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The Daily Dow LEXINGTON, KY. (December 16) -- If it weren't for the merger news concerning Boeing and McDonnell Douglas propping up the Dow, the average's loss would have been considerably worse today. Yet despite the overall ugly tone of the market, the Foolish Four had a decent day. Why? Oil stocks jumped a bit. And since Chevron was the #2 stock last January when we started this model portfolio, it was weighted twice as heavily as the other Foolish Four stocks. On days like this one, where Chevron is the best performer, that over-weighting comes in handy.
A question that arises frequently these days is whether a new Dow investor should sit on the sidelines and wait for a correction or jump in now. Or a variation on that theme: should she invest a portion of the portfolio now and then dollar-cost average in the rest later after things "settle down."
The issue of timing is one I just don't believe in paying attention to. Two years ago when I started writing for The Motley Fool, the very same question was on many investors' minds. Everyone was waiting for the "long-overdue" correction. Well, maybe it's finally arrived, some 2300 points later. In the meantime, that's a heck of an opportunity cost from 3900 to 6200 waiting for it. If you really think you've got bad luck, check out my Fribble on the subject. On to today's issue: dollar-cost averaging.
I'm not a fan of dollar-cost averaging a lump sum. I think adding money over time that you're saving regularly is a great way to build wealth, but holding a lump sum and investing it in segments as protection against a potential drop in the market is a market-timing strategy that goes against the odds (and we all know what the odds can do for "the house").
Since the market historically goes up some 75% of the time (according to several articles I've read over the last year or so), by delaying your investment, you've only got a 1 in 4 chance of actually protecting yourself against a loss. There's a 3 in 4 chance that when you add your installments, they'll buy less than they'll buy today. Those aren't the kind of odds someone like me (without a crystal ball) likes to face. In addition, investing it in segments will increase your commissions.
Now, if you're holding a bit back as you get started so that you can forever run multiple portfolios, that's a plan that has some merit for the future, because running multiple Dow portfolios throughout the year gives you more frequent opportunities to keep adding new money that you've saved. If you plan on making continuous regular deposits into your portfolio, it's a good reason to fight the odds for a year and set up your long-term strategy. But overall, market-timing strategies hurt more than they might help. By focusing on the long run, the near future also becomes less important because you have the investor's primary ally -- time.
Today's Dow Numbers Stock Change Bid ------------------- DD + 1/4 91.63 CHV +1 1/8 63.13 MMM - 1/2 81.00 EK - 3/8 79.00 IMN - 1/2 31.38
Day Month Year History
FOOL-4 +0.52% -0.18% 26.28% 26.28%
DJIA -0.58% -3.88% 22.50% 22.50%
S&P 500 -1.05% -4.92% 17.06% 17.06%
NASDAQ -1.86% -2.45% 19.85% 19.85%
Rec'd # Security In At Now Change
1/2/96 142 DuPont 69.88 91.63 31.13%
1/2/96 149 3M 63.76 81.00 27.04%
1/2/96 380 Chevron 52.38 63.13 20.53%
7/16/96 14 Imation 26.16 31.38 19.94%
1/2/96 148 E. Kodak 67.00 79.00 17.91%
Rec'd # Security In At Value Change
1/2/96 380 Chevron 19902.50 23987.50 $4085.00
1/2/96 142 DuPont 9922.25 13010.75 $3088.50
1/2/96 149 3M 9500.09 12069.00 $2568.91
1/2/96 148 E. Kodak 9916.00 11692.00 $1776.00
7/16/96 14 Imation 366.21 439.25 $73.04
CASH $1942.85
TOTAL $63141.35
Transmitted: 12/16/96
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