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Sunday, April 26, 2009

The Best Mutual Funds

From the Hoss's Mouth


What are the best mutual funds? All money magazines are often faced with this question. Some say the best mutual fund can be found by researching the fund manager, others say to compare the fund's performance with similar funds, and still others advise the investor to compare a selected fund with its benchmark fund.


best mutual fund

One thing is for sure, choosing which mutual fund(s) to invest in is about as easy as picking a husband or wife. They come in all shapes and sizes with various forms of advertising and you have to be extremely careful what choice you make. Sure you can have lots of fun along the way, but if you make a bad decision, it can cost you a lot of money. (P.S. The Hoss made a great choice in Mrs. Hoss) (P.S.S. Mrs. Hoss told me to say she made a wonderful choice.)

The Hoss believes the best mutual fund is the one that puts the most amount of money in your pocket. Just like the best spouse is the one who puts the most love in your life (but of course, I have only ONE spouse; no one can compare to Mrs. Hoss).

The Hoss must point out that analyzing mutual fund performance is intricate and can be very intimidating. You will come across advertisements claiming so and so fund is a "gold star fund." Or the number one fund in the past six months with returns of 40%. If the investor was to believe all the hype, s/he would be of the opinion there are hundreds of funds available which provide great returns. But we know better. You don't pick a spouse by what they wear on the outside, but by what they have on the inside.

A mutual fund's past performance is definitely not a predictor of future results, but careful thoughtful study of past performance will provide some indications of the true quality of a mutual fund. In a lot of cases, you will find that many mutual funds do not regularly deliver the returns their advertisements suggest. Just like a well-dressed man or woman may not be as good a mate as one dressed in grubby jeans and a T.

In his next post, The Hoss will show you how to avoid the pitfall of "annualized return" and how to calculate a mutual fund's actual total return. He hopes this will help you select the best mutual fund. You're on your own when it comes to choosing a mate.

Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: May 03, 2009
Previous Post: Market Timing

Saturday, April 18, 2009

Market Timing

From the Hoss's Mouth

Market timing, in the opinion of Hoss Cents Free Financial Money Magazine, is no different than betting on the horse races. It’s a gamble no matter how you look at it. What is Market timing? It is a strategy used by investors or money managers of making buy or sell decisions of financial assets by attempting to predict when the market will change course.


market timing

Horse players, when attempting to predict winners, will review all available data for all the horses in a particular race. They look at many variables such as the horse's win percentage, ability at the distance and weight it will carry in today's race. Some even develop computer programs to calculate all the variables and predict a winner.



horse racing

Sound familiar? Market timers also use data, only their data is of an economic nature, found in the Wall Street Journal or similar publication, or on the Internet. Market volume, price to earning ratios and cash flow are just a few of the many variables they use to predict stock market fluctuations. Some market timers even develop (yes, you guessed it) computer models which employ technical and/or fundamental analysis for predicting changes in the stock market.
Now for the main and perhaps most important similarity between horse players and market timers: there are more losers than winners. Just in case you missed it, I repeat, there are more losers than winners.

This is not just the opinion of the Hoss. Most reliable studies of market timing demonstrate that market timing usually results in reduced returns. For example, The Hoss refers you to the following two studies: Determinants of Portfolio Performance by Gary Brinson and Investment Policy by Charles Ellis, both of which concluded market timing did not result in improved returns.

If Market timing was the only investment avenue available, The Hoss would rather enjoy a day at the races than waste his money on market timing.


Stay on track,

The Hoss


Next Hoss Cents Free Financial Money Magazine Post: April 26, 2009
Previous Post: Investment Strategy Dollar Cost Averaging

Saturday, April 11, 2009

Investment Strategy Dollar Cost Averaging

From the Hoss's Mouth


What is dollar cost averaging? Hoss Cents Free Financial Money Magazine defines dollar cost averaging as the technique of investing a fixed amount of money on a predetermined schedule regardless of the per unit or share price. Dollar cost averaging can be a very effective investment strategy, especially if you are prepared to make regular investments over a long period of time.


If you are a regular reader of Hoss Cents Free Financial Money Magazine you will have already read his post beginner investing which suggests what steps should be taken before you start an investment program.

Now, for a look at how dollar coast averaging works as an investment strategy...




In each of the three scenarios below our fixed investment amount is $100, and our predetermined schedule is on the first of each month.

Investment Scenario One: Per unit price continually increases.

