It’s been another good month for Plan 5. Here are the September results for Plan 5 Monthly:

Plan 5 Monthly: September 2013 Results

This month saw growth for all five of the September picks. The total portfolio gain of 8.16% edges out last month’s results and again easily beats the S&P 500’s gain of 2.79% over the same period.

It’s rarely a good idea to fix what isn’t broken, so there will again be very little change going into October’s list of Plan 5 Monthly picks:

Plan 5 Monthly: October 2013 Picks

Now, if you’re following Plan 5 Monthly, it’s time to rebalance your portfolio. Before you buy or sell anything, start by adding up the values of all five of your holdings. Divide the result by five to determine the target amount of money you should have invested in each of the new month’s picks. Next, sell your excess shares: for those picks that have carried over from last month (of which there are four this time around), sell however many shares you need to sell to get your total holdings in these stocks as close as possible to the target value you just figured out. One pick, Boston Beer Co., didn’t carry over — so you’ll want to sell your full investment in that company. Finally, using the proceeds from these sales, you’ll want to buy enough shares to bring your investment in each of the October picks as close as possible to the target value. For the new pick, Sierra Wireless, this means buying the full target value. For picks that have carried over, you may need to buy a few shares of some of them. You won’t be able to hit the target value exactly for any of the picks, and that’s okay. Just get about as close as you can given the share prices.

The result is that you should be making six trades. You will be selling all of Boston Beer Co. (SAM) because it is not carrying over. You’ll be buying the full target value of Sierra Wireless (SWIR) because it’s a new pick for October. The four other picks all carry over from last month, so you’ll just be buying or selling enough of each to get the value of those holdings close to your target value.

If you’re not confident that you understand how to do this, it might help to go through the process in a bit more detail. You can review how Plan 5 works, here.

That’s all for Plan 5 Monthly this month. Now let’s take a peek at how Plan 5 Quarterly is doing. If you’re following Plan 5 Quarterly, just sit tight — there’s nothing to do this month. (It’ll be your turn next time!)

Plan 5 Quarterly: September 2013 Progress Report

Plan 5 Quarterly had another great month, having grown 22.96% so far this quarter, with one month to go.

October may turn out to be a rough month for the market. Assuming no last minute deal, the U.S. government will be shutting down, maybe for a few weeks. The temptation is there to get out of the market now and jump back in only once the chaos has blown over. I would recommend staying in, though; riding out the downs and ups is historically a more successful (and much less stressful) strategy than attempting to time the market. If you pull out now and try to get back in at just the right time, you’re competing against many (highly skilled and experienced) money managers who are also trying to find the right timing. Unless you’re exceptionally gifted (or lucky), you’re liable to end up being in for the better part of the fall, and missing out on the best of the recovery. I’d say it’s better to avoid the risk, and the stress, by simply riding out the whole mess. Stick with the plan.

That’s it for this month — I’ll be back at the end of October with the latest picks.

Thrive!

Mike Ferrier

Plan 5’s first month is finished, and the results look good! Let’s dig right in — here’s what happened to the Plan 5 Monthly picks during their first month:

Plan 5 Monthly: August 2013 Results

Three out of August’s five picks went up substantially, more than balancing out the other two that lost ground. The result is a total portfolio gain of 8.05%, easily beating out the S&P 500 which lost 4.01% over the same period.

That makes an excellent first month for Plan 5, but keep in mind that not every month will produce terrific results like this. Back testing shows Plan 5 Monthly losing value in roughly one out of three months, and Plan 5 Quarterly losing value in one of five quarters. So, be prepared to see a minus sign in the bottom line every so often. What’s important is that the value of our portfolio rises more often, and more steeply, than it falls.

Now let’s focus on the present. Here are the Plan 5 Monthly picks for September:

Plan 5 Monthly: September 2013 Picks

If you’re following along with Plan 5 Monthly, here’s a review of what to do now. Because 3 out of the 5 picks are carrying over from last month, you won’t need to sell all of those 3 positions; you’ll just need to buy or sell however much is needed to balance those three, so that you’ll have roughly the same amount invested in each of September’s 5 picks at the beginning of the month.

So the first thing you’ll want to do is add up the values of all 5 of last month’s positions. Say, for the sake of example, that you had invested $1000 in each of last month’s picks. Then, due to some of the picks gaining value and a couple of others losing value, the sum of your 5 positions would now be equal to roughly $5425. If you want to add any money to your Plan 5 investment this month, now’s the time to do it; just add it to that total. For this example we’ll assume no new money is being added, and the total investment will remain at $5425. Now divide that number by 5 to determine how much you’ll want to have invested in each of September’s picks: roughly $1085.

Two of last month’s picks did not carry over to this month: Mobile Mini and WisdomTree Investments. You can start off by selling your entire position in those two stocks.

