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To be honest, I never considered this approach before.

I typically do not like paying fees to fund managers. I am especially skeptical of standard mutual funds when their track record can be worse than the market almost as frequently as above the market.  According to that great champion of individual investors, Motley Fool:

The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general.

Most of my advice is to pick great companies and invest in them with caution, taking profits when the market moves against the company’s stock. I do suggest that a certain portion of your portfolio reside in index funds – I typically tell people to pick their favorite broker and buy a DOW index fund, a S&P index fund, and at least one international index fund.  I rarely care about the brand since we are just trying to match whatever the market is doing.

Crossing Wall Street just did a great post describing a fairly mathematically correct method of creating your own S&P Index fund.  This would allow you to avoid any fees leveraged by the index fund management company.  Not a bad idea.  Note though that not all of these companies are Good Companies (in fact at least one of them is a Poor Company) but that is okay since you are only investing in these companies because they are your own home-grown index fund.

Looking to build a quick-and-easy index fund? Of all the stocks in the Dow, United Technologies [stckqut]UTX[/stckqut] has had the strongest daily correlation with the S&P 500 going back to the beginning of 2005. Each day’s UTX gain or loss has a 69.7% correlation with the S&P 500.

If add in Dupont [stckqut]DD[/stckqut], the correlation jumps to 80.5%. (Note this is average daily change, so it assumes you invest equal amounts each day.)

If you add is Disney [stckqut]DIS[/stckqut], the correlation rises to 85.4%.

Now the extra correlation really is hard to come by. If you add ExxonMobil [stckqut]XOM[/stckqut], the correlation rises to 88.9%.

Still more?

If we add American Express [stckqut]AXP[/stckqut] the daily correlations rises to 90.6%.

Verizon [stckqut]VZ[/stckqut] brings it up to 92.6%.

If you want to go for seven stocks, IBM [stckqut]IBM[/stckqut] will bring you up to 94%.

Now we’re almost out of room. Wal-Mart [stckqut]WMT[/stckqut] will bring our eight stock index fund up to a 95% daily correlation with the S&P 500. This is, of course, an equally weighted fund.

Obviously, you will spend $15-$20 per stock as you buy and eventually sell each stock (I assume you know where to buy or sell a stock for $7-$10). this may make this strategy not work for you depending on the amount that you invest in your “fund” so do the math before you get online with your favorite broker.

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Glenn Curtis of Investopedia recently suggested that it was time to leave the casino stocks. In his article he discusses 4 companies:

  1. Las Vegas Sands Corp.
  2. MGM Mirage
  3. Boyd Gaming Corporation
  4. Wynn Resorts, Limited

I haven’t done a stock analysis post on these four companies but I did a quick check on each one. Frankly, none of them pass the test as a decent company. I would never suggest that anyone invest in these companies in their present condition. They just aren’t that well run to justify an investment compared to other companies on the Good list!

A few of Glenn’s comments (more here):

The space was in the spotlight earlier this month, thanks in large part to upbeat revenue numbers from Macau during December. Macau has become a hot destination in recent years and is located in China. But if you think all this means I’m bullish on some of the bigger casino names, you’re mistaken. In fact, I think many stocks in this space are ripe for a fall.

Why My Reels Aren’t Spinning
Many of the big names have had a huge run since the spring of 2009. For example, MGM Mirage has seen its stock rise from the low single digits, under $2 per share in the spring, to currently trading at around $11.50. Las Vegas Sands has seen its stock rise from under $1.40 per share to its present position, hovering around the $18 mark. But again, I think the run is severely overdone.

My No.1 concern is that I don’t see many average people traveling, or even pondering expensive vacations in the months to come. And I’m not convinced that placing money into a slot machine or laying it on a hand of poker or “21” will sound too attractive to many, particularly until the job market shows some real life. In essence, the macro picture doesn’t seem to match the rise in the escalating stock prices.

You can lose your shirt at the casino or investing in them!

