(Initially posted 06-06-06)
I've got three relevent savings accounts. One is just a regular savings account. Two are for retirement. One of those is a Roth IRA - save after-tax dollars, but no tax is paid on it ever again. The other is a 403(b) - like the more popular 401(k), but for people who work in an educational institution - money is saved tax-deferred. The three accounts are in the same ballpark in terms of dollar figures. This is my starting line.
I'm just getting started. How to go about it? Here's the plan: Use one of these accounts to invest in the stock market for now. This is something of a tester year. What am I comfortable with? How do I do? My regular savings account is possibly going to be needed in the next few years in the form of a down payment on a house/condo. My 403(b) can't be used for stocks - those are the (annoying) rules that the employer made. So, I'm going to use my Roth IRA for investing. I've found a deep-discount online broker - they charge only $0.01 per share ($1 minimum per trade). I'm going to form three portfolios in my Roth IRA, and compete three strategies against one another:
A. Use the MFI. The basic strategy of MFI is to rank all stocks in terms of earnings yield and, separately, return on invested capital. Combine the ranks (eg., if #1 on EY is also #153 on ROIC = combined rank is #154). Choose randomly from the top few percent of that list, such that 5-7 stocks are bought every few months until a portfolio of 20-30 stocks is built up. Hold each stock for a year, then sell and buy new stocks. (There are normally tax implications about exactly when to sell - a little less than a year for losers, a little more for winners - but I don't think that exactly applies in this case, since it's a Roth IRA.) I'm not going to choose 100% randomly - I'm going to also screen for companies in which insiders have recently bought shares. This has been shown to be effective (an online discussion group that I subscribe to posted a report with data on this, and there is an investment company dedicated to this strategy, as well). I'm learning what sorts of financials should be looked at, and starting to learn a little about analyzing companies as well, and these will inform which companies that I invest in.
B. The Motley Fool's Hidden Gem portfolio. Similar approach, but a less mechanical, more research-driven portfolio. Great returns over the last 4-odd years. After what I found about savings vs. returns, the cost for a years subscription seems much more worthwhile.
C. Something along the lines of the One Up on Wall Street approach. I haven't read the book yet, but I think I get the gist: my PhD should be good for something. Maybe it's good for having a superior understanding of the biotech market. For example: I am interested in ALNY. I recently read an analyst report that tried to rank ALNY by using the financials of companies that it called 'comparables.' One of those companies was DVSA. Yes, they are in the same general industry, but no, the business that they do is completely different. DVSA is an established, though still small, biotech company that focuses on producing industrial products using a well-founded technology. ALNY is aiming to produce therapeutics using a technology that is as yet unvalidated. If the technology works, ALNY will clean up, because they have cornered the market on all of the relevent IP. But to compare ALNY to DVSA is actually ridiculous. I'll definitely have more to say on ALNY in the near future.
In addition, I'm going to keep at least 10-15% in reserve, so that when markets tank (like they have in the last three weeks or so), I can buy into them and get great margins of safety.
Just waiting for my account to be funded... It could be up to 10 business days still! For the love--!!
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