This is a hypothetical scenario that shows how
the Money Management Model performs under extreme circumstances. You are
unlikely to experience this degree of ongoing volatility but when extreme
situations do occur (and they do!), you will see how this formula
can significantly enhance your profits. So here we go!
The year: 2000. To make it easy, let's assume you have $10,000.00 to invest. The market has been
rising steadily for quite some time. You want to invest but fear it may be too
late.
see chart
If you are using the Money Management Model (MMM), this is what you do: Invest
half or $5,000.00 in an equity mutual fund and keep the remaining $5,000.00
on standby in a money market fund that pays 3.25% Interest. The price of the
equity fund is
$20.00 and
your $5,000.00 investment gets you 250 units.
see
chart
These numbers are entered into a table so we can chart our progress. Click
on the
see
chart
link to get a better view of what is
described on this page.
Next month you check the newspaper and, sure enough, your fund is sitting at $15.00.
It has lost 25% of its value. You also notice that your percentage loss
is only 12.25% because
only half of your portfolio is at risk.
You enter the amounts in the worksheets, perform the simple calculations and
you are instructed to increase your equity fund holdings by $1,000.00.
You call your broker and have them transfer $1,000.00 from your money
market account to your equity fund.
This chart
shows how the Money Management Model outperforms a Buy and Hold
strategy in a fluctuating market as described in the text.
The following month you are disappointed to see the price of your fund has
dropped to $12.00.
It is down 40% from the day you bought it but you are only showing a loss
of 21%.
Again you enter the numbers in the worksheet, perform the calculations and
receive a signal to transfer $1,350.00 from your money market account to
your equity fund.
The following month you are pleased to see the fund price recover somewhat to
$16.00.
Transfer $470.00 from your equity fund to your money market account.
Compare your results to those of the "Buy and Hold" investors. For
them, a loss of 20%. For us, a loss of only 4.4%.
If the price goes back to $20.00 they break even. We break even at $17.10.
see
chart
Each month you check the price of your fund and follow the formula to
determine how much to transfer. The
chart here
and the graph above show you what
happens as the fund price rises and falls.
The important columns to note for the time being are "MMM Value"
and "Buy and Hold". "MMM Value" shows the results obtained
by following the strategy. Compare to the results obtained using the "Buy
and Hold" approach.
You can see how our profits accumulate with each rise and fall in the fund
price. The "Buy and Hold" investors, on the other hand, end up back
where they started time and time again. The graph makes it easy to see why the
MMM is a useful and necessary tool to help you build and maintain wealth.
The prices used in this example were chosen arbitrarily to demonstrate how
the system manages to make money in extreme or unusual situations.
Take a good look at the chart. Notice how each time the price hits
$20.00 we find ourselves better off than the last
time it hit $20.00. And that is true whether the price rises first and falls back or dips first
and recovers. Think about that for a moment.
Choose any price in the
chart
that you see repeated a few times. Whenever we
see any price reoccurring further down in the list we will be showing a profit
as long as the deviation from this price was large enough to trigger a response.
In other words, the formula forces us to buy low and sell high.
Notice also that right from the start we are in a downtrend. The price slides
from $20.00 to $12.00.
It recovers somewhat to a high of $19.00,
5% down from our initial price but by applying the MMM formula, we are
showing a 7.6% gain.
$18.00,
10% below the high. We are ahead
15.7%. And considering only a portion of our
initial $10,000.00 is at risk most of the time, the actual return on our
"at risk" money is even higher.
see
chart
The price drops further and recovers to
$17.00,
15% off the high. We are showing a 27%
gain.
Another dip to $9.00 and
finally, in July, 2001 we
are back were we started, $20.00.
The "Buy and Hold" investor is happy just to have his money back while
followers of the "Money Management Model" are up
66.9%!
see
chart
If the price suddenly dropped now to
$8.56 our portfolio would be worth $10,000.00.
Break-even. The "Buy and Hold" portfolio would be showing a 57.2% loss
with no opportunity (cash!) to take advantage of the lower prices.
see
chart
Extreme price fluctuations used in this example demonstrate how the MMM
adapts to any situation to ensure long-term growth. Notice how MMM always reacts
in such a way as to profit from the market’s uncertainty. Whenever we buy, we
lower our average purchase price and the break-even point. Whenever we sell, we
sell at a profit.
Each significant drop in the value of the investment triggers a transfer to
equity which lowers our break-even price and reduces recovery time.
If the market keeps fluctuating and we follow the system, growth is
guaranteed.
Take a peek at November,
2003. Since we began almost four years ago
the price is down 60%. Our portfolio is up
68%. Watch what happens as the price
recovers.
see
chart
Another point of interest: The "Buy and Hold" investor always holds
the same number of shares or units. There may be growth in unit value but there
is no growth in the number of units. To multiply your profits you need growth in
both areas.
Use of the "Money Management Model" ensures that over time we tend
to accumulate more and more shares without introducing additional cash.
Ordinarily, you might be quite happy if you had held on to your
$20
shares through thick and thin all the way up to $42
in 5 years. But not as happy as you would be if you had followed this
management system.
Even if the "Buy and Hold" investor was lucky enough to buy at the
lowest low ($8.00)
and sell at the highest high ($42.00),
which by definition would not happen, the maximum return was 425%.
see
chart
Not bad, but in this scenario the "Buy and Hold" investor is up
only 110%. Still not bad. The "Money Management
Model", however, is showing an impressive
509%
gain! And most of the time we are holding a
healthy portion of safe and secure cash. Lower risk. Higher returns.
see chart
There is no joy in watching your profits vanish whenever the market corrects.
Order the system and you will learn to welcome corrections. When you receive the
system, take it for a spin. Look for the bumpiest stock chart you can find. Do
the math. Smile. Pick another chart. Do the math. Smile again.
Try it on a few more charts until your smile becomes permanent. Then rush out
and tell someone.