Now, each of the 3 picks that are carrying over from last month went up substantially — so much so that you’ll need to sell off a little bit of each of them, to bring your investment in each one as close as possible to $1085. So for example, Caesarstone gained 27.32%, so your $1000 investment would have become roughly $1273. You’ll want to sell only enough shares to bring the value of your investment in Caeserstone down to being as close as possible to $1085. In this case, since Caesarstone shares are selling for $41.76, you’ll probably be selling 4 or 5 shares. It won’t be possible to get each of your investments to be worth exactly $1085, of course, because you can’t buy or sell fractions of shares. Some will end up a little high, others a little low. That’s okay.

Had Caesarstone’s value gone down instead, then you would be buying the shares you’d need in order to reach your target of $1085, rather than selling shares.

Once you’ve taken care of re-balancing each of the holdings that have carried over from last month to this month, and you’ve sold off the positions that are not carrying over, then the remaining proceeds from what you’ve sold should be able to be split roughly evenly among this month’s two new picks, LinkedIn and Boston Beer Co., to bring your investment in each of them very close to your target of $1085. The end result is that the money you’re investing in Plan 5 should now be roughly evenly split between all 5 of September’s picks.

If you’re not sure you have a handle on this (it may take running through it a couple of times to master it!) you might want to review how Plan 5 works, here.

That’s all there is to it! Now we can sit back and let our money do its thing until the end of September.

Before I go, here’s a quick review of how Plan 5 Quarterly is doing. There’s nothing for Plan 5 Quarterly investors to do this month except sit tight — but it can be interesting to keep an occasional eye on how our investment is doing. Just watch out not to sweat it day by day, or even month by month; Plan 5 is designed to work over the course of years, and keeping too close an eye on the daily ups and downs can just cause unnecessary stress.

Plan 5 Quarterly: August 2013 Progress Report

With a gain of 13.7%, Plan 5 Quarterly had a great month, even better than Plan 5 Monthly.

That wraps up this month’s post, and a very satisfying first month it was. Enjoy the last days of summer, and I’ll be back with another update at the end of September.

Thrive!

Mike Ferrier

Here comes the very first set of Plan 5 picks! For a review of how Plan 5 works, see last week’s post here.

August 2013 Picks for Plan 5 Monthly:

Caesarstone (CSTE)
Mobile Mini (MINI)
Netflix (NFLX)
Tesla Motors (TSLA)
WisdomTree Investments (WETF)

August 2013 Picks for Plan 5 Quarterly:

Caesarstone (CSTE)
LinkedIn (LNKD)
Netflix (NFLX)
Tesla Motors (TSLA)
WisdomTree Investments (WETF)

Now, in a typical stock picks blog or investment newsletter, this is right about where we’d expect to find a bit of analysis of the picks. This is where I’d talk about how Netflix’s original programming, data-driven approach, brand recognition and content agreements put it in a good position against competitors such as Amazon and Hulu. Or how the size of Mobile Mini’s customer base is going up, while its debt load is going down. But… that’s not what you’ll find here. I use analysis like that to narrow down the field of possibilities, but the final picks are made by a computer algorithm. So, if you’re looking for news and analysis I recommend Google Finance or one of the many newsletters that concentrate on those things. I’ll be focusing on the picks.

The two lists are very similar this month, which is likely to be common. The next set of quarterly picks will arrive at the beginning of November, but I’ll be back at the end of August with a new set of monthly picks and a look at how the first set performed. Until then…

Thrive!

-Mike Ferrier

Hello, and welcome to Plan 5 Picks!

This blog is a chronicle of one adventure in investing. I’ve been researching the stock market on and off for the last 10 years or so. Last year I put together a simple plan and a computer algorithm to help guide my own investing. Back testing looked good for this approach, but as they say, “past results are no guarantee of future performance.” So I’ve been trying it out over the past year, and so far so good. Now I thought I’d blog about this investment approach as I go, for a while, and see how it performs in the future (while keeping a public record). If it does well, great! Maybe I’ll make this into a newsletter. Either way, it’s an experiment — in simple, stress-free investing.

Plan 5 is a straightforward approach to investing that just takes a few minutes every month. At the beginning of each month I’ll post here the results for the previous month, and the stock picks for the new month. If you’d like to invest along with me, you can follow along with Plan 5 yourself, using the instructions below. That’s pretty much all there is to it!

Would I recommend that you start investing with Plan 5 right now? No! If I can establish a good track record over the coming months and years, then sure, it’s worth considering. But that’s all I’m looking to do right now, is to put my investment plan out there as it happens, and establish a track record, for better or worse.

What is Plan 5?

Plan 5 is more than a bunch of stock picks — it’s a method, a strategy. There are going to be two different versions of Plan 5: Monthly and Quarterly. Let’s say you are investing according to Plan 5 Monthly, and you are starting with $5000 to invest. A plan 5 investor owns shares in exactly 5 stocks at all times. Each month I’ll be posting that month’s 5 picks. At the beginning of your first month, you would divide your $5000 into five equal portions (of $1000 each). You would invest $1000 (or as near as you can get, given the prices of individual shares) in each of that month’s 5 picks. Then you forget about it for a while. At the beginning of the next month, you sell all of your shares in all 5 companies. Some may have gone up over the course of the month, some may have gone down. Say that on average, they went up 2%. Then, your total amount of money to invest would now be $5100. You would then divide your new total into five portions, this time of $1020 each, and invest (as near as you can get to) that $1020 in each of the new month’s five picks. That’s it! Simple, right?

