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Author: Holg Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1205  
Subject: Mechanical Investing Options Handout Date: 4/11/2000 9:34 AM
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Options, Indexes and Sector Fund Investing


Options Presentation


Who is klouche? Introduction
My Options Story
Terms
6/3 Theory
How to choose `em
Nuts and bolts
Roll Ups and Outs and Other Fine Tuning
Who should do this
Reference material

Other Stuff


My MI Story
My current methodology
The data mining issue
Applying RS to Indexes (new)
Applying RS to Sector Funds (new)


Who is klouche?


Kevin Louche, 48
Project Manager, Oracle Corp
Married, 3 daughters
Residing near Sacramento CA.
My Options Story


Actually owned S&P500 Index calls in October 1987
Purchased some gold options at a loss
Joined MI (then FW) in August 1998, when R Sheard left TMF
Read 6/3, at first skeptical
In March 1999 generated an options backtest
Purchased first contract group in May at 2% of portfolio, 30% gain
Purchased second group, based on PEG26, August, included QCOM and JDSU, 130% gain
Purchased another group in October, option sale day, included ORCL, QCOM, and SEBL. 400% gain.


Terms


A stock option contract is the right to purchase 100 shares of stock at a specified price for a limited period of time
With MI we use ``call' options
``Put' options have the right to sell 100 shares of stock at a specified price for a limited period of time
We call the stock involved in an option contract the ``underlying'
The specified price the buyer of the option has rights to is called the ``strike' price
The date the option expires is called the expiration data
``Delta' is the rate option price changes with underlying price
``Gamma' is the rate ``Delta' changes with underlying
``Theta' is the rate of time decay, i.e. how fast option price declines per day
``Delta', ``Gamma' and ``Theta' are Greek letters, called the ``Greeks'
If strike price > underlying price at the time of purchase, the option is referred to as ``out of the money', expressed as %OTM
If strike price < underlying price at the time of purchase, the option is referred to as ``in of the money', expressed as %ITM


6/3 Theory


Originated by Sparfarkle
Makes optimal use of ``Gamma' or rate of change of change ``Delta'
Avoids serious time decay by selling 3 months before expire
Uses 10% Out of the Money (OTM) strikes


How to choose `em


Use the following link for the fastest and best quotes: http://www.edreyfus.com/cgi-bin/dbsclient?TYPE=F3&TAG=01QUOTEquote
Use PEG13 or PEG26 or PEGRSW to pick underlying stocks
Best time to buy is during protracted (i.e. at least 3 months) market lulls. Lately August-October is good.
Use entire list, don't focus on top 4 or 5
Be selective on industry, volume, market capitalization if not tech, and volume low, and cap low; reject
In general choose 5% OTM rather than 15% OTM
Choose 7 months to expiration rather than 5
Choose ratio stock to option at least 4, higher the better.
From below

C AUG00 110.000 11 1/2 20 21 1/4 0 0 0 0 1 WATHA

Choose this option, WATHA, from PEG13 #6 stock WAT, 7% OTM,5:1 Stock to Option, 5 months to expire


Nuts and bolts


To buy a stock you need to know one thing, the company name to find the symbol
To buy options you need to specify call (as opposed to put), stock symbol, strike price, and expiration date in order to find option symbol and quote
In general, options are priced fairly close to the Black-Scholes price model see
http://hoadley.it-au.com/Options/BS.htm
However, if there is no activity, the quoted price will not be updated
If stock goes flat or down, most of option value is lost
If stock goes up, a quick calculation is intrinsic value plus 20%
Intrinsic value is current stock prick - strike price

Roll ups and Out and Other Fine Tuning


Who should do this


You should be willing to lose entire option investment twice in a row
You should be able to do simple math calculations in your head
You should have read everything on MI about options purchasing
You should have a $50,000 portfolio, start in October, look for cheap options
Remember, if you decide to experiment, don't mess with the choice of underlyings. Stay with MI.

