The
Dow Approach
The
Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, KY. (Mar. 10, 1997) -- Despite the best Foolish efforts, the single most frequently asked question about the Dow Approaches these days regards short-term timing. "Is now the right time to jump in with the Dow at 7,000?" And my answer is always the same: I have no idea if this is a top, a middle, or something else. (It's obviously not a bottom.) So let me change tacks here and look at a related issue that will give you some perspective on why we don't worry about this particular question. Rule number one in Folly is to treat your stock portfolio as a savings account. That is, think of it as the place you're parking money regularly that you don't plan to touch for decades. If you can step back to that perspective, it makes the question about what's going to happen over the rest of 1997 a whole lot less compelling. But a more comforting story is seen in the parable of Fortuitous Freddy and Doomed Dexter. Freddy is the kind of chap who pulls a book off the shelf at his local library and discovers a $100 bill someone had used as a bookmark and forgotten. Freddy's the kind of guy who scores tickets in the final four lottery ten years in a row. Doomed Dexter, on the other hand, can't even win the local raffle for a bicycle when he buys 60% of the available chances. Dexter's the one who, when he finally manages to pay a scalper twice the face value for his final four tickets, discovers his seat is right behind a support which blocks half the court and it's right next to a rest room closed down by the health department. Their relative fortunes extend to their market-timing prowess as well. Back in 1970, Freddy and Dexter each set up index fund accounts and invested $2,000 every year. Fortuitous Freddy outdid himself and deposited his $2,000 on the day the market bottomed out each and every year. Doomed Dexter stepped in it again, managing to deposit his $2,000 each year on the day the market peaked. The difference in their average annual returns? A whopping 1.6% a year. Freddy recorded gains equal to 10.1% a year while Dexter still recorded 8.5% a year. (Source: Peter Lynch's Learn to Earn) The point is if you're using the stock market as savings vehicle over the long run, when you jump in each year doesn't mean much. Most of us Typical Terrys are going to be somewhere between Freddy's and Dexter's extremes. But it's nice to know that it doesn't much matter, though, isn't it?
(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. |
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