Risk Control

Everything you invest in has risk so you want to do your research before you put your money on the line.

For example, when McDonald's opens a new restaurant (please, don't call it a hamburger joint) they will investigate as many of the relevant facts as possible. The demographics of the area - age and income of those within a certain driving distance. Who, where and how much is local competition? The number of cars driving by each day will be counted and will be tallied at one-hour increments. Local labor costs must be figured in. The cost of acquiring the land and construction of a new building or rental of an existing location is estimated. These and many other factors are added up to get an idea of the approximate operating costs and amortization of fixed assets.

When they have all that then they will be able to figure out how many hamburgers will need to be sold to break even. This true and meaningful research to decide whether to risk money for investment - in this case return on investment or as Wall Street calls it, ROI.

Unfortunately, Wall Street also tells you to do similar research before you buy stock in a company. There is almost no correlation between doing research for ROI and doing similar research to determine if a stock is going to go up. There are thousands of companies that have excellent Operating Statements, but the stock goes nowhere year after year. One of the easiest ways to see this is to go to www.bigcharts.com , type in the symbol of the stock and check back on its price performance for the past 5 to 10 years. If it doesn't have a nice steady upward movement it will be best not to buy it. Also if the price action is extremely volatile you should also pass even if your broker says to buy it, especially if your broker says to buy it.

The type of research brokerage firms tell you to do means absolutely nothing as far as finding out if the stock price will go up. Wall Street-type research is basically worthless.

Let's says you have done some intelligent research and have found a stock or mutual fund that has been going up for the past several months or even years (these are very rare) and you decide to buy it. There is no guarantee it will continue to go up, but you want to limit your risk. How? There are a couple of very simple things you can do.

The first and simplest is to determine how much you are willing to risk in this investment. Maybe the stock cost $60 per share and you are going to buy 100 shares for $6,000. You decide you are willing to risk $1,000, no more. At the time you make the purchase you also put in another order with the broker. Tell him to place a Good Til Canceled Stop- Loss Order for $50 per share. If the stock drops to that price you are out.

The second way is to go back to the Internet and the above web site and print out a chart for the past one, three or five-year time periods. Then draw in a trendline along the bottoms of the price action. Connect a straight line along the lowest price. Usually you will have at least three places that will hit this line as it is progressing upward. When that line is penetrated you want to sell out.

Investing in anything without risk control could mean large losses of capital. Wall Street trained brokers are not taught risk control. If you want to preserve your capital it is up to you.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Copyright 2005

Washington Post-ABC News poll Washington Post, United States - Oct 12, 2008 This Washington Post-ABC News poll was conducted by telephone October 8-11, 2008, among a random national sample of 1101 adults, including additional ...

Crisis may spawn big US wealth transfer moves Reuters UK, UK - 23 hours ago The wealthy use trusts to pass on stocks, mutual funds and physical assets such as real estate. The tax rates for such transfers are linked to interest ...

Indian Savers May Bury Cash in `Panic' Over Banks (Update1) Bloomberg - Oct 13, 2008 He doesn't invest in stocks, mutual funds or real estate because he thinks it's too risky. ``When I don't gamble for high returns, the government should ...

Anxious investors hanging on despite heavy stock market losses Los Angeles Times, CA - Oct 13, 2008 ... have about half a million dollars in the market, including retirement savings, individual stocks, mutual funds and money market accounts. ...

Anatomy of a Scandal American Spectator - Oct 14, 2008 Stocks, mutual funds, 401k's, pensions, credit -- the financial guts of a family, a business, and in turn the underlying financial foundation of the US ...

Our View — Let free market be free Mankato Free Press, MN - Oct 11, 2008 Why not require the same thing with stocks, mutual funds and other investment instruments? It would be less costly than the current bailout. ...

Earning the Boy Scouts' personal management badge Forbes, NY - Oct 10, 2008 _Explain the advantages and disadvantages of putting money into the following: stocks, mutual funds, CDs, bonds, savings accounts. ...

Financial management is part of Boy Scout training Kentucky.com, KY - Oct 12, 2008 Explain the advantages and disadvantages of putting money into the following: stocks, mutual funds, CDs, bonds, savings accounts. ...

Government should stay within our means Myrtle Beach Sun News, SC - Oct 12, 2008 Our stock markets are going in the toilet, and the retirees who rely on stocks, mutual funds and 401(k) income are hurting. Rather than asking how did we ...

Course explores 'Investing for Income' Independent Press, NJ - Oct 12, 2008 We will explore bonds, high dividend paying stocks, mutual funds making generous distributions and a host of other income-producing investments."