Survey Results

Poll
Questions
%
#

Port Composition
No Options
54%
87


Options + Long
34%
55


Options + Cash
0%
0


Options + Long + Cash
7%
12


Options + Short + Long
4%
7






Style
6/3
91%
69


Leaps
4%
3


2/1or other near term expirations
1%
1


Straddles, strangles, sparkleflies
3%
2


Covered calls or other
1%
1






OTM/ITM
15% or more OTM
7%
5


5% OTM through 15% )TM
89%
66


5% or more ITM to 5% OTM
3%
2


more than 5% ITM
1%
1






% of Port
<2%
16%
14


3-5%
22%
19


5-10%
44%
38


10-20%
17%
15


>20%
1%
1






Underlying Simple
Relative Strength and / or PEG/EG
64%
54


Spark, Keystone, Plow
4%
3


What's Working Now or Short History Screen
2%
2


IBD, IBD WER or other
4%
3


Mixture of above
27%
23





How big is your MI port? (If you have parts of your port that aren't in MI

strategies, please don't include in your calculation)

20% (42 Votes) $1-$50,000
38% (79 Votes) $50,001-$250,000
24% (50 Votes) $250,001-$750,000
10% (21 Votes) $750,001 - $1.5M
8% (17 Votes) > $1.5M






Maximum symbols for equities 10, Options, use 1 base symbol only

Quotations delayed 20 minutes during stock market hours.


Symbol: WAT, Quote: 103 1/2


Maximum symbols for equities 10, Options, use 1 base symbol only


* * * C A L L S * * *

For DBS clients authorized to trade options.

Click on description to go directly to option order entry.


DESCRIPTION LAST BID ASK CHG HIGH LOW VOL OI SYM
------------- ----- ------- ------- ------ ------- ------- ------ ----- -----

C MAR00 80.000 12 26 1/2 27 3/4 0 0 0 0 0 WATCP
C MAR00 85.000 16 1/2 21 5/8 22 7/8 0 0 0 0 0 WATCQ
C MAR00 90.000 20 1/4 13 3/4 14 3/4 +2 3/4 20 1/4 20 1/4 1 8 WATCR
C MAR00 95.000 14 1/8 9 3/4 10 1/4 +3 15 1/4 14 1/8 20 40 WATCS
C MAR00 100.000 5 1/8 6 3/8 6 7/8 -4 7/8 10 7/8 5 1/8 21 71 WATCT
C APR00 80.000 23 1/4 28 1/8 29 3/8 0 0 0 0 2 WATDP
C APR00 85.000 13 5/8 23 7/8 25 1/8 0 0 0 0 10 WATDQ
C APR00 90.000 12 1/4 20 1/8 21 3/8 0 0 0 0 0 WATDR
C APR00 95.000 16 1/4 16 3/4 17 3/4 0 0 0 0 300 WATDS
C APR00 100.000 13 3/8 11 3/8 12 3/8 -1 5/8 13 3/8 13 3/8 2 15 WATDT
C APR00 105.000 11 3/4 9 1/8 9 5/8 +5/8 11 3/4 11 3/4 10 2 WATDA
C MAY00 55.000 5 1/4 52 1/8 53 3/8 0 0 0 0 10 WATEK
C MAY00 60.000 7 5/8 47 1/4 48 1/2 0 0 0 0 21 WATEL
C MAY00 65.000 14 3/8 42 1/2 43 3/4 0 0 0 0 1 WATEM
C MAY00 70.000 15 37 7/8 39 1/8 0 0 0 0 40 WATEN
C MAY00 75.000 19 1/8 33 3/4 35 0 0 0 0 1 WATEO
C MAY00 80.000 15 1/4 29 5/8 30 7/8 0 0 0 0 2 WATEP
C MAY00 85.000 14 26 27 1/4 0 0 0 0 20 WATEQ
C MAY00 90.000 16 22 3/8 23 5/8 0 0 0 0 74 WATER
C MAY00 95.000 0 19 1/4 20 1/4 0 0 0 0 0 WATES
C MAY00 100.000 11 3/8 16 1/4 17 1/4 0 0 0 0 10 WATET
C MAY00 105.000 0 13 5/8 14 5/8 0 0 0 0 0 WATEA
C AUG00 40.000 0 42 3/4 44 0 0 0 0 0 WATHH
C AUG00 45.000 0 38 1/8 39 3/8 0 0 0 0 0 WATHI
C AUG00 50.000 5 58 1/8 59 3/8 0 0 0 0 10 WATHJ
C AUG00 55.000 29 1/4 53 5/8 54 7/8 0 0 0 0 2 WATHK
C AUG00 60.000 0 49 1/4 50 1/2 0 0 0 0 0 WATHL
C AUG00 65.000 34 45 46 1/4 0 0 0 0 0 WATHM
C AUG00 70.000 13 1/2 41 1/8 42 3/8 0 0 0 0 6 WATHN
C AUG00 75.000 10 3/8 37 1/4 38 1/2 0 0 0 0 10 WATHO
C AUG00 80.000 29 34 35 1/4 0 0 0 0 30 WATHP
C AUG00 85.000 32 1/4 28 29 1/4+16 1/8 32 1/4 32 1/4 5 41 WATHQ
C AUG00 90.000 21 27 7/8 29 1/8 0 0 0 0 28 WATHR
C AUG00 95.000 17 3/8 25 1/8 26 3/8 0 0 0 0 5 WATHS
C AUG00 100.000 19 1/2 22 5/8 23 7/8 0 0 0 0 26 WATHT
C AUG00 110.000 11 1/2 20 21 1/4 0 0 0 0 1 WATHA



