How to choose and use investment software. (Compute's Getting Started with Personal Money Management) (Buyers Guide)
by David English
Investments? Not for you; they're too risky.
Are investments really too risky? It depends on your perspective. Let's look at the stock market. Most people are scared that they'll lose a big chunk of their money in a dramatic move down. They may remember the sudden crash in October 1987. And everyone has heard of the big crash in 1929 that foreshadowed the Great Depression in the 1930s. Even Peter Lynch, the top Mutual Fund guru, warns investors that the stock market can fall as much as 40 percent in any given year.
That's the short run, now look at the stock market, not from the point of view of a few months or a single year, but from the perspective of decades. In this century, the stock market has gained about 10 percent per year, assuming reinvestment of dividends. After inflation that works out to a profit of between 6 and 7 percent.
With a 6-percent return, a one-time investment of $1,000 would grow to $1,689 in ten years, $3,025 in twenty years, $5,418 in thirty years, $31,120 in sixty years, and $320,096 in a hundred years.
If you were able to increase that 6-percent return to a 10-percent return after inflation, your single $1,000 investment would grow to $2,357 in ten years, $5,559 in twenty years, $15,863 in thirty years, $276,801 in sixty years, and $12,527,829 in a hundred years. (Debt works the same way, except in reverse. After paying off your ten, twenty, or thirty-year mortgage, you may well have paid $150,000, $200,000, or more for your $100,000 house. Because of this, you should pay off any money you owe as soon as you can.)
Interestingly, bank and money market accounts, while much less risky than the stock market, barely kept up with inflation. The only other investments that have rivalled the stock market over the decades have been real estate (which has special tax benefits) and certain collectibles (imagine buying Impressionist paintings at the turn of the century, movie posters in the 1930s, base-ball cards in the 1940s, and comic books in the 1950s).
My point is that prudent investments can pay big dividends over the long run. If you put just $1,000 or $2,000 into an IRA each year, you could have a sizable nest egg when it comes time to retire. And if you plan to save for your first house or send your kids to college, you had better start putting money aside now.
Just keep in mind that increased risk follows increased reward, so be prepared to ride out the short-term fluctuations. Also seek sensible advice with a proven long-term track record. The Zweig Forecast has the best long-term record for a stock market newsletter (Zweig Securities, P.O. Box 2900, Wantagh, New York 11793-9881; 516-785-1300; $256 a year). Or, as you'll see later on, you can do your own research and choose your own investments.
While personal-finance programs, such as Quicken and Microsoft Money, can help you track and evaluate your daily expenses, other programs, such as Managing Your Money, WealthStarter, and WealthBuilder, are better suited to help you plan for and meet your long-term savings and investment goals.
Managing Your Money (MECA Software, 55 Walls Drive, P.O. Box 912, Fairfield, Connecticut 06430; 800-288-6322; $79.95) includes tuition and retirement planners and a full investment portfolio manager that can update prices automatically through CompuServe and Dow Jones News/Retrieval. It can even suggest which investments would be best to sell before the end of the tax year.
WealthBuilder 3.0 (Reality Technologies, 2200 Renaissance Boulevard, King of Prussia, Pennsylvania 19406; 800-346-2024; $79.99) helps you set up a personal financial profile taking into account your net worth, risk tolerance, budget, short- and long-term goals, and personal preferences. It then helps you create a savings strategy, plot your financial goals, and determine your best mix of assets. WealthBuilder also includes Reality Technologies' SmartInvestor (available separately for $59.99), which gives you online access to stock, bond, and mutual fund prices as well as buy and sell alerts and online trading. (SmartInvestor comes with one month of online access. After that, you'll need to pay either $9.95 or $17.95 a month.)
WealthStarter 2.0 (Reality Technologies; $34.99) includes over 300 financial strategies based on the popular books by Charles Givens. Like the books, the program is a bit heavy handed at times, but its emphasis on establishing a set of financial goals (WealthStarter has eleven types) can encourage you to follow through.
The Trend Is Your Friend
As I mentioned earlier, there are programs that let you do your own research on stocks and other investments. The most common form of computer-based investment analysis is called technical analysis, where you chart historical price and volume data--usually of a stock, mutual fund, or market index--in an attempt to predict its future trend. Technical analysis is based on the notion that prices move in detectable patterns, and those historical patterns tend to repeat.
The best technical analysis program for the small investor is MetaStock Professional (Equis International, 3950 South 700 East, Suite 100, Salt Lake City, Utah 84107; 800-882-3040; $349). MetaStock includes more than 60 pre-programmed indicators and studies you can use to analyze your data and a formula builder that lets you customize your own indicators and studies.
Once you've set up your own trading system, you can test your trading rules against your historical data, quickly produce buy and sell signals, and calculate your profit and loss. In this way, you can test your trading system before risking any real money. The program has a host of additional features including Smart Charts, which remembers where your charts were placed on the screen and which indicators were active when you saved. A built-in macro recorder lets you save elaborate configurations and play them back with two simple keystrokes. To get a real feel for the program, check out the Investor's Forum on CompuServe (type GO INVFOR). It has an active area devoted exclusively to MetaStock.
