I made my very first investment in the stock market when I was ten years old. Ever since then I have been hooked! Now I check out hundreds of trades each year with the same excitement andenthusiasm, and each time try to find that one market at the right time that could dramatically create wealth.

If you would’ve been fortunate enough to invest $1,000 in Microsoft when it first came public, that initial investment would be worth close to $300,000 today. In the last 10 years America Online has been up 12,000% and it has come creashing lower as well! Although statistics like this are advocated regularly by journalists and brokers the majority of investors have a very difficult time staying in an investment for that long of a period of time even though they know they are in a good company The financial markets are a never ending source of temptation trying to lure you into a new position with each passing second. The belief that the grass is always greener in another market is a distraction that every investor eventually has to contend with. Even if you are a MUTUAL FUND investor the fact is that you are always looking for the BEST return available.

Years ago when I worked as a broker I was confronted with this dilemma. One of my clients told me that he knew the BIG MONEY was made in holding on for the LONG TERM but that he liked trading the short term swings. He asked my advice and I had to think long and hard for several days before I could respond.

Eventually, I presented him with the following strategy that literally combines the best of the TRADER and INVESTOR worlds. Traders are looking for the quick hit and run. Investors seek their advantage by looking at the long term. Long term investors quite often benefit from allowing dividends to be reinvested into purchasing more stock in the company and the very real possibility of the stock splitting in the future. If you combine both of these apparently opposite perspectives you end up with a very unique viewpoint that eliminates a lot of stress associated with decision making. This strategy will bring home the perspective that within every seed that you plant in the financial markets lies the promise of ten thousand forests. I refer to it as my FOREST STRATEGY! It is another way to make your short term efforts as a trader pay you dividends by also recognizing the importance and significance of long term investing.

Let’s say that your initial investing capital is $10,000. 1) Find a company, preferably in the Standard and Poors 500 Index that you understand and are familiar with. If you want to narrow down your group you can select companies that are in the Dow Jones Industrial Average which include only 30 stocks. These are established companies with long financial histories that can be researched to your hearts delight.

2) Study the companies Price Earnings Ratio. Where is the Price Earnings ratio now? What has been The highest and lowest points of the price earnings ratio over the last five years? Look to buy a company with a historically low price earnings ratio that is a leader in its industry. Use the Price Earnings Ratio as a guide. Don’t try to pick bottoms. 3) Look at a chart of prices to see what has happened recently and to determine where a good buy point is.

4) Place your trade with the intention of a 10% profit objective. Once you reach your profit objective, sell enough shares in the company to remove your initial $10,000 investment and only leave your $1,000 profit in that stock.

5) Repeat steps 1-3 as you search for another company to trade for a 10% profit and plant the Remainder for the long term.

6) Repeat, Repeat, Repeat.

The drawback on this type of trading is that when you are with a great company you do give up a lot of upside. However, if you look at the PROBABILITIES how many IBM’s, Aol’s, Yahoos! Or Microsofts are there out there in relation to the entire universe of stocks? What I personally like about this style of trading is that it eliminates the GREED factor that most investors have of trying to hold on for the top tick. Secondly it also allows you to build a nice diversified portfolio. Thirdly, trading becomes a very fun game with potentially lucrative long term implications. It is very possible to trade this way once a month planting a seed in a quality company that can easily become a Forest of Wealth for you.

Some trades might take the better part of a year to pan out. Some trades might achieve your profit objective in a matter of weeks or days if you are really fortunate.. Keep in mind that you still have to manage your risk on each and every trade. Let me be perfectly blunt, if you don’t manage your downside there will not be an UPSIDE… It is acceptable to use any of the RISK Management Techniques that I advocate by doing Partial Covered Calls and other Option Selling Techniques. When done correctly those techniques can dramatically accelerate your returns.

I must admit that I truly enjoy this type of trading. (My broker likes it as well as it generates many more commissions for him.) However, part of the reason that this method sits well with me is that I hardly pay any attention at all to my profits after I take them. It becomes very stress free to know that you have increased your wealth 10% and are just interested in planting seeds all over the financial landscape in companies that meet your criteria. I must however stress the point that you make sure that you are aware of the downside. This method is by no means RISK FREE….but for the individual who likes to trade and invest simultaneously it truly is ideal.

