Dollar Dollar

I opened a Roth IRA today. Well it's processing anyway. Market is down past couple of days so no hurry on having the paperwork go through. I put in the max $3k I am legally allowed but I split it between two funds. $1k went into the equivalent of the S&P 500 index to hedge any losses I might take from the $2k that went into a very aggressive mutual fund called Emerging Markets. It's a risk but what isn't when you want to invest?

I have a pretty good size 401k that's growing as the market rebounds. I'm glad to see that. I'll always have that.

I used to dabble in stocks too but sold them back in January to pay off all of my bills. I'm quite happy to be bill free this year so it was definitely worth it. That investment actually was an interesting period. Originally my investment was $3k I put into a strategy known as the Foolish Four which is something that the guys at Fool.com came up with. The Foolish Four is a spin off of an older strategy called Dogs of the Dow. In Dogs of the Dow, you take the ten companies of the Dow Jones Industrial Average with the highest yield and invest in those ten companies for one year. Yield is the relationship between the stock's price and what they pay out in dividends. In Yield, the idea is if a stock is paying a lot of dividends, it probably means its oversold which explains the low price and the price is most likely due for a comeback, so you ride the comeback. If it doesn't rebound, well you're getting pretty good dividends and you wait a year to reallocate your investments. The Foolish Four takes the top four instead of the top ten. It's cheaper, less broker fees to pay for the transactions and you have less stocks you have to keep an eye on. I put my three grand in the Foolish Four in May 1999. That's right, the height of the tech boom. Within a couple of years, that 3k was at 1700. Almost a 50 percent drop on a strategy that's supposed to average 20 percent gains per year. If you go back to the Fool site, you'll notice (or not) they no longer support the Foolish Four. Gee I wonder why? So I ate my losses, sold my four supposed-to-be oversold stocks, took my measly 1700 and started playing around with cyclical stocks.

Cyclical stocks have prices that show a pattern of going up and down over a period of time. This is more like day trading. You buy low, sell high, find another at its low point and do it again. Sometimes you can come back to the same stock after its tumbled. Some people even short the stock (shorting a stock is where you borrow shares from your broker, sell them off at hopefully a high price, then when it drops, buy the shares back, return them to your broker and you keep the savings) on the way down, buy them on the way up and keep doing this all on one stock. I never shorted a stock in my life but in 2002 I was able to take my 1700 and turn it into 3400. That's right, 100 percent gains in one year using cyclical stocks. Not bad if I do say so myself. That whoops every mutual fund's rate of return in this world by a huge margin! Take that Warren Buffett! And since I sold my Foolish Four losses in the same year I made the huge profit, I hardly had any taxes on it. Technically I only netted 400 dollars that year. So I sold that $3400 to pay the rest of my bills early this year.

You might ask, why not stick with your new strategy and try and turn your 3400 into 6800 this year? Because I know when to quit when I'm ahead, I just got burned on the previous strategy so having a new strategy that actually didn't cost me money made me elated, plus it's more important to pay off bills before you try to make money, you're guaranteed to save money paying off your bills first.

What's nice is I still have a couple of grand saved (it's easy to have this much when you don't have bills). I think I'm going to get back into trading stocks with that 2k and see what I can do with it. 100% per year is a very nice rate of return. I'll be happy if I can make 20%. What am I saying, I'll be happy if I don't lose it.