Other Stuff


My MI Story


In 1987 purchased a ``system' to identify entry/exit points for commodity contact purchases
Early 1991, loaned out of the library Michael O'Higgins ``Beat the Dow'.
Purchased 4 BTD stocks, my first MI purchase
Sold in early 1992
Purchased BTD and RP4 in a SEP-IRA, April 1993, through October 1999
Obtained monthly DOW component prices, worked various RS and BTD strategies
Purchased Keystone, September 1998, AOL first $100,000 winner
Purchased RKE blend, July 1999; included TTN
April 1993 to date CAGR is 65% beating all known ``wise' records and most of the traders in ``New Market Wizards'

My current methodology


I use SOS-K primarily, a 3 stock monthly blend with a solid 14 year backtest
Supplemental screens primarily a what's working now composite, lately RS13, FOG-MI, EG
Options purchased on PEGxx, SOS-K, FOG-MI
In general I hold few stocks considering portfolio size

The data mining issue


In general, the way we approach MI, the fear of data mining is over-rated
In limited data backtests, with a variety of investment choices available, indicate that 85% of the ultimate best screen is possible



Applying RS to Indexes (new)


Now that historical data is readily available, we can test relative strength theories on a variety of market data. Using Yahoo tables, I constructed a backtest from 1986 through 1999. Dividends not included so these numbers are skewed slightly against the DOW.