Guard your investment principal at all costs and let your profits run. Just one more way to look at the bigger picture. Kind of like a Johnny Appleseed meets the financial markets. Many extremely successful investors do this with Initial Public Offerings as well. Study away.and remember,let’s be careful out there.

Dowjonesfully-
Harald Anderson
http://www.eOptionsTrader.com

Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com a leading online resource of Options Trading Information. He writes regularly for financial publications on Risk Management and Trading Strategies. His goal in life is to become the kind of person that his dog already thinks he is.http://www.eOptionsTrader.com.

The World Bank claims that some two billion of the world’s citizens live on $1 per day or less! That fact absolutely shocked me. With this statistic in mind it becomes important to focus on all of the things that have served as money over the history of civilization. Aztecs used Cocoa beans, Norwegians used Butter and dried cod, many Indian tribes used animal skins and some of the early colonists used grains. It’s worth thinking about this the next time you pick up your paycheck. The word “salary” is derived from the word SALT, which is what was the key currency of the North Africans for hundreds of years. SALT was a key commodity substance used for preserving food.

A butter and dried cod banking system? Reconciling your monthly bank statement must have been very messy!

I’ll take bear markets for $100 please Alec!

Anybody want to guess how we came to describe and define a BEAR market? Well, there is a debate on this one as most people feel that when a Bear makes a killing its claws move from up to down. However, bear markets are bone-chilling experiences. Markets always fall much faster than they rise! Anyway, the word “arctic” is derived from “arktos” which just so happens to be the Greek word for “BEAR!” And that is how it is believed that the word BEAR came to describe a declining market. Brrrrrrrrrrr..

Now you know!

Ok, why the heck do they call it Wall Street anyway?

It was the Dutch you see. They had just moved to Manhattan and had nowhere to build a dyke, so instead they built a wall. This was in 1653, and it wasn’t meant to keep water out, but was made to keep out the British and Indians. Easy enough for the Dutch, just a 12 foot high wood stockade that ran from river to river.

Then in 1685 they laid out Wall Street along the line of the stockade.

Now you know.

These days the average volume on the New York Stock Exchange is several hundred million shares. We have even seen numerous days when the volume exceeded over one billion shares. To give you an idea of how far we have come, the last date on record when the New York Stock Exchange traded less than one million shares was October 10, 1953. The very first day that the BIG BOARD traded over one million shares was December 15, 1886. On Black Tuesday, the BIG CRASH on 10/29/29 the market established Record volume of 16 million shares!

Now you know.

Gosh! One Billion Shares a day….that’s a lot of dried cod!

Dowjonesfully,
Harald Anderson
http://www.eOptionsTrader.com.

Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com a leading online resource of Options Trading Information. He writes regularly for financial publications on Risk Management and Trading Strategies. His goal in life is to become the kind of person that his dog already thinks he is.http://www.eOptionsTrader.com.

A colleague of mine just returned from a scuba diving trip in Cozumel, which just happens to be one of my favorite places to dive. Anyway, she was telling me about an unexpected difficulty she encountered while swimming around the corral reef down about 85 feet. It wasn’t anything serious but her story reminded me of something my scuba instructor used to say over and over again. “Plan your dive, and dive your plan”.

When you’re down about 90 or 100 feet the nitrogen acts on your body in a way that’s not too dissimilar to having one dry martini on an empty stomach. It’s called Nitrogen Narcosis, Rapture of the Depths, or Martini’s Law. So the thing to do is get your planning done while you have a clear head, (i.e. on the surface). And then when you’re deep into it, and you’re feeling a bit euphoric, or nervous, you don’t have to make any decisions about ‘what’ to do. You just follow your plan.

This holds true for trading as well. When you’re feeling the euphoria or nervousness set in, remember to follow your plan. And, uhm yeah„ also have a plan to follow. Clear heads will prevail.

