Dad’s Stock Investment Plan
Happy Father’s Day to all of you Dad’s and future Dad’s. I hope you enjoy the love and company of your children, relatives and friends today.
Dad was born in 1924 – a child of the depression. His parents literally lost the farm as a result of the dust bowl and depression era of the 20’s and 30’s. He grew up on a farm, decided NOT to be a farmer, went to electronics school and ended up working on the US space program.
During that time he tried different methods of making extra money, from being an inventor; to residential home rentals; to his own business of radio and television repair; to flipping houses; and finally to investing in the stock market (he was a chartist and a trader).
He came late to the market because society generally considered investing a risky business back then, besides, he didn’t have money to lose until we kids left home. As an investor, some years he made 2 times his annual job salary and other years he lost 2 times worth.
In all endeavors, he sought to teach us (my brother and I) what he learned. As a result of his research and activity in the market, he devised (or found somewhere) a plan to help beginning investors overcome the propensity to succumb to emotional investing.
Dad’s Stock Investment Plan
My Dad had a structured plan that (when followed) tries to take advantage of the cycles in the market.
It causes you to buy more shares when the price is on a downward trend, save more in a reserve fund when the price is going up, and helps you figure out when to sell. It is similar to dollar cost averaging investing, but with a trigger to sell and take profits.
Today, in his honor, on Father’s Day, I share his plan with you – and most especially with my own children and grandchildren. Dad passed on in 1983 from colon cancer – way before his time at age 65. I miss you Dad!
Decide how much and often you can invest.
Decide how often you want to invest (weekly, monthly, quarterly). Example data: Monthly.
Decide how much you want to invest in each period – lets call this the PLANNED INVESTMENT AMOUNT. Example data: $200 a month.
Remember that it is good practice, in my opinion, to invest only money you can afford to lose!
Plan start up
The first month:
Save half, reserve half
Put half of your PLANNED INVESTMENT AMOUNT into a savings account of some sort (bank, money market, etc). This should be somewhere that pays interest and where you can get your money back any time without costs. Lets call this your RESERVE FUND. Example data: $100 in a new Bank Account.
Invest the other half into a mutual fund that is volatile and no load/with low fees. Lets call this your INVESTMENT FUND. Set it us so that all dividends and capital gains are in cash and get deposited into your RESERVE FUND. Example data: VGPMX Van Precious Metals & Mining. $200 invested on 8/27/09 at $17.52 per share.
The second month:
Calculate savings and investment amounts
Calculate your average cost per share by dividing the total cost shares purchased so far by the number of shares. Example data: $200/$11.416 shares = $17.52 average cost per share.
Then calculate your INVESTMENT PERCENT. Divide the average cost per share by the market price per share on the day you are going to invest (actually this will be the price of the mutual fund as of the prior day’s close). Example data: $17.52/$18.69 = .9374 or 93.74%.
Next figure out how much to invest this period by multiplying the INVESTMENT PERCENT by your PLANNED INVESTMENT AMOUNT giving THIS PERIOD’S INVESTMENT AMOUNT.
Finally, invest THIS PERIOD’S INVESTMENT AMOUNT in your mutual fund.
From then on
When stock prices are going up – do the same thing you did in the second month.
Keep starting new investments if prices are too high
BUT if prices go up enough, you are going to put this investment aside and start up a new one. Here’s how:
If your INVESTMENT PERCENT is 75% or less use your RESERVE FUND to start a new INVESTMENT FUND. Don’t sell shares in your first INVESTMENT FUND to buy the shares in the new one. Keep on starting new funds like this as long as stock prices are going up.
When the stock prices are going down:
You are going to invest more – here is how to figure out how much more to invest.
Invest more of your planned amount and use your reserve fund to buy more shares.
Figure out how much to invest this period – you’ll figure out an INVESTMENT PERCENT (which will be greater than 100%) as well as an amount from your RESERVE FUND.
Figure out a base amount to invest from your PLANNED INVESTMENT AMOUNT – just as you did above:
Calculate average cost per share by dividing the total shares purchased by the number of shares.
Then calculate your INVESTMENT PERCENT. Divide the average cost per share by the market price per share on the day you are going to invest (actually this will be the price of the mutual fund as of the prior day’s close). This should be more than 100%.
Next figure out how much to invest this period by multiplying the INVESTMENT PERCENT by your PLANNED INVESTMENT AMOUNT giving THIS PERIOD’S INVESTMENT AMOUNT.
Finally, invest THIS PERIOD’S INVESTMENT AMOUNT in your mutual fund.
Also, figure out your RESERVE FUND INVESTMENT AMOUNT:
Subtract 100% from your INVESTMENT PERCENT. Multiple it by the amount currently in the RESERVE FUND.
Add the two amounts together and invest in your mutual fund. Because the cost is going down, you are buying more shares.
When to sell
If the price dips below your second highest average cost per share, sell any shares where you have a profit (ie your average cost per share is lower than the market price).
Re-figure the average cost of the remaining shares in that fund and keep on using the Stock Investment Plan on this fund.
Try it out with historical data and a pretend investment
We have only used this partially so I can’t give you personal results. Try it out with historical data to see how it works before starting it. This is a long term approach to investing, not something that will be completed in a month or year.
Have you heard of this approach to investing?
