Creating Your Own Mutual Fund

In the previous lessons we have learned that Panic Kills. We have learned that the best way not to Panic is to have a good control of your money and knowledge of your financial needs. We learned how important and helpful creating a budget can be. We also have gone over several types of investments. We learned about the benefits of diversification and why a mutual fund is great. Now let’s set up our own mutual fund.

When I first stumbled upon the book which taught me how to create a mutual fund of my own and the benefits of it, things were different than today. Oh the market was pretty much the same place of unbridled greed running amok. It was the early 1990’s and the world had just gone through the excesses of the 1980’s which was commonly referred to as the ‘me decade.’ In the transition of from the stagflation of the 1970’s to the boom of tax cuts and government spending of the Reagan Era many companies which were not prepared found themselves being taken over when their stocks which people had dumped were being grabbed up by competitors. They sought solutions to protecting their interests.

The solution was simply to buy all their stocks they could to get the stock off the market and return this outstanding stock back into their control in order to maintain their interests. But this was a very expensive proposition and many companies needed that money to operate their business. Some businesses looked to a “White Knight” (a friendly business which would buy and hold the stock all the while permitting the company to run itself with no interference from the White Knight, and let the company slowly buy the stock from the White Knight as it was able.) Of course the problem was that true White Knights were rare and could always change their mind which is why I guess they alluded to a fictional fairy tale character for the name.

Another solution some companies tried was to “Swallow a Poison Pill,” which was just slang for taking on a lot of unnecessary debt to make them look bad to potential corporate raiders. Some did this just to get the cash to be able to buy their stock off the market. Problem here was the debt had to be repaid. With cash tied up repaying loans a company was unable to take advantage of opportunities which popped up. Then someone came up with an idea that would allow a company to grab back its free floating outstanding stock and locking it up in safe hands. Companies would help employees to buy the company’s stock for a retirement plan as part of the employees’ benefit package. It also helped to curb turnover rates as employees stayed with what they now perceived as their company since they were truly invested in it. It also had an added benefit that an employee would show a higher level of loyalty and desire for the company to succeed. It was no longer just a job. They called this idea the Employee Stock Ownership Program or E.S.O.P. and it worked well. They also created Dividend Reinvestment Programs or DRiP’s where instead of just paying out dividends to shareholders the shareholders could sign up to have their dividends used to buy more shares for them.

This book I found explained a way to use both of these programs. It explained how you would have to buy the minimum shares to enroll in the DRiP’s to get started. For most companies this was only one share while others required you to have more such as five or ten shares before you could enroll in their DRiP. Others required a certain dollar amount invested before you could enroll. McDonald’s for example would require you to invest $1,000 but you could do it in monthly installments of $100. But once invested and enrolled you could buy and sell shares when you wanted while earning dividends on the shares you did possess which went to buying ever more.

Back then the book suggested using “The Money Paper” to get started. You would get a subscription and throughout the year besides getting a great publication each month which was full of excellent advice “The Money Paper” would help you acquire minimum shares of various companies. It was a slow process. But now this has changed. There are numerous applications which are available for computers, tablets, and smartphones which have increased the ease with buying and selling and even researching stocks. I will however, refrain from mentioning any because any information I write here about a particular application may be obsolete by the time you actually read this and get started with your own mutual fund.

Currently I am using three applications to research stocks and one for the actual investing. I currently own shares in ten different companies and five mutual funds. My stocks come from different industries while the mutual funds focus on five different markets and strategies. Again, I will not tell you what they are because any information I could share about them will be outdated by the time you read this and get started. Besides it will be important for you to find the stocks, bonds, and Mutuals which work the best for you. I will explain more on why I did this when we learn how to run your mutual fund. For right now let’s just go over some basics about creating your own mutual fund.

You will need to look through the various applications and pick the one or those which work for you. I will tell you that some applications charge per transaction. You will be limited to those investments which the applications offer. You may have a subscription fee. Some require you to buy full shares while others will let you purchase partial. For example if you have an application which requires you to buy a full share they let you deposit money into your account but won’t actually allow you to purchase the stock until you have enough deposited. The application I am using now let’s me purchase partials. Almost all of them will try to teach you about investing and the markets. They will offer advice. They will also push their products. Main thing you need to look at your desires and understanding and decide which one is best for you.

Now they do change. You should always keep your eyes open to other possibilities when it comes to applications. But don’t be afraid to change if the need does arise or you recognize a better potential in another.

It is important for you to set up a mix which works for you. I highly recommend when you are first starting out you should stick with the stocks of companies which are not only highly established companies but are ones with which you are familiar. It will make it easier for you to research the company especially if it is one you patronize. You will be able to see their latest trends. As you get used to investing and gain some experience you can go to companies with which you are unfamiliar. But I do recommend that you have at least one which is considered an income investment. These are investments which stay around the same market price but generate dividends on a regular basis. These include utilities and financial institutions such as banks. You will see how this comes into play when we talk about how to run your mutual.

Chances are you will change around your investments as you gain experience. You may even desire to have more individual investments than I had mentioned I have. As you gain experience you may even develop your own strategy from the one I am going to teach you in the following lessons. But for now, just pick a few well established companies you are fairly familiar with at least one of them being an income generator. Main point it is your Mutual and you are in charge of it. If you start out with too many companies to follow simply cut back to the ones you can follow. If you feel you can do far more then do it.

Now that we have a fairly decent understanding of Mutual Funds and how important it is to be prepared financially to avoid panic let’s spend the next lesson learning how to buy stock which can be used with purchasing other investments as well.