Years ago I had the good fortune of talking with a trading guru for several hours. This individual is world renowned for his trading saavy and skill. What he elaborated in that conversation had a tremendous impact on me. HE said that when he learned how to trade that his family enforced only one rule that he had to follow. KNOW WHERE YOU ARE GOING TO GET OUT BEFORE YOU GET IN. He felt that the problem that most traders had was that they felt that this simplicity did not apply to them. I remember sitting and speaking with him and thinking about my own mistakes, primarily letting hope take over in my decision making.

Many traders think that crying “UNCLE” on a trade and taking a loss is unacceptable. Since that conversation I have taken numerous losses on trades but it’s funny how they don’t have the STING that they used to because I PLAN MY DIVE and DIVED MY PLAN.

This is really simple and incredibly workable. Apply it to your own trading and investing.

-Downjonesfully,

Harald Anderson
http://www.eOptionsTrader.com

Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com a leading online resource of Options Trading Information. He writes regularly for financial publications on Risk Management and Trading Strategies. His goal in life is to become the kind of person that his dog already thinks he is.http://www.eOptionsTrader.com.

After some forty years of banking and investments, I retired in 2001. But since I do not golf, I soon found retirement to be very boring. So I decided to return to the investment world after ten months. However, those ten months were not a complete waste of time, for I had spent them in trying to utilize my forty years of investment experience to gain perspective on the most recent stock market “bubble” and subsequent “crash.”

There were several people who saw the stock market crash coming, but they had different ideas as to when it would occur. Those who were too early had to suffer the derision of their peers. It was difficult to take a stand when so many were proclaiming that we were in a “new era” of investing and that the old rules no longer applied. Since the beginning of 1998 through the market high of March 2000, among 8,000 stock recommendations by Wall Street analysts, only 29 recommended “sell.”

I am on record as having called for a cautious approach to investment two years before the “Crash of 2000.” In an in-house investment newsletter dated April 1998, I have a picture of the “Titanic” with the caption: “Does anyone see any icebergs?”

When I resumed employment in 2002, I happened to glance at the chart on the last page of Value Line, which showed the stock market as having topped out, by coincidence, in April 1998, the same date as my “Titanic” newsletter! The Value Line Composite Index reached a high of 508.39 on April 21, 1998 and has been lower EVER SINCE! But on the first page of the same issue, the date of the market high was given as “5-22-01”! When I contacted Value Line about this discrepancy , I was surprised to learn that they had changed their method of computing the index for “market highs” from “geometric” to “arithmetic.” They said they would change the name of the Value Line “Composite” Index to the Value Line “Geometric” Index, since that is how it has been computed over the years. Currently Value Line is showing a recent market low on 10-9-02 and the most recent market high, based on this new “arithmetic” index, on 4-5-04, ANOTHER ALL-TIME HIGH! If they had stayed with the original “geometric” index, the all-time high would still be April 21, 1998!

Later that year, I was pleasantly surprised to read in “Barron’s” an interview with Ned Davis, of Ned Davis Research, that said that his indicators had picked up on the bear market’s beginnings in April 1998, the same date as my “Titanic” newsletter! So, my instincts were correct! I believe that we are in a “secular” downturn that began in April 1998 and the “Bubble of 2000” was a market rally in what was already a long-term bear market.

Another development transpired soon after I resumed employment in 2002. I happened to notice one day that, in its “Market Laboratory,” “Barron’s” had inexplicably changed the P/E Ratio of the S&P 500 to 28.57 from 40.03 the previous week! This was due to a change to “operating” earnings of $39.28 from “net” or “reported ” earnings of $28.31 the previous week. I and others wrote to “Barron’s Mailbag” to complain about this change and to disagree with it, since these new P/E ratios could not be compared with historical P/Es. “Barron’s apparently accepted our arguments and, about two months later, changed back to using “reported” earnings instead of “operating” earnings and revised the S&P 500 data to show a P/E Ratio of 45.09 compared to a previous week’s 29.64.

