In my last post, I talked a little bit about emotion in investing. Emotions in investing can really make or break your annual returns. Seriously, sometimes it is really tough to stomach the market ups and downs. Ask anyone that suffered through the 2000-2003 bear market or the 2008-2009 meltdown. What I am talking about to avoid emotions with investing is mechanical investing…
Mechanical investing is an investing strategy where there is a fixed set of rules to make buy and sell decisions. Mechanical investing strategies exclude any exercise of human judgment, making them less subjective to emotions of the investor.
BINGO! A system where I do not have to become emotionally attached to stocks to buy them and then later on hopefully find a time to get detached from the same stocks, hoping it happens at a profitable moment. You buy stocks when they a meet specific criteria and then sell them when they no longer meet that criteria. One of my favorite mechanical systems of all time was the Reuters Relative Growth stock screen. That stock screen was turning an amazing profit, just over 24% CAGR between January 2000 and August 2007. That is stunningly impressive as compared to the S&P which returned a meek 1.4% CAGR for the same time period.
But, I had a problem. At the time, Reuters listed the stocks passing the screen free on their website which was great for me. However, each week, literally 20 or 30 stocks passed the screen. Knowing that I only had about $6,000 to invest at the time, how could I possibly buy 20 or 30 stocks given the high cost of commissions at brokerage firms? Basically, I was left to sort through the list of stocks and try and come up with the 3 to 4 stocks that looked the most attractive. I couldn’t buy 20-30 stocks because commissions and the time involved with trading that many stocks would eat me and my bankroll alive. Having to weed through a list of stocks and pick just 3 or 4 sort of defeats the purpose of using a “mechanical strategy” and eliminate emotions of stock picking. But then I stumbled across what I consider absolutely the best broker for mechanical investors!
Originally called FolioFN and now called FolioInvesting.com, this gem of brokerage was the answer to my prayers for being able to implement a profitable mechanical investing strategy. Launched in 1999, the business model was set up to help individual investors take better control of their own finances and allow stock diversification at a reasonable price. Basically, you could develop your own mutual fund of stocks. I will go into more detail about Folio Investing in a later post (hopefully the next one, but it may be more helpful to discuss mechanical investing more in the next post). FolioInvesting allowed me to implement my dream investing strategy for around $300 per year in commissions! Unbelievable! Buying and selling 20-30 stocks per month for just $300/year! Dream come true!
Until I can find time to write more about FolioInvesting, feel free to check out them at their website. No, they are not paying me to refer people to their site. They just have a great service for individual investors and there is nothing wrong with promoting a company that fills a need. Besides, we are just a tiny website here at AssetWealthDev, and I am doubting we could make a noticeable dent in accounts at their brokerage firm.
Cheers until next time,
Bret