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Tip 3 - Never Buy A Mutual Fund

Never buy a mutual fund unless it is a no-load index fund with the lowest cost structure. (I will tell you where to find it later.)

Why Stock Options are better than Mutual Funds

The Great Myth Of Out-Performing Mutual Funds

Every year, dozens of financial magazines, newspapers, and newsletters dutifully report the top-performing mutual funds, based on 1-, 2-, 5-, or more year time periods. Presumably, the mutual funds that scored the highest in the past are the ones we can expect to continue to outperform in the future. This presumption is a myth.

To me, these scorecards are like reporting the most recent numbers which won at a roulette wheel - they indicate little or nothing about what is likely to happen on the next roll. Every year, we see entirely new mutual funds at the top of the lists. In fact, in many instances, the funds that will perform the best next year can be found at the bottom of last year's list. (Bad luck got them at the bottom last year, just as good luck got the best performers at the top. In both cases, luck, not skill, was the primary determinant of success.)

The Best-Of-The-Best Mutual Fund Managers Make Their Picks

At the beginning of 2001, Business Week magazine selected four experts to invest a hypothetical $100,000 in their 10 favorite stocks. These stock-pickers were good, apparently the best in the business. One manager had earned an average of 20.3% a year for 3 years, placing her in the top 2% of her peers. Two of the fund managers had lost a little during 2000, but their losses were only 1/5 or 1/6 of the average for their kind of mutual funds.

One manager's secret was to "buy improving companies dirt cheap" - he was quoted as saying that "Cisco at $52 was a reasonable valuation" (of course, a year later, it was under $20, but what the heck, it must have been a real bargain then). The fourth manager specialized in small-caps, and had returned 16.6% for the past three years vs. 1.8% for his small-cap peers. So Business Week had identified the cream of the crop of mutual fund managers to make their very best picks for the year.

Of Course, 100% Of The Absolutely Best Fund Managers Can Still Be Wrong

At the end of the year Business Week (December 31, 2001-page 106) sheepishly reported the results. If you had bought all four portfolios (spreading your risk over 40 stocks), you would have lost 26.7% of your investment for the year. Remember, these were the best of the best experts in their field who were making the picks.

Of course, 2001 was not a great year for stocks. Had you bought an S&P 500 Index fund, your loss for the year would have been 13%. But how would you have felt to have paid these "best of the best" experts by buying their mutual funds (and paying them their 3% or so management fee), and experiencing a loss twice as great as the market average? For sure, they were paid hundreds of thousands of dollars each for their work in 2001 (when a dart thrower could presumably have done twice as well).

The On-Going "Experts Challenge The Darts" Contest

For many years, the Wall Street Journal has run a contest between the top stock picks selected by four "experts" and stock choices made by random darts thrown at the financial pages. Six months after the picks are made, the results are tabulated. So far, the experts hold a narrow lead over the darts.

This contest is not fair, however. The darts are handicapped. Millions of investors are introduced to the single best stock pick of four recognized experts. What's more, investors read the expert's reasoning behind his or her choice. This publicity is sufficient for many investors to buy companies they may never have heard about before the contest. I, for one, have bought stocks recommended by these experts on many occasions. All this new buying serves to push the prices higher for the experts' choices. Presumably, not too many investors run out and buy the darts' stock picks.

A fair way to run this contest would be to wait two weeks after the contest was announced, and use those prices as the starting points for both the experts and the darts. Of course, then the experts might be totally humiliated. It's bad enough that they get beat a good share of the time already.

One Of The Great Mysteries Of The Investment World

If portfolio managers really can't outperform the market, why do we pay them so much? Year after year, millions of investors pay mutual fund managers billions of dollars to under perform the market. It's one of the investment world's strangest mysteries to me. Does it make sense to you?

Where To Find The Lowest Cost (Index Or Otherwise) Mutual Funds

You can find any mutual fund's annual percentage cost (and these costs vary unbelievably), at www.personalfund.com. Check it out. No one should buy a mutual fund without going there first. This website could save you thousands of dollars every year.