But a similar problem occurred the next day in a sister publication to “Barron’s.” On April 9, 2002, “The Wall Street Journal” came out with a new format that included, for the first time, charts and data for the Nasdaq Composite, S&P 500 Index and Russell 2000, in addition to its own three Dow Jones indices. The P/E Ratio for the S&P 500 was given as 26, instead of the 45.09 now found in “Barron’s.” I wrote to the WSJ and after much correspondence back and forth, they finally accepted my argument and on July 29, 2002 changed the P/E Ratio for the S&P 500 from 19 to 30! I had given them examples showing where some financial writers had inadvertently confused “apples” with “oranges” by comparing their P/E of 19, based on “operating” earnings, with the long-term average P/E of 16, based on “reported” earnings.

Because I started to be cautious about investing as early as April 1998, since I thought that price/earnings ratios for the stock market were perilously high, I was not hurt personally by the “Crash of 2000” and had tried to get my clients into less aggressive and more liquid positions in their investment portfolios. But the pressures to go along with the market were tremendous!

Price/earnings ratios do not enable us to “time the market.” But comparing them to past historical performance does enable us to tell when a stock market is high and vulnerable to eventual correction, even though others around us may have lost their bearings. High P/Es alert us to a need for caution and a conservative approach in our investment decisions, such as a renewed emphasis on dividends. Very high P/Es usually indicate a long-term bear market may ensue for a very long period of time. We are apparently in such a long-term bear market now. But in determining whether the market is high, we must be vigilant with regard to what data mambers of the financial press are reporting to us, so we can compare “apples” with “apples.” When the financial information does not appear to be correct, we, as financial analysts, owe it to the investment community to challenge such information. That is what I have concluded from my personal “odyssey” in the investment world.

After three years of the DJIA and the S&P 500 closing below their previous year-end figures, the market finally closed higher at the end of 2003. But the P/E ratio is still high for both indices.

Does anyone see any icebergs?

Henry V. Janoski, MBA, CFA, CSA is a 1955 graduate ‘magna cum laude” of Yale University and a member of Phi Beta Kappa. He received his MBA in finance and banking from the Wharton Graduate Business School of the University of Pennsylvania in 1960 and holds the professional designations of Chartered Financial Analyst (CFA) and Certified Senior Advisor (CSA). As a registered investment advisor representative with the title of Senior Investment Officer, he is located in Scranton, PA. His biography is listed in “Who’s Who in Finance and Industry” and in “Who’s Who in America.” E-mail address: HJanoski@aol.com

When is a dividend not a dividend?

The latest thing “conservative” brokers are preaching these days is to buy stocks that pay dividends. Everyone likes dividends. I know I do, but when Wall Street tells me something I am automatically suspicious because they lie to me every day. Is this a new scam? Let’s take a look.

When you buy a bond or a CD at the bank it pays interest and is a real dividend. You might get a check every month, quarter or annually or receive a credit to your account. The amount of your principle (what you paid for it) remains the same. Yes, that is a true dividend.

Companies make big splashes about raising their dividend. It was 50 cents per share, but we have raised it to $1.00. Big deal. Yes, you will receive a check and at least you know the company has cash available to pay you. That is an indication the company is in good financial condition, but there have been many of the big names on the NYSE that have continued dividends even when they have lost money. How can that be?

Currently Microsoft has announced a dividend of $3.00 per share. The talking heads on CNBC-TV tell us they are loaded with cash and want to distribute it to their stockholders. Many people buy the stock in anticipation of the dividend as they think they will be getting an extra $3.00 per share. They are in for a big surprise.

The day that dividend is paid Microsoft stock (symbol MSFT) will automatically drop $3.00 per share. Today $27.00; tomorrow $24.00. Folks, this is NOT a dividend. This is a distribution of capital. You are being paid in your own asset. The fool that believes the Wall Street mumbo-jumbo will not have one extra penny after the dividend than he did before. In fact he will have less. Why?

The stockholder will now be allowed to pay income tax on the “dividend” distribution. To make that “dividend” seem even better the Bush administration has reduced dividend taxes from 38.6% to 15%. Thanks, Mr. Bush. Thanks for nothing. I can’t blame him for more Maul Street smoke and mirrors. He has just made it cost less to get back your own money.

