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The Daily Dow LEXINGTON, Ky. (June 18): Another day where no real specific news surfaced either for the market or for the Foolish Four stocks, but traders have to act (or react) to something, so the theme du jour was worry about the coming quarterly earnings season. The Nasdaq was hammered today (dropping 2%) as a few technology companies are hinting that earnings might disappoint.
As usual though, this kind of short-term movement, while painful to watch, isn't something on which you should necessarily act. No one knows what will happen in the short run. If your stocks' stories are still intact, you're better off washing the car or seeing a new movie than fretting about what "the market" did today or will do tomorrow. (Muppet Treasure Island wasn't bad; check it out!)
One recurring question about the Foolish Four approach is the question of taxes. Doesn't paying taxes each year ruin the great model returns? Wouldn't we be better off buying and holding a mutual fund?
Let's compare. Let's say you put $10,000 into your favorite mutual fund or stock for the next twenty-five years, letting it sit so you don't have to pay any taxes until the end. And let's assume you find an investment which grows at 15% annually. (I've yet to find this long-term stellar investment, but for this model, let's assume it exists.)
After 25 years, your $10,000 has grown into $329,190. Now Uncle Sam takes his 28% cut of the gain, and you're left with $239,817.
Now let's put the same $10,000 into the Foolish Four, which has returned an average of over 22% for the last 25 years (we'll round it off to 22%). We'll also assume that the portfolio turns over completely so you're forced to pay the 28% taxes on the entire gain every year. (This is stacking the deck against the way it really works, but so be it.)
After 25 years, paying taxes every year, your Foolish Four portfolio would be worth $394,879. That's 65% more than a straight buy-and-hold portfolio would have become, even under the pretty generous (some might say wildly optimistic) conditions I've allowed for it in this example.
In other words, taxes won't kill the Dow approach. You're better off paying the taxes every year and moving your money into the new Foolish Four than trying to avoid taxes by accepting an inferior rate of return.
Fool on!
Transmitted: 6/18/96
Today's Dow Numbers THE FOOLISH FOUR MODEL (6/18/96) |
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