Investment Basics

The Ameristock Guide to Formulating a Sound Financial Plan

Investing: So Many Ways, So Many Reasons
Investing in anything — including mutual funds — requires a certain amount of capital and risk to accompany an expectation of a return. And, while there is a seemingly unlimited variety of ways to invest your money, the reasons are as numerous as people are unique.

"What Do You Want to Do With Your Money?"
The answer is most likely "Make more money," of course. But how? Like anything else, the first step towards successful investment is the creation of a plan. In the world of investing, that would mean a financial plan. So ask yourself: "What do I want to do with my money?"

Though people most save and invest in the market for a wide variety of reasons, the following are the most common:
  Emergency funds
  Retirement
  Discretionary purchases (a house, car, vacation...)
  Their children (college, wedding...)
  Gifts

Fortunately, there is a financial plan format that fits all circumstances (including yours). Your plan can be mapped out by closely considering into two basic investment objectives and six inherent constraints.

Your Plan's Two Basic Investment Objectives

1) Required Return
Required Return is just that: the amount of money you require to be returned to you annually to reach your goal. Your required return depends on how much money you have available to invest, how much return you expect, and the amount of time you have in which to invest.

The formula for figuring out required return is:

Required Return = (($ Want / $ Have)^ 1/Time in Years) -1

The little caret sign, ^ means "to the power of." Any calculator with an Xy key should work. If your calculator doesn't have an Xy key, call us. Ours does.

Now let's put that formula into practical terms by inserting some actual numbers:

Suppose you have $25,000 but you need $50,000 for that new home you're planning to buy in seven years. Here's how this example would translate into the above equation, step by step:

Required Return = (($50,000 / $25,000)^ 1/7) -1
  = ((2)^.1428) -1
  = (1.104) -1
  = .104 or 10.4% per year to reach the goal.

2) Risk Tolerance
Your tolerance to financial risk can also be called the "Can you sleep well at night with your investments?" objective. Risk tolerance is a very personal thing and has no correlation to how risky you are in life. Some skydivers are very conservative investors, while many funeral directors speculate wildly in the market. (It's the funeral directors that skydive that we haven't quite figured out.)

Your Plan's Six Basic Constraints

1) Time
The longer you have to invest, the better your chance of getting the required return you need. Therefore, the more time you have, the more risk you can take, and the higher your percentage of assets should be in stocks.

2) Taxes
Your investment is either taxable or tax-deferred (IRA, KEOGH, Trust, 401(k), 403(b)...). If your investment is taxable you should try to minimize the tax bite by investing in funds with capital appreciation vs. only current income and funds that keep realized short and long-term capital appreciation low by keeping turnover to a minimum. Like the Ameristock Mutual Fund.

3) Investable Funds
How much do you have to invest? Will it be all in one lump sum or will you save a bit each month to take advantage of "dollar cost averaging*"?

In dollar cost averaging, you periodically and regularly invest a set amount of money so the average cost of shares rises and falls with the market's peaks and valleys. Your dollars buy fewer shares when the market is up, but when it's down? They buy more.

4) Investors' Preferences

Do you want to invest in American, overseas or multinational companies? Do you like large, well-known companies or small startups? On a completely different note, Will the account go to your grandchildren? A charity? This is one area over which you have complete control. As the investor, it's all up to you and your preferences can be as broad or narrow as you like.

5) Liquidity
How quickly could you pull your money out of your investment? People investing in real estate can't sell their homes on a day's notice. Investors in mutual funds can pull out on a day's notice. Remember, upon redemption, shares may be worth more or less than the original amount invested.

6) Legal
If you're investing for someone else or for tax-deferred accounts (IRA, KEOGH, Trust, 401(k), 403(b)...), legal requirements need to be followed such as ERISA, prudent man rule, IRS statutes, and many others. We suggest consulting a lawyer and tax advisor to find out exactly which legal rules pertain to you.

Relax. It's Easier Than It Looks.

Looks complicated? It isn't.

Chances are, you probably already have some form of a basic financial plan in your head. Writing it down using the above objectives will help you formalize it. It'll also help your investment process by helping you match the different funds out there to your specific needs. It will also come in handy later on, when you're reviewing your investments and how they fit your lifestyle.

Has anything changed in your life recently? If so, see if your investments still meet your needs. If they don't, change them. Everyone's investing style changes as they go through life. Marriage, children, grandchildren, business conditions, home ownership and more can impact to varying degrees how you invest. Having a financial plan that you can review again and again as life unfolds will help you meet your investment goals.

*Such a plan does not assure a profit and does not protect against loss in declining markets. Such a plan involves continuous investment in securities regardless of fluctuating price levels of such securities. Thus, an investor should consider their ability to continue their purchases through periods of low price levels.

Ameristock Funds. Your Place to Be in the Market.