Companies seldom pay large dividends and they are paid quarterly. A $30 stock that pays a 4% dividend ($1.20) on a quarterly basis shows a decrease in the stock price that day of 30 cents per share and is lost in the noise of trading. Few notice that part of the price change is due to the “dividend”.

When you own the stock of any company the most important criteria is to find one that is in a long term upward trend. Never buy a stock that is showing a decline no matter how “good” the company may be. Even sideways movements should be avoided. Keep in mind you are buying the stock to make money. Forget the dividends and all other “reasons” and remember if it isn’t going up, don’t buy it!

F*R*E*E investment letter.http://www.mutualfundmagic.comCopyright 2004 Albert W. Thomas All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” Comments toal@mutualfundmagic.com Former 17-year exchange member, floor trader and brokerage company owner.

Among the largest forces that affect stock prices are inflation, interest rates, bonds, commodities and currencies. At times the stock market suddenly reverses itself followed typically by published explanations phrased to suggest that the writer’s keen observation allowed him to predict the market turn. Such circumstances leave investors somewhat awed and amazed at the infinite amount of continuing factual input and infallible interpretation needed to avoid going against the market. While there are continuing sources of input that one needs in order to invest successfully in the stock market, they are finite. If you contact me at my web site, I’ll be glad to share some with you. What is more important though is to have a robust model for interpreting any new information that comes along. The model should take into account human nature, as well as, major market forces. The following is a personal working cyclical model that is neither perfect nor comprehensive. It is simply a lens through which sector rotation, industry behavior and changing market sentiment can be viewed.

As always, any understanding of markets begins with the familiar human traits of greed and fear along with perceptions of supply, demand, risk and value. The emphasis is on perceptions where group and individual perceptions usually differ. Investors can be depended upon to seek the largest return for the least amount of risk. Markets, representing group behavior, can be depended upon to over react to almost any new information. The subsequent price rebound or relaxation makes it appear that initial responses are much to do about nothing. But no, group perceptions simply oscillate between extremes and prices follow. It is clear that the general market, as reflected in the major averages, impacts more than half of a stock’s price, while earnings account for most of the rest.

With this in mind, stock prices should rise with falling interest rates because it becomes cheaper for companies to finance projects and operations that are funded through borrowing. Lower borrowing costs allow higher earnings which increase the perceived value of a stock. In a low interest rate environment, companies can borrow by issuing corporate bonds, offering rates slightly above the average Treasury rate without incurring excessive borrowing costs. Existing bond holders hang on to their bonds in a falling interest rate environment because the rate of return they are receiving exceeds anything being offered in newly issued bonds. Stocks, commodities and existing bond prices tend to rise in a falling interest rate environment. Borrowing rates, including mortgages, are closely tied to the 10 year Treasury interest rate. When rates are low, borrowing increases, effectively putting more money into circulation with more dollars chasing after a relatively fixed quantity of stocks, bonds and commodities.

Bond traders continually compare interest rate yields for bonds with those for stocks. Stock yield is computed from the reciprocal P/E ratio of a stock. Earnings divided by price gives earning yield. The assumption here is that the price of a stock will move to reflect its earnings. If stock yields for the S&P 500 as a whole are the same as bond yields, investors prefer the safety of bonds. Bond prices then rise and stock prices decline as a result of money movement. As bond prices trade higher, due to their popularity, the effective yield for a given bond will decrease because its face value at maturity is fixed. As effective bond yields decline further, bond prices top out and stocks begin to look more attractive, although at a higher risk. There is a natural oscillatory inverse relationship between stock prices and bond prices. In a rising stock market, equilibrium has been reached when stock yields appear higher than corporate bond yields which are higher than Treasury bond yields which are higher than savings account rates. Longer term interest rates are naturally higher than short term rates.

That is, until the introduction of higher prices and inflation. Having an increased supply of money in circulation in the economy, due to increased borrowing under low interest rate incentives, causes commodity prices to rise. Commodity price changes permeate throughout the economy to affect all hard goods. The Federal Reserve, seeing higher inflation, raises interest rates to remove excess money from circulation to hopefully reduce prices once again. Borrowing costs rise, making it more difficult for companies to raise capital. Stock investors, perceiving the effects of higher interest rates on company profits, begin to lower their expectations of earnings and stock prices fall.

