Creating Your Own Mutual Fund

Let’s start out looking at what I call the typical investor. Like most, he or she has a very limited understanding of the market not to mention of economics in general. Perhaps he or she is a little apprehensive about investing. He or she hears about a stock tip. Possibly they are talking with a friend and the friend mentions how they had bought some stock in Company B. His or her friend mentions how it went up twenty dollars a share in three months. Our investor decides he or she needs to get in on the action and sinks their savings into the stock.

After days, even weeks of watching the stock page religiously our investor notices that though the price has risen in value some it now seems to have leveled off and is hovering within a range of a few cents of a certain price. Our investor is confused, has grown a little impatient, is frustrated, perhaps a little angry that he/she is not seeing the twenty plus dollar increase his/her friend had enjoyed. Chances are the return so far does not even cover the transfer costs (actual fee the broker charged for carrying out the transaction.) Our investor is a little irritated about the fact that he/she has money tied up in something while other opportunities are being noticed. He/she starts to ask others for advice.

One of the realities of this world was recognized by Andy Warhol when he noticed that everyone has fifteen minutes of fame. Some do have more time while others have far less time in the limelight. Whatever time fate has allotted them all people, in my experience, will jump at any opportunity to claim center stage. Try it sometime. When in a group of friends or coworkers ask advice on any subject then sit back and be both amazed and even entertained at what occurs. I am willing to bet that out of a group of ten all ten will offer something. Some may even debate it even further, far further than necessary. With this in mind, our investor finds himself/herself not enlightened and possibly more confused about what to do. In a moment of indecision he/she decides to give the stock more time before acting.

Continuing to watch the market our investor sees the price slip a little. Feeling a little anxious he/she quickly go over the options of how to react to this dip. Choosing not to panic our investor decides to give it a few days to see what happens before reacting. After all, he/she is still waiting, hoping to get the same or similar gain his/her friend had. Let’s not forget that though the price has slipped a little it has been going up and down slightly a few cents centered on a price which has still been more than the initial price the investor had paid. So the investment is still showing a potential profit. So the wait, the hope continues and our investor seeks more advice which is another way of saying that our investor is seeking validation for the decision he/she had made in order to calm his/her nerves. However, after taking in all the opinions our investor still has no idea what is the best choice and in the moment of indecision the investor decides to wait.

One day our investor wakes up. He/she goes downstairs and grabs his/her paper. Turning to the stock page his/her jaw drops as he/she sees that the stock has plummeted to a price which is below the purchase price. Our investor panics. Again, seeking advice our investor gets an earful of to sell, to hold, to buy, and the ever popular, “you should have listened to me.” Not having any real answers our investor decides to sell and salvage what he/she can. In the end our investor has done what so many do, he/she bought high and sold low which is the exact opposite of what you should do.

Sounds very scary and it is very understandable why it would sound scary.

No matter how made up this story sounds this unfortunately does occur far often than you may realize. I have talked to a lot of people and heard of their ideas of the market. I have heard a few stories of success and most are minimal even what an accountant would call ‘de minus’—of little value. I have friends who have worked as financial managers—the fancy word for stockbroker—who had told me of their horror stories in trying to help people. Several financial managers had quit their jobs because they were tired of the frustration of developing a plan only to have the person do their own thing and then blame the financial manager. I have read numerous books on investing and they all mention persons just as the one in our example. I am actually looking at an investment I have made that is plummeting right now and it is fine. I will explain a far better way of handling such an event than what had occurred in our example.

Update on this plummeting investment of mine is very good. Having followed the ideas of the investment strategy I have reduced my cost and even though the stock hasn’t come close to the price it had had prior to this free fall my investment is now in the positive. By the time I have finished writing this book, about three months, I am now showing a profit of 35.72%.

Let’s face it, the market; any market can be very intimidating to the novice. There are many different stocks, there are many different economic factors, and there is even an entire new vocabulary to not just learn but to understand. There is also the tales from my high school days of how people lost everything in the 1929 crash. I do mean everything. In our highly materialistic world money means everything to many. Not wanting to face life with no money or starting from scratch, some chose suicide. There were cases of investors leaping from buildings. There were cases of people taking out life insurance policies with their spouse or children listed as the beneficiary before taking that plunge. Sad reality is that a lot of the businesses which were there before the crash are still in business today. Which means in the long run their stocks did rebound and actually surpassed pre crash prices and many have made millions from these companies over the years since the crash.

I want you to think on that. Take all the time you desire but really think about the last couple sentences. Many of the large well established businesses of today such as MMM, Westinghouse, Eastman Kodak, Coca Cola, and many others existed before the crash and continue to do well today. Think about that and continue to think about that as we go ever more into this investment strategy.

