the idea is to buy the shares for as low as we can.

Investments Alpha Beta Charlie Delta

Hi/Lo 10 – 40 15 – 55 5 – 30 10 -20

Current Price $35 $50 $25 $20

Accumulated Shares 16.667 15 0 0

Total Invested $200 $300 0 0

Current Value $583.35 $750 0 0

Yes, stocks and other investments can move like this and this can happen. Again, which stock do we invest in? As I mentioned earlier when the price is up it is because the market feels highly confident in the economy. Since we stuck with large, well established companies they tend to move with the market. I also said that we should either hold or sell when the stock is up. I decide not to invest at this moment because the investments are all up. However, had I did decide to invest because the investments aren’t up to their fullest potential which is their 52 Week High, I would have used the same approach as we used earlier. We determine the ranges. Subtract the 52 Week Low from its respective current price and divide by the range. In this case we find that Alpha is at the lowest with the price at the 62.5% point of the range between its 52 Week Low and High.

Let’s assume for this example we did decide to purchase Alpha. We found out they were creating a new and highly aggressive marketing campaign to gain more of the market share and speculators are going nuts for it. With our $100 we bought 2.857 shares. This gives us a grand total of 19.524 shares at an average cost of $15.37 a share. So, even after the purchase we are still showing a profit of $19.63 a share if we were to sell at this moment. But as there is still potential with the remaining range of this stock we just continue to hold

Investments Alpha Beta Charlie Delta

Hi/Lo 10 – 45 15 – 55 5 – 30 10 -20

Current Price $45 $50 $10 $20

Accumulated Shares 19.524 15 0 0

Total Invested $300 $300 0 0

Current Value $878.58 $750 0 0

In the following month we found that our hunch about Alpha worked out very nicely as the company achieved a new 52 Week High. Even if it hadn’t it would had to have dropped to $15.36 for us to have a potential loss. Again, it is only a potential loss and we do not realize it until we sell. Let’s say if it did drop to $15.36 because the campaign was wrong and did more to hurt the image of the company than to help. This does happen. But like Papa John’s they usually rebound even after racial remarks. But in that disgraceful drop, smart investors were able to cash in on the drop.

But let’s turn our attention back to the last recorded results. We notice that not only has Alpha reached a new 52 Week High but at the same time Charlie is at a low which could because of many reasons such as having paid a dividend, seasonal fluctuations, slowdown, or poor marketing plan. I decide to sell or transfer my money from Alpha to Charlie. Alpha could go higher but I chose to sell and I am sticking with it. I made 192.9% return on Alpha investments. I take my money along with the $100 for this month and place it in Charlie. The result is I bought 97.858 shares.

Let’s move ahead and say Charlie is rising and hits its 52 Week High. This represents a potential of a 200% return on what I had already earned. But looking at the table below we can see that all the stocks are up high. What can we do?

Investments Alpha Beta Charlie Delta

Hi/Lo 10 – 45 15 – 55 5 – 30 10 – 20

Current Prices $45 $50 $30 $20

Accumulated Shares 0 15 97.858 0

Total Invested 0 $300 $400 0

Current Value 0 $750 $2,935.74 0

If you noticed I didn’t say that the total invested in Charlie was $978.58. Instead I just recorded the money I had actually taken from my bank account to originally invest. I do this because this is how I do my accounting. You can do it anyway which makes sense to you.

Back to the example we see Charlie is at its 52 Week High however, the other companies are up as well. Since it is up we want to cash it in and take advantage but we still would like to invest it further. Problem is we could cash it in but it won’t be continually earning for us and if we have it in cash it may be tempting to spend. So what do we do?

This is where our income company Delta comes in to play. If you noticed its price has stayed rather stable. Yes, it is at its 52 Week High but it has been there every time we have checked in. As mentioned before, income companies are very stable companies such as banks or utilities and their price stays relatively stable. So, I take the money out of Charlie and put it in Delta. Yes, Delta could go down but it won’t be that far or that fast. Let’s see how it worked out for us in the next month.

Investments Alpha Beta Charlie Delta

Hi/Lo 10 – 45 15 – 55 5 – 30 10 – 20

Current Prices $35 $40 $20 $20

Accumulated Shares 0 15 0 151.787

Total Invested 0 $300 0 $500

Current Value 0 $600 0 $3,035.74

All the investments except for Delta have dropped. I can either hold and see if they drop more and just invest this month’s $100 into the stock with the highest potential using the previously used formula of finding the range, subtracting the 52 Week Low from the price, and dividing that by the respective range. In this case I would put the $100 amount to invest this month into Beta. I could also have decided to put the money in Delta into Beta as well depending on what is going on according to research I did. Or, I could just hold it in Delta until one of the others drops closer to its 52 Week Low.

Hopefully, this will help you to have a good idea of how to run your mutual. Hopefully these examples gave you a strategy to help you buy low and sell high. Each month you will put your monthly allotment into which ever of your investments is at its lowest while moving money from those which have hit their 52 Week High or higher into those which are at their lowest until you are finally ready to cash in for whatever goal you had originally set for you mutual fund such as retirement, a house, a dream vacation, or total financial stability by generating added income or just simply creating a financial safety net. Whatever the reason it is your money and your mutual. I wish you all the best of luck with this incredibly simple to use strategy.

Key points I hope you take away from this lesson and have grasped a great understanding of are:

• As time goes on and you put your designated allotment for investing into shares that are closest to their 52 Week Low you will acquire more shares at the lower price and not only will you acquire more shares but you will be bringing your average cost in acquiring these shares down close to their respective 52 Week Low. This will increase your earning potential.

• When you notice an investment is close to its 52 Week High and you cash it in you are realizing that potential you have created.

• When you take the funds from an investment which has reached its 52 Week High realizing its potential and invest it in another of your investments which is close to its 52 Week Low you are developing an even higher potential compounding the effect. You can turn a single digit return into a double or even triple digit return.

• Yes, investments do go up and down but you have not realized the loss or the gain until you have cashed it in. If an investment takes a nose dive don’t cash it in and consider putting more money into it to take advantage of the lower prices and to help bring your cost of investing down closer to your investments’ 52 Week Lows thus increasing your potential. This is why it is important to use money you don’t need in the near future and to stick with well established companies with proven track records and massive assets. Especially when you are just beginning.

• Panic kills create the financial stability you need while investing to reduce the chances of panic and making mistakes.

In the following lessons I shall be going over some finer points as well as other ideas in making finances work for you.

personal finance
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About the Creator

V. H. Eberle

I have been a student of human nature since I can remember. I hope that you feel free to explore my findings in these short stories and articles. Perhaps you will learn far more about yourself and others.

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