Long term bond holders keep an eye on inflation because the real rate of return on a bond is equal to the bond yield minus the expected rate of inflation. Therefore, rising inflation makes previously issued bonds less attractive. The Treasury Department has to then increase the coupon or interest rate on newly issued bonds in order to make them attractive to new bond investors. With higher rates on newly issued bonds, the price of existing fixed coupon bonds falls, causing their effective interest rates to increase, as well. So both stock and bond prices fall in an inflationary environment, mostly because of the anticipated rise in interest rates. Domestic stock investors and existing bond holders find rising interest rates bearish. Fixed return investments are most attractive when interest rates are falling.

In addition to having too many dollars in circulation, inflation can also be increased by a drop in the value of the dollar in foreign exchange markets. The cause of the dollar’s recent drop is perceptions of its decreased value due to continuing national deficits and trade imbalances. Foreign goods, as a result, can become more expensive. This would make US products more attractive abroad and improve the US trade balance. However, if before that happens, foreign investors are perceived as finding US dollar investments less attractive, putting less money into the US stock market, a liquidity problem can result in falling stock prices. Political turmoil and uncertainty can also cause the value of currencies to decrease and the value of hard commodities to increase. Commodity stocks do quite well in this environment.

The Federal Reserve is seen as a gate keeper who walks a fine line. It may raise interest rates, not only to prevent inflation, but also to make US investments remain attractive to foreign investors. This particularly applies to foreign central banks who buy huge quantities of Treasuries. Concern about rising rates makes both stock and bond holders uneasy for the above stated reasons and stock holders for yet another reason. If rising interest rates take too many dollars out of circulation, it can cause deflation. Companies are then unable to sell products at any price and prices fall dramatically. The resulting effect on stocks is negative in a deflationary environment due to a simple lack of liquidity.

In summary, in order for stock prices to move smoothly, perceptions of inflation and deflation must be in balance. A disturbance in that balance is usually seen as a change in interest rates and the foreign exchange rate. Stock and bond prices normally oscillate in opposite directions due to differences in risk and the changing balance between bond yields and apparent stock yields. When we find them moving in the same direction, it means a major change is taking place in the economy. A falling US dollar raises fears of higher interest rates which impacts stock and bond prices negatively. The relative sizes of market capitalization and daily trading help explain why bonds and currencies have such a large impact on stock prices. First, let’s consider total capitalization. Three years ago the bond market was from 1.5 to 2 times larger than the stock market. With regard to trading volume, the daily trading ratio of currencies, Treasuries and stocks was then 30:7:1, respectively.

James A. Andrews publishes the Wiser Trader Stocks and Options Newsletter. Site contact,http://www.WiserTrader.com. © 2004 Permission is granted to reproduce this article in print or on your web site so long as this paragraph is included intact.

Buy high and sell low — It’s not a typo.

Millions of investors guarantee their failure by selecting mutual funds and stocks based on quarterly or annual performance records. Do you chase performance? You might be buying high and selling low!

As the year draws to a close, millions of mutual fund investors begin an annual event to divine next year’s winners. Yet most of these individuals rely heavily on a time-honored – but terribly wrong – method of evaluating strength. Whether analyzing screening tools from websites, reviewing fund honor rolls in magazines, or using star ratings from fund analysts, normally savvy business people foolishly chase the returns of last year’s hottest investments.

This begs the question: Can top performing mutual funds lead two years in a row? Consider a study commissioned by Vanguard Investments Australia and released by Morningstar. The five best performing funds were analyzed from 1994 to 2003. Here are the results:

– Only 16% of top five funds make it to the following year’s list.

– Top five funds average 15% lower returns the following year.

– Top five funds barely beat (by 0.3%) the market the following year.

– 21% of all top five funds ceased to exist within the following 10 years.