In the following lessons I hope to help you to understand how to avoid the fate of so many others by following this simple to understand investment strategy, have a better understanding of the market, and have a better understanding of your finances. In this first lesson let’s focus on avoiding the biggest thing which caused investors to literally rain from the tops of high buildings. Let’s focus on investing responsibly.

Panic causes indecision, delay, mistakes and most of all Panic kills. I will say this again, Panic kills. When I served in the military we would practice, we would train and train. We would learn everything about our equipment, develop tactics, and learn strategies for different scenarios. We would rehearse so that when we actually found ourselves in a difficult situation we could rely on our training to find options to help us. Many of these options had been trained into us so much that they were automatic. Our command acclimated us to the situation as best as they could so that we would react with the proper response and not PANIC. This is true of the market as well. As you become acclimated to both the strategy in this book and the market and as you learn as much as you can about the market and investing (highly recommended) you will eventually even develop your own strategy which works well for you with the confidence of a seasoned pro. But to get started let’s go over some very basic concepts to help you to avoid panicking and making bad decisions.

One of the biggest things to cause panic is the threat of losing your money. To many people money is the key in achieving their hopes and dreams. They work long and hard while doing without to scratch together what they can in the effort to reach those hopes and dreams. To many it isn’t just money. It is a healthy and happy life. It is the ability to go to school, to put a roof over your head, an amazing and well deserved vacation, or even the dream wedding and honeymoon. It is easy to understand how people can become emotionally attached to their money and truth is emotions do play a major part in driving the markets as they do in so many other aspects of our lives. So, let’s look at how to avoid emotional mistakes. Remember, even though these points are great for fiscal responsibility the main reason for this lesson is to a foundation in financial security to stop you from panicking and making rash decisions. Best way to avoid panic is to create a sense of financial security.

Here are some pointers to help you to develop a sense of fiscal security, responsibility, and most of all to NOT PANIC:

• Investments go up and down. If you watch them closely enough you will notice that many tend to have seasonal trends. For example: most beverage companies will do a brisk business around the holidays and summer but kind of stagnate in the periods in between. Retail does an amazing amount of business just before and up to the holidays but quickly drop in January and February. Car manufacturer stocks sky rocket when they unveil their new models for the new model year. You will also notice that whenever there is a recall stocks tend to drop for that company or industry. All of this is because the markets are ruled not by sage experience but by emotions and nothing is more skittish than a stock speculator. As in the years following 1929 you will notice as you keep track of stocks do rebound and continue an average 8% return which is far better than the quarter of a percent you were getting from the bank.

• Realize that economics are used to manipulate people. Turn on one news report and the economic report is doom and gloom while another’s is everything is fine, while yet another’s is going strong and couldn’t be better. Huh, what’s this? One thing which most people don’t realize is that the person doing the report majored in journalism. They may have taken an economic course or two under their belt and this is probably the reason their editor assigned this person to cover economics. A true student of economics will recognize potential and possibilities in every scenario. When you think about economics you realize that every expense is someone else’s income. At the same time someone’s loss is another’s gain. So someone is still making money which means there is still potential. True, this company or industry may have suffered a setback but there is always potential to learn, grow, and comeback slugging. You should carefully consider what is the motivation of the person telling you that all is doom and gloom? What reaction are they trying to get out of you and what are they trying to get you to do? Most salespersons and politicians will use fear to convince and make their sale.

• Create a budget and do your best to stick to it. Budgets are simply plans on how best to handle your money. They are also excellent tools in helping you to see where your money is going and developing plans to make better use of it. With a budget you will be able to identify money you do have which you can invest. Due to the overall importance of a Budget the next chapter will be dedicated entirely on how I have found it best to develop a budget.

• Create a safety net. Once you start keeping track of your spending and are creating a budget you will start to get an idea of the money you require a month. You should try to save between three to six months of your monthly expenses in easy to access accounts such as savings. If you find that your monthly expenses amount to $2,000 you should strive to save at least $6,000 to $12,000. This will be for emergency reasons such as losing your job to help you meet your obligations until you are able to find a new job.

