The Frugal Stock Fund: Part 1

The Frugal Stock Fund: Part 1

Good day everyone! I hope you all are doing fantastic and making profits in the market. I recently had a thought pass through my head and they are few and far between so I took note of it. The thought was if I had to start a retirement fund, or any kind of fund for that matter, and I only had $5000 dollars, what would that fund look like? There are so many things to think about when we are looking at starting a fund and I'm going to outline the new fund I am going to start. I obviously hope to make some money, but this is truly an experiment that could blow up in my face. Without further ado, let's start a $5000 frugal trading fund.

The first thing we need to think about is 'diversifying' the fund. Meaning we need to have stocks that are in different sectors of the market in case one sector crashes we don't blow up the whole account, but also if one sector takes off we can take advantage of the large move. With $5000 to start the account we will not be taking AAPL, GLD, AMBA, DIS, and NKE. The reason is because it is more of a long term fund and I want to take advantage of selling covered calls to increase the speed of the growth in the fund. If I bought 100 shares of NKE to sell covered calls on, that would take up my whole account plus some margin. Which leads into the whole idea of the frugal fund.

The second portion to consider is the price range for our picks. I think our sweet spot will be over $2 up to about $12. The reason I say about $12 is because if I find something prime for a move that is trading at $12.50 I won't hesitate to add that to this portfolio if it fits the rest of my parameters.

Thirdly, with the prices low on these stocks we will need some large volume. If the stock is below $5 I will be looking for volume at or above 5 million, again there is a little wiggle room there. I want large volume because it shows me the stock is nice and liquid for getting in and out, but it also tells me that there is interest in the company. Something else to consider with these low priced stocks is the average true range or ATR. This is how much the stock moves from high to low on average. We want stocks that move or are 'in play'. I will be looking for stocks that are moving at least 30 cents per day.

Next to consider are the strategies that will be used to make that money and how long we are going to hold onto each stock in the fund. Because of the low prices, I will be spending 99% of my time looking at long positions. I will focused on buying stock at nice strong support areas and selling covered calls as we approach strong resistance. If the stock continues in our direction and the shares get called away, great; if the call expires worthless, great. This means we lowered our cost basis for the stock and can sell another call right away. If I see a stock late that is still primed for a move higher, I will also consider selling a naked put in order to get the stock at the price I want without chasing it. Some of these positions we may only be in a couple weeks, some could be over a year.

So that pretty much sums up what the frugal fund and what it will look like. I invite all of you to follow along in this adventure and know that if you start up a fund of any kind you could lose the entire investment. Though this is not the goal, it is a reality and this is an experiment. I will be posting my ideas on specific stocks, and the plan for each play in an article to follow in the next couple weeks. And if there is still interest I will send an update out every month with new ideas for the fund or just updates on the current positions.

Have a blessed day!

Jonathan Higgins