Academic studies and market statistics confirm the typical investor acts in direct opposition to the sage advice – buy low, sell high. It’s only after high returns are realized and reported that investors pour money into both stock and bond mutual funds. In fact, Financial Research Corporation compared investor cash flows into mutual funds. Purchases immediately following best-performing quarters exceed 14 times those immediately following their worst-performing quarters. In other words, you are 14 times more likely to buy funds at their highest price than at it’s lowest. Buy high and sell low.

Just what kind of damage are they inflicting to their investment returns? DALBAR, Inc., conducted a well-known study called Quantitative Analysis of Investor Behavior. The study confirms investors’ poor timing and the resulting financial carnage. Investors buy funds immediately after a rapid price appreciation. This just happens to be right before investment performance wanes. Prices fall soon after and the investors quickly dump their holdings to search for the next hot fund. The resulting returns fail to even beat inflation! When measured over the last nineteen years, the average equity investor earned a meager 2.6% annual return. Compare that to a 3.1% inflation rate and a 12.2% return from the S&P 500 over the exact same time period. Not only did investors fail to keep up with the market, they also lost money to inflation.

We’ve all seen the warnings on packages of cigarettes. Even smokers understand their relevance; smoking is not a healthy activity. So why do investors not heed warnings about mutual fund returns? You’ve all seen those statements too. But can you remember what is said? Past performance is not a guarantee or indicator of future results. Research and studies have proven this fact, yet the majority of investors choose to ignore this warning. Yes, it’s an easy means of comparing funds. It also happens to be completely irrelevant. Let me evangelize these words for you. Past performance does not predict future results!

Here’s how you can stop chasing short term performance and stay focused on your financial goals. Identify appropriate long-term investments by evaluating the following: (1) Leadership: How does the fund perform relative to similar size and similar style funds? (2) Tenure: How long have the managers and advisors been at the fund?
(3) Management: Managers well-known, highly-regarded (e.g. remember Peter Lynch)?
(4) Consistency: Are the 3, 5, and 10 year returns all above average?

Finally, measure returns based on your entire portfolio. History shows that no single investment success repeats. Accept the fact every year is different and brings new leaders and laggards. Use an asset allocation strategy to guarantee balance and increase long term returns among all your investments. Invest in a diversified portfolio to meet your financial goals — and stick with it.

Not yet learned your lesson? Consider this: Fourteen mutual funds topped the 2003 charts with returns over 100%. In 2004, these fourteen funds lost over 4% while the S&P 500 gained 3%. Congratulations, chasing performance lost 7% of your money this year.

Tim Olson

TheAssetAdvisor.com
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Mr. Olson is the editor of The Asset Advisor, a financial investment service providing proven strategies for no-load mutual fund investors. He brings 26 years of education and experience from Stanford University, Ernst & Young financial consulting, personal wealth management, and venture capital investing.

Three little pigs went to the market to stock up for the future.

The first little pig liked chips so he went to the DOW market. He was told by everyone you could always rely on their products. They were always good. The manager told him you could put them away and forget about them.

The second little pig liked spicy things. He shopped at the NASDAQ market where they had unusual products. He said that his purchases were good to put away even though they had some strange ingredients. He took his home and said he did not need to worry about them even though others had told him to be careful.

The third little pig went to both of those markets. He would pinch the tomatoes and squeeze the Charmin. He was a very careful shopper. Many times he would put things in his shopping cart, but later take them out because they were not “just right”.

Our first little piggy brought home his purchases, put them away and many times forget about them. The store manager had told him they would always be good and he believed him so he did not bother to check on them periodically.

When the second pig got home he also put the things he picked out at the market on his shelf and would brag to his friends about the great things he would have in the future when he was ready to retire. He would have more than he would ever need. He rarely looked in the pantry, but once in a while he knew that one of the products was spoiling. That didn’t worry him either, as he knew they would still be fine some time in the future when he wanted them.

The third little guy put his purchases away, but regularly checked to see that they were all right. If one of them was not “just right” he would take it back to the market. Our third pig made sure that none of his market purchases went sour.