Year
DOW
IXIC
N225
OEX
SPX
Averages

1986
37.4%
16.8%
53.7%
28.9%
29.4%
33.2%

1987
-9.3%
-12.1%
18.5%
-6.5%
-6.2%
-3.1%

1988
19.6%
16.4%
33.1%
15.9%
15.7%
20.2%

1989
10.6%
3.6%
17.8%
8.1%
10.6%
10.1%

1990
5.6%
-0.4%
-37.4%
5.8%
4.5%
-4.4%

1991
17.8%
49.7%
-5.5%
16.7%
18.9%
19.5%

1992
2.7%
12.3%
-22.7%
5.6%
7.3%
1.0%

1993
20.2%
15.0%
18.8%
11.0%
9.8%
14.9%

1994
-3.4%
-5.7%
-7.8%
-2.1%
-2.3%
-4.2%

1995
40.4%
40.3%
11.6%
39.7%
35.2%
33.4%

1996
26.3%
30.2%
-11.9%
26.5%
23.6%
18.9%

1997
16.0%
17.4%
-9.3%
21.5%
24.7%
14.1%

1998
18.4%
54.7%
-12.8%
36.6%
30.5%
25.5%

1999
17.3%
57.2%
33.8%
17.9%
9.5%
27.1%









CAGR
14.9%
19.2%
2.9%
15.4%
14.4%
13.4%

GSD
13.0%
20.1%
27.7%
12.5%
11.6%
17.0%

SHARPE
0.763
0.708
(0.076)
0.827
0.814
0.493




INDEX CODE
DESCRIPTION

DOW
Dow 30 Industrials

IXIC
NASDAQ Composite

N225
Nikii (Japan) 225 Composite

OEX
S&P 100 (Large Cap)

SPX
S&P 500 (Large and Mid Cap)




From the above it's apparent that IXIC was the place to be over the 14 year period. N225 was the place not to be. The burning question: is it possible to achieve the IXIC return without knowing the future, on January 1, 1987. Back then, the Japanese market seemed invincible. Excess foreign dollars were buying US real estate and companies at an alarming rate. Honda was making the Accord while Chrysler made ``K' cars. The emotional investor may have chosen the N225 for the next 14 years.


To see if we could avoid the N225 using Relative Strength, a database of pre 1,2,6 and 12 month performance and 1,3,6 and 12 month results was constructed. Then each combination of pre/post tested. In addition, a 1,2,6, and 12 month composite (like RSW) was used. The result:

RS Months
Hold Months
Rank In
Annualized

RSW
1
1
21.0%

2
1
2
19.7%

6
1
1
19.5%

1
2
2
18.9%

12
2
4
18.5%

6
1
4
18.5%

12
1
1
18.3%

1
2
4
18.1%

RSW
1
4
18.0%

12
12
1
18.0%

6
6
4
17.9%

6
2
4
17.8%

12
1
2
17.7%

12
6
1
17.5%

6
12
1
17.3%

1
6
2
17.0%

12
2
1
17.0%

RSW
2
3
17.0%

RSW
12
1
17.0%

2
1
4
16.9%

12
1
4
16.9%

1
1
1
16.8%

1
2
3
16.8%

6
1
3
16.7%

12
2
3
16.7%

12
6
4
16.6%

12
12
4
16.6%

6
2
2
16.5%

2
1
3
16.4%

6
12
4
16.3%

6
2
3
16.2%

2
1
1
16.2%

12
1
3
16.2%

6
6
2
16.1%

12
2
2
16.0%

2
2
3
16.0%

1
6
3
16.0%

RSW
1
3
16.0%

RSW
2
1
16.0%

RSW
2
4
16.0%

RSW
6
1
16.0%

2
6
2
16.0%

1
12
3
15.8%

2
6
3
15.8%

6
1
2
15.6%

2
2
1
15.6%

6
2
1
15.5%

1
12
1
15.5%

2
12
1
15.5%

6
6
1
15.4%

2
2
2
15.2%

6
6
3
15.2%

RSW
1
2
15.0%

RSW
6
2
15.0%

RSW
6
4
15.0%

RSW
6
3
15.0%

RSW
12
3
15.0%

RSW
12
4
15.0%

2
6
4
15.0%

2
12
4
14.9%

2
12
2
14.9%

1
1
2
14.9%

12
6
2
14.8%

2
2
4
14.7%

6
12
3
14.7%

6
12
2
14.6%

12
12
2
14.6%

12
6
3
14.6%

1
6
4
14.4%

2
12
3
14.4%

1
12
2
14.2%

12
12
3
14.1%

RSW
2
2
14.0%

RSW
12
2
14.0%

1
1
3
14.0%

1
12
4
13.9%

2
6
1
12.5%

2
2
5
12.0%

1
1
4
11.7%

1
2
1
11.4%

1
6
1
11.2%

1
6
5
10.8%

2
6
5
10.0%

RSW
2
5
10.0%

1
12
5
9.6%

2
12
5
9.2%

1
1
5
8.9%

1
2
5
8.8%

RSW
6
5
8.0%

RSW
12
5
8.0%

6
2
5
7.6%

12
1
5
6.5%

2
1
5
6.4%

RSW
1
5
6.0%

12
2
5
5.5%

6
12
5
5.5%

6
1
5
5.4%

12
6
5
5.4%

12
12
5
5.0%

6
6
5
4.5%





Good news! Using one of several RS techniques, in three case we beat what would become the best index to own after 14 years. In general, buy the number 1 ranked index, based on RSW and hold for a month.


It's interesting to review what indexes we would have been in over time.


Number of Months of Year in Index Ranked #1, based on RSW Year
DOW
IXIC
N225
OEX
SPX

1986
2
2
8
0
0

1987
4
1
6
0
1

1988
1
1
9
0
1

1989
3
1
6
0
2

1990
7
0
2
2
1

1991
0
11
1
0
0

1992
4
6
1
0
1

1993
1
7
3
1
0

1994
4
4
3
1
0

1995
3
3
2
3
1

1996
4
5
2
1
0

1997
3
5
0
2
2

1998
2
5
1
4
0

1999
2
9
1
0
0




Note how in 1986-1989 we would be heavily in N225, corresponding to the rise of the Japanese market. Then the focus shifts to IXIC until today.


Here's RSW, Buy #1 Ranked Index, Hold for a Month

Year
Return

1986
35.3%

1987
12.1%

1988
25.8%

1989
15.6%

1990
-18.8%

1991
35.8%

1992
14.6%

1993
23.2%

1994
-3.4%

1995
47.8%

1996
11.5%

1997
18.1%

1998
26.4%

1999
48.9%




CAGR
19.5%

GSD
17.5%

SHARPE
0.831





Dividends would push this over 20%. Application of this strategy to be discussed later.



Input rank as it affects return.

Average of Annualized
Rank In





Hold Months
1
2
3
4
5

1
18.3%
16.6%
15.8%
16.4%
6.7%

2
15.1%
16.1%
16.5%
17.0%
8.8%

6
14.5%
15.8%
15.3%
15.8%
7.7%

12
16.6%
14.5%
14.8%
15.4%
7.4%

Averages
16.2%
15.7%
15.6%
16.1%
7.7%






Applying RS to Sector Funds (new)



Fidelity Investments has offered mutual funds since 1930. It is the largest mutual fund company today with over 243 offered. Included is 38 sector funds ranging from Biology to Utility. Can MS RS techniques apply here?


To determine, I selected 1986-1999 history on 27 of the 38 sector funds as follows:

Symbol
Name
Symbol
Name

FBIOX
Biology
FSHOX
Housing

FSAGX
Amer Gold
FSLBX
Brokerage

FSAIX
Air Trans
FSLSX
Leisure

FSAVX
Autos
FSPCX
Insurance

FSCGX
Indust Equip
FSPFX
Paper

FSCHX
Chemical
FSPHX
Health Care

FSCPX
Computers
FSPMX
Prec Metals

FSCSX
Software
FSPTX
Technology

FSDAX
Defense
FSRPX
Retailing

FSDCX
Devlp Communications
FSTCX
Telecomm

FSDPX
Indust Matl
FSUTX
Utilities

FSELX
Electronics
FSVLX
Home Finance

FSESX
Energy Svcs
PFHCX
Med Delivery



PFNGX
Natural Gas




The performance of funds vary widely, by descending CAGR:


1986 (or later) to 1999 Performance Fund
CAGR
Years of

Data

FSDCX
32.1%
14

FSELX
25.6%
13

FSPTX
22.9%
13

FSCSX
21.3%
12

FSTCX
21.0%
11

FBIOX
18.3%
12

FSPHX
17.3%
7

FSRPX
14.6%
13

FSUTX
14.6%
13

FSCPX
14.5%
7

FSLBX
13.5%
13

PFHCX
11.8%
13

FSPCX
11.2%
13

FSCGX
11.1%
13

FSVLX
10.9%
13

FSCHX
10.5%
14

FSAIX
10.1%
13

FSESX
9.4%
13

FSDAX
8.8%
13

PFNGX
8.2%
13

FSHOX
7.9%
13

FSLSX
6.8%
13

FSPFX
6.4%
13

FSAVX
5.9%
14

FSDPX
4.1%
13

FSAGX
0.2%
12

FSPMX
-5.2%
6




Median return is a measly 11%, worse than the indexes talked about earlier. However, the best sectors rival MI screens. Developing Telecommunications returned 32%! Not bad for a fund, over the long haul.


Before we go much further, some basics on these funds:


At least 80% of funds must be in the sector.
A 3% front end load is charged on all funds.
From that point forward, switching is $7.50 if > $1,000 and .75% if less than $1,000; if more than 29 days between switches.
Minimum for IRA is $500, $2,500 for other accounts.

So the question is, what switching technique would allow us to grab the most returns? To determine, pre 1,3,6 and 12 month prior returns were calculated against 1,3,6 and 12 month forward returns. As expected there is significant auto correlation, however with a significant #1 curse. That is, the #1 performing fund was usually at slight disadvantage to #2, #3 and #4.


A summary:


Performance if Ranking 1-3 or 2-4 Sector Fund Purchased


Ranks

1-3


Ranks

2-4



Back
Forward
Correl
CAGR
GSD
Sharpe
CAGR
GSD
Sharpe

B1-12
F01
-59%
26%
16%
1.300
27%
16%
1.357

B12
F01
-58%
25%
21%
0.983
25%
20%
0.991

B12
F03
-70%
23%
18%
0.998
25%
18%
1.092

B03
F01
-26%
22%
19%
0.878
22%
20%
0.867

B06
F12
-56%
21%
16%
1.002
20%
16%
0.966

B03
F12
-64%
21%
15%
1.031
20%
14%
0.975

B12
F06
-62%
20%
16%
0.925
21%
16%
0.963

B1-12
F12
-52%
20%
17%
0.899
20%
17%
0.906

B1-12
F03
-46%
20%
14%
1.053
20%
15%
1.051

B01
F12
-48%
20%
16%
0.894
19%
16%
0.836

B01
F01
-65%
19%
19%
0.760
20%
20%
0.785

B12
F12
-12%
19%
16%
0.870
17%
16%
0.760

B06
F06
-58%
19%
12%
1.155
20%
11%
1.254

B06
F01
-31%
19%
19%
0.708
18%
17%
0.696

B03
F03
4%
18%
13%
0.996
20%
12%
1.118

B06
F03
-35%
18%
13%
0.984
19%
12%
1.121

B1-12
F06
-33%
17%
11%
1.095
17%
12%
1.093

B01
F03
-30%
17%
16%
0.721
17%
17%
0.768

B01
F06
2%
15%
14%
0.740
16%
13%
0.766

B03
F06
16%
15%
11%
0.884
15%
11%
0.949





In general, the best history is 12 month history, the best hold term is 1 month, the best ranks to own are 2-4. In all cases, median sector fund return of 11% is exceeded. The Correl column is the auto correlation between inbound rank and outbound performance. The more extreme the correlation, the better the return. In fact, the correlation of correlation to CAGR is -67%, fairly strong. RS works on Sector Funds!


Here's an example: 12 month RS, against 1 month hold, average of #2, #3 and #4 rank:

Year
Return

1986
24.7%

1987
-17.4%

1988
27.5%

1989
13.4%

1990
27.2%

1991
45.3%

1992
15.9%

1993
19.6%

1994
1.4%

1995
37.9%

1996
30.6%

1997
31.0%

1998
45.1%

1999
79.5%




Not too shabby, considering returns on cash, bonds, indexes and other mutual funds.