• Invest only money which you are able to afford to invest. All too often investors like people in a casino get carried away and get into trouble taking and betting money they really didn’t have. When you create a budget stick only to that money which you can afford. When people see dollar signs and take money they should be using for bills or take an advance against their lines of credit they are only setting themselves up for a possible problem. Nothing will cause you to PANIC and cloud your decision making more than being worried about money you didn’t have and with which you needed to pay your commitments. Keep it simple. Make a budget, identify the money you do have to invest, and stick to just that. As you earn money in the market that will give you more to move around and take advantage of potentials. Even if you did invest money you needed for say, a car payment and it worked out the way you wanted it there could still be problems. If you used money you should have used to cover a payment and it did make money you could be hit with late fees which erodes the value of the money you had made while waiting to get your money back due to waiting for funds to settle. Sometimes this could take several days depending on the application you decide to use. So it is a better idea to just make your car payment and stick to funds that have been identified for investing. For most people who are just starting out I like to recommend limiting your investment to $100 a month until you get a better grip on your financial needs and understanding. This is about $20 to $25 a week which is the amount most of us spend mindlessly on drinks, snacks, newspapers, et cetera. If your budget says you can afford more then put that aside in your safety net for emergencies until you have gained some experience in investing.

• Once you have identified the funds for investing you should decide when would be the best time for you to invest. I have chosen one day each month in which I make a purchase. This is because over the years I have run into a lot of apps and brokers who charge a fee with each transaction. So, with one transaction there is only one fee. Other applications do not deal with odd or partial lots and you must buy full shares. Currently the one I use allows unlimited trades and lets you purchase partial shares.

• Quite often people tend to watch their investments on a daily or even constant basis. This can also lead to over thinking and mistakes which can lead to PANIC. In the 1990’s and early 2000’s there was a disturbing trend of people watching the ups and downs of the day or even week. They would hope to capitalize on opportunities when a stock was down by buying all they could. They would then be glued to the media to keep a track of what was happening hoping to sell when the stock was up and then starting the whole process over with another or even the same stock. Timing was the key to everything in this style of investing. This is what they call Day Trading. Yes, some people made a lot of money while many others lost everything. I check my investments once a day or a couple of times during the weeks between my investment date just to see if there are any opportunities I could take advantage of with the money which is already in investments. I shall explain this to you more in detail later. I also keep an ear out for any of the companies I am invested in to see possible opportunities. But I really don’t track or get that deeply involved. About a few days before my monthly investment date I get involved. Most of the month I am in another place far from the ups, downs, and confusions. I am just enjoying life.

• When starting out you should stick mainly with investments with proven track records. When dealing with companies stick with companies which have been around and are well established. A good example would be to stick with Fortune 500 companies. These companies have a low level of risk and if something does happen they have plenty of assets to fix a problem or adapt and turn things around. In the strategy of investing you will be learning you will still be able to get double digit returns using these companies. As you gain experience in the market and develop the funds then you can go after what are known as higher risk such as Junk Bonds which are like the rookie cards of the investment world. They are stocks and other financial instruments issued by start up companies which have no proven track record. All Fortune 500 companies’ stock started out as junk bonds and people who took a chance and hung in there with companies that succeeded did make a lot of money. But, for right now, let’s learn to walk before we try to fly.

• Another good point is to stick with companies you are familiar out of the well established companies. It will make it easier to find them when you are researching. Even better, if it is a company you like to go to for services or to shop you will be able to get a first hand look at what is going on in the company and when business is up or down for them.

• Take full advantage of your job’s pension or retirement programs. In most instances to encourage employees to utilize these services a company will match the employee’s fund up to a certain percentage. For example many I have had the pleasure to work for offered 100% matching funds for investing up to 6% of my paycheck. So if this was $60 the company would match it with another $60 giving me a total of $120 in my retirement plan. That is a return rate of 100%! And that is before you even get a return from your retirement plan.

• Feel free to learn all you can about the market and other investment strategies. I learned some of the basic of this strategy from a book on how to create your own mutual fund I found shortly after I graduated from college. I have gained far more experience and have since greatly improved on the strategy which that book had described.

This may seem like an amazing amount to accomplish before you can start investing. It may even seem to be insurmountable. Let’s face it very few have 3 to 6 months of monthly costs to put into a savings for an emergency fund. Not to mention in order to create a very accurate budget it would take a year of tracking. So, you might think what is the point? You can do all of this at the same time. You can develop a budget, sign up for the company’s retirement plan, build up your safety net, learn about the market and investing, research companies, and start investing at the same time. This is why I set a starting fund of $20 - $25 a week or $100 a month for most people to start investing. Again, this is roughly the amount of money most people absentmindedly spend in a week on snacks, drinks, or whatever. You can start out with that or even less. It is your money and you are the boss of it. There are some investment venues which at the time of writing this only require $5 a month to get started. As time goes on you will get better and better as you learn and gain experience while at the same time smooth off the rough edges.

Now, let’s get on with the budget.