Time passed and our first little pig got to the point that he needed to start eating out of his savings. To his dismay he found many of his guaranteed chips has spoiled. There were still enough there so he could eat, but not the way he had before. Our second pig also no longer bought at the market, but when he went to the pantry he found almost all of his purchases had become rotten. In order to eat at all he had to take a job at Wal-Mart as a greeter.

Mr. Third Pig’s purchases all were good because every month he had checked to be sure nothing was going bad and if it was he would get rid of it right away. He was able to enjoy being at home or playing golf because his pantry was full.

It seems it doesn’t make any difference where our 3 pigs did their shopping – DOW or NASDAQ markets. The important difference was that the one who checked to be sure his purchases never went bad was the one who ended up with plenty.

Al Thomas’ book, “If It Doesn’t Go Up, Don’t Buy It!” has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter athttp://www.mutualfundmagic.comand discover why he’s the man that Wall Street does not want you to know.

With over 6,000 mutual funds available, it may be tempting to pick funds from a popular star or index rating system. Savvy investors, however, balance multiple factors in their selection process. Ratings represent only the historical performance of funds and cannot predict the future. Performance consistency, management skill, and expense limitations are among the many factors that influence a fund’s prospects. Each must be carefully evaluated to improve your chances of finding a fund to outperform the market.

Create a plan
Define your financial goals. Are you saving for retirement? Putting money aside for a home? Funding a child’s college education? Your answer will have significant implications on your choice of mutual funds. More time gives you flexibility to use an aggressive approach. Immediate needs call for safety and capital preservation. Take careful consideration of your tolerance for risk. If the market dips, at what point would you lose sleep? Is it a 5% drop? 10% drop? An asset allocation plan will balance your portfolio and maximize return for your level of acceptable risk.

Dismiss recent results
Past performance is no indicator of future results. No truer words could ever be spoken and they are included in every mutual fund advertisement. But it’s extremely difficult to ignore these numbers which the fund companies conveniently place in big bold letters – immediately above the fine print warning us. Nothing is more attractive than a fund with a great record, especially given the dismal performance in the market.

Past performance can provide a good starting point, but nothing more. In fact, past performance predicts losers better than the winners. A 1998 study from fund-tracking firm Morningstar, demonstrated the top fund performers rarely hold their spot on the charts. The study also concludes bottom performers rarely did anything but continue to sink. Never assume the past will repeat itself, yet, ignore a fund’s historical record at your own peril. Avoid the perennial losers.

Seek consistency
Evaluate a mutual fund’s performance beyond just the recent year. Any fund can get lucky, but it’s the rare firm that prove themselves year after year. Examining a fund’s long term performance can answer the question of consistency. If the performance was good, was it repeatable due to skill – or merely a spike due to dumb luck?

Watch for a solid record of returns, rather than funds showing spurts of great years followed by fits of lousy ones. Compare the fund’s returns to a relevant benchmark index, (large-cap vs. S&P 500, small-cap to the Russell Index, etc.) Solid funds should not only consistently beat the benchmarks, they should also beat their peers.

Seek good managers
Always review the experience and performance of the fund’s managers. When you buy a mutual fund, you are actually investing in the experience, skill, and savvy that the manager brings to the table. When the manager leaves, the fund performance generally goes with him. How many years has the manager been leading the fund? The longer (if generating strong results), the better. And keep an eye out for the gurus. The industry’s better managers are well-respected, high-regarded, and often quoted in the press. You’ll find multiple articles and even manager profiles published in the popular financial magazines and newspapers.

Think cheap
Check out the fund’s cost of ownership. While you can not predict a fund’s performance, you can control the ongoing expenses. Since expenses impact your ability to grow investments over time, select a fund with low costs. Check the expense ratio, sales fees, trading costs, and 12b-1 fees charged to cover the marketing, distribution and sales. Everything counts against your bottom line – keep it small as possible. When possible, choose funds with expenses less than their category average.

Taxes are often overlooked and can substantially reduce your after-tax gain unless investing within a tax-deferred, retirement account. Avoid funds with large distributions (capital gain payments) by searching for funds with low turnover. Since buying and selling stock incurs transaction costs, lower turnover translates to lower expenses and lower capital gains’