The first article in this series,  48% Annual Rate of Return!?!  How...? suggested that, for the Average American, one possible profitable approach to investing is to work with industry sectors and the mutual funds that represent them.  Four case studies were presented.  These case studies are actual histories of success for a period from November of 2005 to January of 2006.  They are recent and real.

In this article I wll explain in detail what the elements of this strategy are.  In subsequent articles I will expand on this strategy and introduce you to the simple but useful tools used to implement the strategy.  And as the articles unfold, you will be introduced to additional case histories and we will analyze a couple of different families of scenarios (short term and long term), how they occur, how to manage them and how to interpret what the tools are telling us in each case.

Ok, let's get started with our simple basic set of four case studies.  I will use the first one, computers, as the subject of the following narrative, but the same explanation applies to the other three examples as well.  And the explanation is basic to all that follows in this and subsequent articles.

If the money invested in the example (1.) shown in table 1 below had been invested instead in a CD with an annual rate of 4.34%, it would take 365 days to earn $4.34 cents per $100.00 invested.  We will use the Computer Mutual Fund for the case study.

Mutual_Fund_CD_Scenario

Here are the figures on the Computer Mutual Fund and three other actual histories.

 Mutual_Fund_CD_-_Table_1

If the money were invested in the stock mutual fund example (1.) as shown in the table at the time I did actually invest in it, it would take 36 days to earn the same amount as the 1 year CD.  The same relationship holds true for the other three examples.

The projected slope of the annualized return on that Sector mutual fund, admittedly hardly achievable, would point at 45% for the year.  The 4.34% represents actual earned coin of the realm in my pocket at the end of the 36 day period.  The annual rate is for keeping score, i.e., how am I doing vs a CD or a savings account or ...  Mutual_Fund_Sector_Scenario

So the idea is to get out when your ROI objective has been met (greed will kill you - make a plan and stick to it) and reinvest that principle and earned return for the remainder of the 365 day period.  In our example that would be 329 days to make a year.

 The principle and interest (in this case $104.34 after 36 days) is reinvested in a money market fund at 3.39% just as an example.  You could get a better return and virtually absolute security with a CD, but that ties your money up.  Or you could plow the money back into the market, or some other venture with a potentially higer risk and yield factor.  That is your choice.  In this example I've chosen a MM fund because it is middle of the road risk versus yield.

Mutual_Fund_CD_plus_Sector_Scenario

Mutual_Fund_CD_plus_MM_-_Table_2

For every $100.00 invested in each case, I made by the end of 1 year:

  1. $107.73
  2. $109.05
  3. $107.75
  4. $107.71

In the next article we will take a look at some more case histories, and the tool that I used to keep track of their performance.  This tool is where the rubber meets the road because it tells me when to hold 'em and when to fold 'em, and how to count my money.

We'll also take a look at the tool I use to monitor sectors in the Investor's Business Daily on a weekly basis.  This tells me what the best bet might be, what sector's table is hot.

See you there.

Disclaimer: While I have never lost with this strategy and these tools, investing in the stock market is always a gamble.  I make no guarantees whatsoever concerning my strategy and these tools.  This is not advice.  I am sharing my experience with you free of any charge or remunerations.  Conversely, I take no responsibility for your actions.  You can take it or leave it.  If you take it, your success will be based on your understanding, your control of yourself, and the Gods. 

Also, while I have checked my figures until I am cross-eyed, as soon as I publish this I will undoubtedly find an error or so, or at least a typo.  I appreciate any corrections, opinions and discussions.