While you can input data manually into MetaStock, most choose to download the data from one of the online services. Equis sells a separate downloading program, called approximately enough, The Downloader ($195). The current multiple-service version works with five popular data services: CompuServe, Dial/Data, DBC Signal, Dow Jones, and Marketscan Plus. Individual versions of The DownLoader also are available for CompuServe, Dial/Data, and DBC Signal ($69 each).
The Downloader also works with Equis' excellent investment portfolio program, Pulse Portfolio Management System ($349). If you have only a few investments, you probably can track their prices and total value on a spreadsheet. If you're using a personal-finance package, such as Quicken or Managing Your Money, you may be able to get by with its portfolio management features. But if you have a large number of investments or do a lot of complicated trading, Pulse is both flexible and comprehensive. I use it each year to sort out my mutual fund trades, which have to be tracked using the complicated first in, first out method.
For the active investor who needs to track the markets moment to moment, Equis has a special version of MetaStock that can give you real-time prices and charting. It's called MetaStock Professional RT ($495). Prices are captured via satellite, FM transmission, or cable television. Using MetaStock RT, investors can chart securities in any time period: tick charts, 1-minute bars, 2-minute bars, 5-minute bars, and more. There's an additional monthly fee for the price data and receiver, which runs about $600 a month for 15-20 minute delayed prices and $231 a month for non-delayed prices.
A great way to get started with either version of MetaStock is with Systems! (Nirvana Systems, 3415 Greystone Drive, Suite 205, Austin, Texas 78731; 512-345-2545; $49). It provides 40 trading systems with predefined rules that tell you when to get in and (where appropriate) when to get out. You simply install the new trading systems into MetaStock, where you can easily check them for profitability against your historical data. Systems! works especially well with two other MetaStock add-ons from Nirvana Systems: WhatWorks ($79) and AutoStock ($49). WhatWorks looks at your indicators and trading systems and determines which one works best with each security in your database. AutoStock also tests your indicators and trading systems against your database of securities, but it provides a report with daily buy and sell signals, potentially saving you hours of poring over charts each day.
Predicting the Future
AIQ offers its own set of technical analysis packages, including MarketExpert, StockExpert, and TradingExpert (AIQ, P.O. Box 7530, 916 Southwood Boulevard, Incline Village, Nevada 89452; 702-831-2999). Like MetaStock, the AIQ programs offer scores of built-in indicators, including moving averages, relative strength, Bollinger bands, stochastics, and Japanese candlesticks. But while MetaStock is designed for investors who essentially want to design their own groups of indicators, the AIQ programs are more rigid.
By itself, MetaStock is largely unwilling to tell you which indicators are best for all situations, while the AIQ programs are more than willing to pick and choose. The AIQ approach is better suited for those who want to explore technical analysis but, in the end, want a program to give a non-ambiguous buy or sell signal. The MetaStock approach is best for those who don't want to follow the crowd and would prefer to put together their own trading systems.
MarketExpert ($199) tracks the market as a whole and signals when to be in stocks and when to be out of stocks. Introduced in April 1987, the program received a lot of coverage in the press when it gave a strong sell signal just before the October 1987 crash. StockExpert ($399) looks at individual stocks, recommending when to buy and sell specific issues. The company's latest program, TradingExpert ($1,499), combines features of both products, letting you study both the market as a whole and individual stocks, as well as perform sector and group analysis. Both StockExpert and TradingExpert include portfolio management and can be upgraded with the Options Extension ($499) to track stock and index options.
Learning the Fundamentals
In theory, a pure technical analyst doesn't care whether the stock is a computer chip manufacturer or a chocolate-chip cookie retailer. Fundamental analysis takes the opposite approach--analyzing the financial health of a company and ignoring much of the movement of the stock's price (except in as far as it represents a fair market value for the company). Fundamentalists study such accounting-like indicators as cash flow, debt-to-equity ratio, return on assets, and historical growth rate.
One of the best ways for the individual investor to perform fundamental analysis is through an online service called Telescan (Telescan, 10550 Richmond Avenue, Suite 250, Houston, Texas 77042; 800-324-8246; $395 for basic software, plus $.33 a minute non-prime time or $.75 a minute prime time). Using the specialized software that Telescan provides, you can plot a company's historical dividends, price/earnings ratio, book value, cash flow, price-to-sales ratio, and more. You can create a composite overlay that's composed of two or more fundamental indicators. In addition, Telescan includes a variety of technical indicators, text services, special reports, and search programs.
Once you're done your research, you can buy and sell online though Fidelity On-lineXpress (MECA Software; $119.95). In addition to placing orders online, you can get real-time quotes on stocks, options, mutual funds, and market indexes; perform real-time research through Dow Jones, Telescan, and Standard & Poor's and track the performance of your investment portfolio. Best of all, you get 10-percent off Fidelity's usual discount brokerage fees.
Not everyone has the tenacity to weather the storm of short-term losses, butjust about everyone should consider some sort of long-term savings or investing plan. With a little discipline, the best financial advice, and the right software, you could be well on your way to a more financially secure future.