Here's a count of which funds were owned during the 14 year time period, using RS to choose 3 each month:

Count of Name
Year
















Name
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Total

Air Trans

1
1
9





3
2

4


20

Amer Gold

2


1


7
3

4




17

Autos

3
5



8
2







18

Biology
4


4
8




1
2


4

23

Brokerage





3
3
2


2
9
2


21

Chemical

5
1





3






9

Computers







8
2

1

3


14

Defense










5




5

Devlp Communications







2

6


2
6
1
17

Electronics




7

4
2
4
2
3
6
1
6

35

Energy Svcs

3

1
2


1


1
9
2

1
20

Health Care




11
8
1

3
4


3


30

Home Finance



1

2
4
2
2
1
7
8



27

Housing

5
6












11

Indust Equip


5
3











8

Indust Matl

4
3



4

2






13

Insurance

1

2


1
2



2
1


9

Leisure
5
1













6

Med Delivery


3
3
1
1


9
3





29

Natural Gas










6




6

Paper

1



1


3
3





8

Prec Metals

2
4

1


4
4






15

Retailing

2
3
4

5
1



1
1
1
2

29

Software

2




9
3

7


1
3

25

Technology

1


3
7


1
6
2
1
1
12
1
35

Telecomm

1
3
9








4
1

18

Utilities
11
1
2

2

1
1




2
2

22





Compared to MI returns, so what? I see several uses for sector funds:


For investors starting out, with as little as $500, this is the way to go.
For investors with large accounts, sector funds could be a good place to park some of the portfolio in lieu of picking a long term buy and hold.
For options investors, sector funds look tempting for options profits, as money is taken off the table.
For MI investors, who've reached critical mass, sector funds are a simple way to park assets, diversify to one of the largest financial institutions in the country that the government will probably never let fail.

The downside is the 3% load. One would have to be committed to Fidelity to and keep funds there for some time. However the total slippage of $7.50 is not to be taken lightly. On a $10,000 transfer, this is almost non-existent. In non IRA accounts, margin can enhance return.


To put this in perspective, I've developed some investor life cycle scenarios. In scenario 1, a young investor, I'll call ``Little Bucks', scrapes up $500 a year for 6 years and purchases the top performing Fidelity Sector mutual funds in a Roth IRA. So, $3,000 over 6 years, and his savings days are over! Big Deal! Then, he follows MI techniques for the next 12 years. At the end he returns the funds to Fidelity, and draws 25% annually. He's living on over $500,000 per year, tax free (less 10% penalty), and never has to work again!


In another scenario, Mr. Big Bucks can sock away $2,000 per year for 3 years. He's doing the same as ``Little Bucks', 4 years sooner. Here's the tables:

``Little Bucks' - $500 / Year for 6 years, to half million forever






Phase
Years
Return
Start
End
Payment

Mfund
6
25%
0
5,461
(485)

MI Annual
4
50%
5,461
27,644


MI An/Mo
4
65%
27,644
204,896


MI Options
4
80%
204,896
2,150,920


Mfund

25%


537,730

Total Years
18








``Big Bucks' $2000 / Year for 3 years, to half million forever






Phase
Years
Return
Start
End
Payment

Mfund
3
25%
0
7,568
(1,940)

MI Annual
3
50%
7,568
25,541


MI An/Mo
4
65%
25,541
189,313


MI Options
4
80%
189,313
1,987,330


Mfund

25%


496,832

Total Years
14









The contribution phases above use Excel's future value function and assume 3% load.


This is not the first time Fidelity Sector switching has been proposed. There are newsletters and advisories that do the same. A small book is available called ``Fidelity Select Money', by Donald Pickinpaugh, ATL Press. They came up with similar conclusions. In one case they claim a 27% return, but probably is a data mined exception.


It has been a pleasure talking to you this afternoon. Happy Fool's Day.


Kevin Louche
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