I don't get paid anything to send you there - it's my way of thanking you for coming to my web site and learning about ways to double your money with just a little effort.

If the investment pros can't beat the index averages, how do you think the ordinary investor can match up? Probably not too well, even with a full-time research effort. I firmly believe that if you want to invest in mutual funds, you should stop trying to guess which one will have the hot hand next year, and content yourself with the lowest-cost index fund instead. In the long run, you will be way ahead.

Make A Little Extra Effort And Multiply Your Returns

I feel even more strongly that instead of being a passive investor in index mutual funds, you should direct at least some of your money into an active investment that might yield you three or seven or ten times as much as the index fund does.

I'm talking about stock options in general, and LEAPS in particular. It doesn't take too much to learn about these little-known instruments, and the returns can be tremendous. Tip #1 - All About Options includes a short primer on stock options.

My program is designed to show you several methods to double your money. Tip #5 - The Lazy Way To Double Your Money Strategy involves only two trades at the beginning of the two-year period, but can't be used in an IRA.

My favorite strategy, Tip #6 - The 10K Strategy, involves a little work and trading every month but can generate superior returns even in a flat market. Sign Up For My Free Options Strategy Report and receive two free reports - "How to Make 70% a Year with Calendar Spreads" and "Case Study - How the Weekly Mesa Portfolio Made Over 100% in 4 Months".

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Terry's Tips Stock Options Trading Blog

October 31, 2014

How to Make 60% to 100% in 2014 if a Single Analyst (Out of 13) is Right – an Update

Last week we discussed vertical spreads. This week, I would like to continue that discussion by repeating some of what we reported in late December of last year. It involves making a relatively long-term (one year) bet on the direction of the entire market.

And again, a brief plug for my step-daughter’s new fitness invention called the Da Vinci BodyBoard – it gives you a full body workout in only 20 minutes a day right in your home. She has launched a KickStarter campaign to get financing and offer it to the world – check it out: https://www.kickstarter.com/projects/412276080/da-vinci-bodyboard

Terry

How to Make 60% to 100% in 2014 if a Single Analyst (Out of 13) is Right – an Update

This is part of we wrote last December – “Now is the time . . .

October 24, 2014

A Little About Vertical Spreads

Today we will discuss vertical spreads, and how you can use them when you have a strong feeling about which way a stock is headed.

But first, a brief plug for my step-daughter’s new fitness invention called the Da Vinci BodyBoard – it gives you a full body workout in only 20 minutes a day right in your home. She has launched a KickStarter campaign to get financing and offer it to the world – check it out: https://www.kickstarter.com/projects/412276080/da-vinci-bodyboard

Terry

A Little About Vertical Spreads

Vertical spreads are known as directional spreads. When you place such a spread, you are betting that the stock will move in a particular direction, either up or down. If you are right, you can make a nice gain. Even better, you can usually create a vertical spread that also makes money if the stock doesn’t move in the direction you hoped, but stays absolutely flat instead.

October 17, 2014

Knowing When to Bite the Bullet

Sometimes, the market does just the opposite of what you hoped it would, and you are faced with the decision to hang on and hope it will reverse itself, or accept that you guessed wrong, and close out your position and move on to something else.

That will be our subject today.

Terry

Knowing When to Bite the Bullet

Kenny Rogers said it well – “You’ve got to know when to walk away and know when to run.” We set up demonstration portfolio to trade diagonal spreads on an ETP called SVXY. We were betting that the stock would go up. In each of the last two years, SVXY had doubled in value. Its inverse, VXX, had fallen from a split-adjusted $3000+ to under $30 over the past 5 years, making it just about the biggest dog on the entire stock exchange (selling it short would have made anyone a bundle over that time period). We felt comfortable being long (i.e., the equivalent of owning stock) in something that would do just the opposite of VXX.

In our demonstration portfolio, we decided to . . .

Making 36%

Making 36% – A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

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