Build Your Own Stock Index

FUN STOCKS PORTFOLIO – HOW TO BUILD YOUR OWN

Fun stocks IndexTM  (FSI), which has outperformed the S&P 500 by more than 6 to 1 since January 1, 2009, is not yet available as a mutual fund or ETF that you can easily buy through a broker. If it were, it would be in the Aggressive Growth or Growth with Value portion of your overall investment portfolio plans.

Many of our subscribers have requested that we show them how they can construct one of their own. In this blog, we will show you three simple methods to build your own Fun Stocks Portfolio (FSP) with very low costs. There will not be any annual or ongoing mutual fund management fees, financial planning fees, high investment advisor fees, or high commissions. The only costs are the transaction or small brokerage commissions ($4.95 or $7.95/trade) that you pay for each trade made through a discount broker of your choice. InvestBetterSpendSmarter.com (IBSS) receives no compensation for our service, because we believe in giving you the smartest tools for free to help you self-manage your money.

Our goal is to help you join the “Manage My Own Money Movement.”

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Step 1 – Use IRA or taxable funds to open a brokerage account at your online discount broker of choice (ETRADE.com, Fidelity .com, Interactivebrokers.com, Merrilledge.com, Schwab.com, Scottrade.com, Sharebuilder.com, TDAmeritrade.com, USAA.com, Vanguard.com, etc.). IBSS is not a brokerage firm, so we have no accounts. Be sure to note the trade transaction commission charged by your broker and include it in your calculations.

Step 2 – Decide the amount you plan to allocate to your Fun Stocks Portfolio (FSP). You should treat your FSP as a growth portfolio or as a portion of your total growth portfolio.

Step 3 – Depending on the amount of time you are willing to commit and the risk you are willing to take with your FSP, choose one of the 3 methods below to use to construct your FSP.

Step 4 – Subscribe to our free InvestBetterSpendSmarter.com blog, follow our Fun Stocks Index (FSI), and track our current ratings and comments for each of the 15 companies that comprise our FSI.

Step 5 – Monitor your FSP ideally on a weekly basis, but at least once a month. Given that you should treat this as an Index, you should not need to make active trades in the stocks of the portfolio. (Note that the Current IBSS Ratings in our FSI chart provide new subscribers some guidance in how fast they may accumulate shares of the companies in the FSI. The ratings act as a timing tool.)

Methods – Choose one of these methods after Step 2 above: Stock Market Report

Method 1 – If you have limited investment dollars or want to own shares in fewer companies, choose several from among the 15 companies that you believe will continue to outperform the S&P 500 and do well in the long-term. Conduct your research and due diligence using the research tools that are available through your discount broker (for example, annual reports, analyst reports, etc.) or through other research sources such as Money.MSN.com. To reduce some risk with a minimum level of diversification, purchase the shares of at least 5 of the 15 companies in our Fun Stocks Index and hold them for a long time (for example, 1-5 years or more). Add to these holdings as you monitor their business progress. You can invest an equal amount of dollars in each company or simply buy the same number of shares for each company. You now have a nice Fun Stocks Portfolio of your own. Track your progress and the progress of our Fun Stock Index.

Method 2 – Decide how much you want to invest into your own Fun Stocks Portfolio and simply purchase equal number of shares in each company listed in our Fun Stocks Index. The Total index Price for the Fun Stocks Index is the cost of buying one share of each company. Use that total to help calculate the number of shares you can purchase by dividing your investment amount into the Total Index Price. Keep in mind that you can only buy whole shares, not fractions of shares.

Examples:

  • Suppose the Total Index Price is $2,072.00, and you have $5,000 to invest.  Based on the calculation below, you can purchase 2 shares of each company.

Calculation: $5,000 divided by $2,072 = 2.413

  •  Suppose the Total Index Price is still $2,072.00, but you have $20,000 to invest.  Based on the calculation below, you can purchase 9 shares of each company.

Calculation: $20,000 divided by $2,072 = 9.653

Similar to other index constructions, our Fun Stock Index is based on this method, so if you choose this method, your own Fun Stocks Portfolio will track with our Fun Stocks Index.

Method 3 – You decide the amount of investment dollars that should be invested in your Fun Stocks Portfolio and divide that amount equally among the 15 companies in the Fun Stocks Index. Given that there are 15 stocks in our Fun Stocks Index, one company would equal 6.67% of the total amount of your planned investment portfolio. Therefore you should simply invest 6.67% of your total dollar amount in each of the 15 Fun Stocks. For example: If you are investing $20,000 into your Fun Stocks Portfolio, you should buy $1334.00 of Disney stock and $1334.00 of stock in each of the remaining 14 companies in our Fun Stocks Index. This method is easy to execute and may be the least risky of all three methods. You may have to round out and adjust some share amounts, because you cannot buy a fraction of a share.

The Potential Risks

Method 1 requires that you focus on only 5 companies, subjecting you to the higher risk of a concentrated portfolio. In general, the more companies you own, the lower the risk.

Method 2 is also risky because it builds a portfolio that is based on investing more into the current higher priced stocks. Those may or may not be the better performing stocks. If those companies outperform the others, your portfolio will reflect this performance. However, if they underperform, then your index will also underperform.

Method 3 applies an equal dollar amount to the diversified group of 15 companies so that a few stocks do not distort the risks and make the overall portfolio riskier. However, method 3 will not reward you as much if a few stocks continue to outperform the rest and you own a smaller number of their shares. In investing there are tradeoffs between the risks you take and the rewards you may receive.

Lowering your risks – Averaging is one way to lower your risk. You can use averaging with all three methods. With the amount that you plan to invest into your own Fun Stocks Portfolio, divide it into 4 equal parts and invest each part over 4 separate periods. The periods can be 4 weeks, 4 months, or 4 quarters. Make sure you invest an equal amount of money regardless of the prices of the stocks. Using this risk moderation technique, you avoid having to make decisions about the prices of the stocks and their volatility.

The Ease of Index Investing

If you treat your Fun Stocks Portfolio as an “Index” of 15 stocks that reflects a solid long-term investment strategy, you should not have to worry about the individual holdings in the portfolio. The diversification of these 15 stocks should minimize the effect that any single holding might have on the entire “Index.” Therefore you can just relax and watch it grow and invest the dividends back into the stocks that paid them.

No matter which of the 3 methods you use to build your own Fun Stocks Portfolio, you can enjoy owning it and knowing that the next time you spend money on the products or services of any of these companies (Netflix, Disney, Priceline, etc.), you are contributing to their profits, which ultimately benefits you.

Have fun!

Your IBSS Team


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Jim Tso wants to “give back” and share his 35+ years of successful personal money management experience to help others to achieve their financial goals. Jim created this InvestBetterSpendSmarter blog (IBSS) to provide you with free investing, planning, savings, retirement, and inspirational tips derived from his unique, innovative, and proven approaches to money management. He welcomes and appreciates your feedback.

Jim would also appreciate it if you would kindly share our IBSS website and blogs with your family, friends, and business associates. Thank you!

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