Month

Invested

Cost

Units

Total Units

Invested

Value

Profit

Jan

$100

$10.00

10

10

100

$100.00

$0.00

Feb

$100

$11.00

9.09

19.09

$200.00

$210.00

$10.00

March

$100

$12.00

8.33

27.42

$300.00

$329.09

$29.09

April

$100

$13.00

7.69

35.12

$400.00

$456.52

$56.52

May

$100

$14.00

7.14

42.26

$500.00

$591.63

$91.63

June

$100

$15.00

6.67

48.93

$600.00

$733.89

$133.89

July

$100

$16.00

6.25

55.18

$700.00

$882.82

$182.82

Aug

$100

$17.00

5.88

61.06

$800.00

$1,037.99

$237.99

Sept

$100

$18.00

5.56

66.61

$900.00

$1,199.05

$299.05

Oct

$100

$19.00

5.26

71.88

$1,000.00

$1,365.67

$365.67

Nov

$100

$20.00

5

76.88

$1,100.00

$1,537.54

$437.54

Dec

$100

$21.00

4.76

81.64

$1,200.00

$1,714.42

$514.42

Due to the constant increase in per unit cost, the number of units purchased each month declines (10 in the first month, 4.76 in the last) . At the end of the 12 months your investments are worth $1714.42, an increase of $514.42 over your purchase price, which is a profit of 42.86%.


Investment Scenario Two: Per unit price declines for the first five months and then increases for the next five months.

Month

Invested

Cost

Units

Total Units

Invested

Value

Profit

Jan

$100

$10.00

10

10

100

$100.00

$0.00

Feb

$100

$9.00

11.11

21.11

$200.00

$190.00

($10.00)

March

$100

$8.00

12.5

33.61

$300.00

$268.89

($31.11)

April

$100

$7.00

14.29

47.9

$400.00

$335.28

($64.72)

May

$100

$6.00

16.67

64.56

$500.00

$387.38

($112.62)

June

$100

$5.00

20

84.56

$600.00

$422.82

($177.18)

July

$100

$6.00

16.67

101.23

$700.00

$607.38

($92.62)

Aug

$100

$7.00

14.29

115.52

$800.00

$808.61

$8.61

Sept

$100

$8.00

12.5

128.02

$900.00

$1,024.13

$124.13

Oct

$100

$9.00

11.11

139.13

$1,000.00

$1,252.14

$252.14

Nov

$100

$10.00

10

149.13

$1,100.00

$1,491.27

$391.27

Dec

$100

$10.00

10

159.13

$1,200.00

$1,591.27

$391.27

Here your profit would be $391.27 (32.6%) and have a total of 159.13 units.


Investment Scenario Three: The per unit price fluctuates over the 12 month period.

Month

Invested

Cost

Units

Total Units

Invested

Value

Profit

Jan

$100

$10.00

10

10

100

$100.00

$0.00

Feb

$100

$12.00

8.33

18.33

$200.00

$220.00

$20.00

March

$100

$11.00

9.09

27.42

$300.00

$301.67

$1.67

April

$100

$13.00

7.69

35.12

$400.00

$456.52

$56.52

May

$100

$12.00

8.33

43.45

$500.00

$521.40

$21.40

June

$100

$14.00

7.14

50.59

$600.00

$708.30

$108.30

July

$100

$13.00

7.69

58.29

$700.00

$757.71

$57.71

Aug

$100

$15.00

6.67

64.95

$800.00

$974.28

$174.28

Sept

$100

$14.00

7.14

72.09

$900.00

$1,009.32

$109.32

Oct

$100

$16.00

6.25

78.34

$1,000.00

$1,253.51

$253.51

Nov

$100

$15.00

6.67

85.01

$1,100.00

$1,275.17

$175.17

Dec

$100

$15.00

6.67

91.68

$1,200.00

$1,375.17

$175.17

This scenario is probably the most realistic of the three investment scenarios in demonstrating actual conditions. Here your investments would should a profit of $175.17, or a 14.6% profit.

Dollar coast averaging is particularly useful to those investors with a long investment horizon and who can dedicate a certain amount for investments. The primary advantage of using a dollar cost averaging as an investment strategy is that it removes the problems associated with trying to time the market. In addition, most mutual fund companies and investment firms provide an automatic purchase plan. In fact, The Hoss uses the automatic purchase plan provided by his mutual fund company. It is very convenient and enables him to make purchases on a regular basis without fail.

Stay on track,

The Hoss


Next Hoss Cents Free Financial Money Magazine Post: April 19, 2009
Previous Post: G20 Summit

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