Two important strengths of this approach are:

No Need to Sweat the Timing. It removes the emotional stress (and resulting bad decision making) from the process. You don’t have to worry about figuring out just the right time to buy and sell; just do it at the beginning of the month. Plan 5 doesn’t depend on precise timing; if you’re a few hours or a couple days past the opening bell at the beginning of a new month, no problem; it won’t make a huge difference.

Balancing. Your investments will regularly be rebalanced. Balancing is an important part of any investment strategy, to make sure you don’t end up with a portfolio too heavily weighted with investments that have grown (and may now be overvalued), and too light on investments that have fallen (and may now be undervalued).

Why 5 stocks? Well, the fewer stocks you invest in, the less diversification there is, and so the greater the risk. But the more stocks you invest in, the higher the transaction costs. By running many computer simulations, I found 5 to be a good compromise to mitigate risk while maintaining high returns and keeping transaction costs from getting out of control.

Of course, the success of Plan 5 will come down largely to whether the monthly picks are any good. That’s what this blog will be a test of. Each month’s picks will be made publicly available right here, so there’ll be a record of how well the plan does over the long term.

You may be wondering how I approach coming up with stock picks every month. There are several different factors involved, starting with expert analysis to build a large pool of quality companies with good potential for growth. I then run that list of companies through my own proprietary computer algorithm, which looks for particular statistical patterns that, in my back testing computer models, have on average tended to predict stocks that are more likely to rise in the near term than to fall. The algorithm spits out the top five choices.

As I mentioned above, for any investment method to be successful it’s got to keep trading costs low. Every dollar paid to a stock broker is one less dollar available for investment. Minimizing trading costs is one of the reasons that this is Plan 5, rather than plan 6 or 8. And there are three more important ways to minimize trading costs:

The Quarterly Plan. Again, there are two versions of Plan 5: Monthly and Quarterly. With the monthly plan, you would buy and sell your 5 stocks at the beginning of each month. With the quarterly plan, you would buy and sell your 5 stocks at the beginning of every third month. Each month I will post the Plan 5 Monthly list of picks, and every third month (February, May, August and November), I will also post the separate Plan 5 Quarterly list of picks. If you want to invest using Plan 5, it’s up to you whether to follow the Monthly or Quarterly plan. The monthly plan performs a little better, according to back testing. The quarterly plan requires one-third the number of trades (and so one-third the trading cost), as well as less of your time and attention. Unless you have a good deal of money to invest with Plan 5 (on the order of tens of thousands of dollars), I would recommend starting with the Quarterly plan, to minimize trading costs.

Broker Fees. Another important part of reducing trading costs is choosing a low cost stock broker. A popular online broker, E*Trade, is fairly expensive at $9.99 per stock trade. If you don’t yet have an account with an online broker or are willing to open a new account, a good choice is OptionsHouse. They charge only $3.95 per trade, and get good reviews for their features and service. The difference between the two fees can be the difference between losing $1200 versus $474 per year to transaction fees with Plan 5 Monthly, or $400 versus $158 per year with Plan 5 Quarterly.

Repeat Picks. There are five picks every month (or every quarter), but that doesn’t necessarily mean 10 transactions (5 sells and 5 buys). This is because there will often be some picks in common between one period and the next. Say there is one stock in common between last month’s picks and the new month’s picks. You don’t need to sell that stock and then re-buy a different amount of it; you only need to sell or buy shares of it, in order to rebalance your investment in that stock so that it is roughly equal to your investments in the other four, new picks. That will save one transaction for each stock that is a repeat pick. Some months there may be no repeats, but other months may bring three or four repeats. This technique is a bit more complicated, but the savings add up.

While we’re talking about brokers, another decision you’ll need to make is what type of account to do your Plan 5 investing in. You can do it in a normal investment account, so that the money is always available for your use whenever you’d like to withdraw it. But you might want to consider using a retirement account (such as an IRA, 401k or SEP account) instead. With a retirement account, you won’t need to pay capital gains taxes each year, which will help your principal to (hopefully) grow faster and will save you a lot of record keeping come tax time. If you choose an IRA, you also have the choice between a regular IRA, where you pay taxes only when you eventually withdraw the money, or a Roth IRA, where you pay taxes the year you earn the money. If you’re planning to be in a higher income bracket when you’re retired than you’re in now (and what investor isn’t?) you might want to consider the Roth option.

That’s all for this little intro to Plan 5. I hope you find it interesting, entertaining, and maybe even useful. I’ll be back at the end of the month with our first set of picks. For now I just recommend: sit back, breathe, maybe give someone a hug or a smile, enjoy life, and most of all…

Thrive!

-Mike Ferrier