The Dow Approach

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Thursday, March 6, 1997
The Daily Dow FOOL GLOBAL WIRE by Robert Sheard LEXINGTON, KY. (Mar. 6, 1997) -- Limping home from my CPA's office, the scars still fresh from seeing the punishment I'm going to get when I have to write a check to Uncle Sam next month, it's not surprising that taxes are foremost on my mind today. A frequently asked question in the Dow area concerns how well our Dow Approach after taxes stacks up to a buy-and-hold approach in an index fund. In short, it does very well. Since 1971, the various Dow variations have averaged approximately 23% a year, so after pulling out the maximum long-term capital gains taxes of 28%, the after-tax return is still more than 16.56%. The long-term returns on the various index funds have averaged under 15% -- before taxes. So even deferring the taxes in an index fund doesn't compensate for the loss of returns possible in the Dow Approach. But let's dream a little since capital gains taxes under being scrutinized for potential reform. (We can only hope that Congress hears Alan Greenspan as clearly as the market seems to lately, given Greenspan's consistent position that the capital gains tax rate should be zero.) I have heard various pundits and gurus speculate that some reduction in capital gains taxes is probable, the only questions being what kinds of gains will be included and how deep the reduction would be. A maximum rate of anything from 15% to 22% for long-term gains seems in the range of possibility. Any reduction, of course, only makes these terrific long-term approaches even more attractive. That 16.56% after-tax return suddenly grows to 17.94% if the tax rate drops to 22%, or 19.55% if the rate is reduced to 15%. Those increases make a huge difference over 20 years' worth of compounding. If the next 20 years maintain the growth rate for the approach it enjoyed over the last 26 years, a $50,000 portfolio would grow to $1.36 million after taxes at the 22% rate. At the 15% tax rate, the same $50,000 would grow to $1.78 million. At the current rate, it would grow to $1.07 million. Despite the market's short-term paranoia, then, perhaps there's a proverbial long-term silver lining ahead for us in the form of tax reform that stops punishing savings and investments. Tell 'em, Alan!! (c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.	The Current BTD 10 1. AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:T)") else Response.Write("(NYSE:T)") end if %> 2. *International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:IP)") else Response.Write("(NYSE:IP)") end if %> 3. *Goodyear Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GT)") else Response.Write("(NYSE:GT)") end if %> 4. *General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GM)") else Response.Write("(NYSE:GM)") end if %> 5. *Chevron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CHV)") else Response.Write("(NYSE:CHV)") end if %> 6. Minnesota Mining <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MMM)") else Response.Write("(NYSE:MMM)") end if %> 7. Exxon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:XON)") else Response.Write("(NYSE:XON)") end if %> 8. Texaco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TX)") else Response.Write("(NYSE:TX)") end if %> 9. J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JPM)") else Response.Write("(NYSE:JPM)") end if %> 10. Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MO)") else Response.Write("(NYSE:MO)") end if %> ***NOTE: FOOLISH FOUR STOCKS ARE PRECEDED BY AN ASTERISK AND ARE ITALICISED Last Update: 03/05/97
Today's Dow Numbers Stock Change Last -------------------- T --- 36.38 GM - 3/4 56.13 CHV +1 1/8 66.50 MMM -1 1/8 90.88 Day Month Year Since 1996 FOOL-4 -0.20% -3.58% -2.40% 26.19% DJIA -0.02% 0.97% 7.70% 35.72% S&P 500 -0.42% 0.98% 7.81% 29.66% NASDAQ -1.03% 0.49% 1.89% 25.02% Rec'd # Security In At Now Change 1/2/96 155 3M 64.50 90.88 40.88% 1/2/96 198 Chevron 52.38 66.50 26.97% 1/2/97 231 Gen. Motor 55.75 56.13 0.67% 1/2/97 618 AT&T 41.75 36.38 -12.87% Rec'd # Security In At Value Change 1/2/96 155 3M 9998.09 14085.63 $4087.54 1/2/96 198 Chevron 10370.25 13167.00 $2796.75 1/2/97 231 Gen. Motor 12878.25 12964.88 $86.63 1/2/97 618 AT&T 25801.50 22479.75 -$3321.75 CASH $396.17 TOTAL $63093.42

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