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The money that you invest in stocks needs to be money that you don’t need immediately. This does not mean that it is not necessarily money that you won’t need for 20-30 years. If you have money that you are confident that you will not need for decades, you should probably invest that money in your own home. Follow the old Benjamin Franklin saying “A penny saved is a penny earned.”

If you currently pay 7% interest on your home loan, any extra money that you apply to your mortgage will immediately give you a 7% return for the balance of your mortgage time. Therefore if you pay a one-time extra $1,000 on a 7% mortgage that has 23 years left on it, then it will result in $5,002.04 that you didn’t have to pay over the course of the 23 years. This is an absolutely guaranteed return – over the course of 23 years you will be over $5,000 wealthier due to that one-time investment.

Your home mortgage is the safest “buy and hold” investment that you can make! You already know that you pay a certain percentage. If you pay the loan off early, you effectively make that loan percentage as an investment return.

Also, the same logic goes for your car loan and definitely your credit cards. This is typically more short-term debt than your home. Quick payoff on any short-term debt will guarantee you the quickest and best investment strategy simply because you do not spend those pennies, you save them. Benjamin Franklin will be proud of your efforts to quickly and efficiently pay off your short-term and long-term debt.

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The Wall Street Journal just wrote an article saying that more mutual fund managers are using market timing and stock timing tools to “time” the market. They are doing this to act more nimbly and get into and out of stocks that are moving up and down.

Mutual funds have a problem with this technique that doesn’t affect small investors. Mutual funds have to move much larger sums of money around and therefore can affect the market with their purchases or can incur higher management costs.

From WSJ.com:

Some of these funds have beaten the market in recent years. Ivy Asset
Strategy, for example, gained an annual 14.9% in the five years ending
Nov. 10, compared with less than 1% for the Standard & Poor’s
500-stock index.

Fund companies say investors spooked by the recent market turmoil
are demanding more-flexible products. Many investors have been
frustrated “with investment products that were not able to react to the
environment that we just went through,” says Joel Sauber, head of U.S.
products at Legg Mason. The firm’s new Legg Mason Permal Tactical
Allocation Fund can stash up to 40% in cash.

A study from New York University’s Stern School of Business suggests
market-timing can work for some mutual-fund managers. The best
stock-pickers during economic expansions also show some market-timing
ability in recessions, the study found.

So if the “big guys” are using market timing to improve their performance, why aren’t you?

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The absolute best investment that you can make is to pay off your higher interest loans!

If you are carrying any credit card debt, you are probably paying double digit interest rates. This is short term money so you have to put yourself on a budget and pay these debts off. Whatever your current interest rate on your credit card, that is exactly the interest rate you will effectively earn by paying off that short-term debt. In today’s economy, I don’t know of any other legal investment that will GUARANTEE your return at double digit percentage rates.

If you have a car payment that is over 6% interest rate, that is also a likely target for accelerated payments. Once again, a 6.9% loan on your car means that you are guaranteed to get 6.9% return by paying the loan off more quickly (minus inflation). Since car loans rarely go longer than 60 months, this is medium term money (as opposed to short-term for credit cards). If you don’t need the extra $100 in the next month, spend that money on your car loan.

However, you may have bought your car with a subsidized loan from the manufacturer and therefore paying a very low rate that is approaching 0%. In that case, you may want to slow down this payment and only pay the minimum amount that you can. Essentially, inflation will grow faster than your interest rate so your cash equivalent spending will go down over the course of time. In this case, you are earning whatever the inflation rate is in interest!

Your home loan is probably different. Chances are you have been able to drive your interest rate down below 8 or 9%. Your home loan may still be 10, 20 or more years left so any money that you put into it is very long-term. You may need this money before the 10 years are up and if that is the case then it will be quite expensive to get it back out. It is reasonable to pay a bit extra on your home loan but be careful that it doesn’t impact your regular cash flow – and pay off your credit cards first!

In order to do all this, you need to start budgeting your money. Check out these sites for some advice on how to successfully budget your money.

[save] Budgeting for Dummies

How to budget your money for debt relief

The Fluid Budget