The Daily Dow
Thursday, June 26, 1997
by Robert Sheard

LEXINGTON, KY. (June 26, 1997) -- The question of an optimal holding period for the Dow stocks has arisen again and again of late, so let me address the question through a filter of the research I've read. The standard model calls for an annual re-evaluation of one's Dow portfolio, but is there anything special about the 12-month cycle?

The only tangible aspect of a one-year holding period, of course, is that your gains qualify for long-term capital gains tax treatment. But does this holding period maximize one's returns?

A study by Lawrence S. Pratt two years ago suggests that a longer holding period may be better for optimal gains. Pratt's study, "Toward an Optimal Stock Selection Strategy," was printed in the June 1995 issue of the Economic Education Bulletin, which is put out by the American Institute for Economic Research of Great Barrington, Massachusetts (01230).

Pratt tested different holding periods for the 30 Dow stocks over the twenty-year span from the end of 1974 to the end of 1994. And while he didn't test the Beating the Dow approach specifically, he did test combinations ranked by dividend yield.

The optimal strategy using Pratt's test would be a 4-stock portfolio (the 4 highest yielders) which are held for a 17-month cycle. This achieved an annualized return of 19.80%. Depending on how many stocks one holds, the optimal holding period hovered right around the 17- or 18-month interval.

What does this mean for Foolish Four investors? Should you abandon the plan in favor of Pratt's strategy? Not necessarily, or at least not entirely. Keep in mind that while Pratt's optimal strategy earned 19.80% during that 20-year stretch, the Foolish Four earned an annual return of 22.79%. Three percentage points a year is significant over a 20-year run. It's the difference between $742,000 and $1.2 million on a $20,000 initial investment.

Now that's not to say that lengthening the holding period for the Foolish Four won't also help those returns; it very well might. But the combination of high yield and low price isn't a test Pratt included in his report. Perhaps a Fool with extra time on his hands wants to run a test for us using the Foolish Four and an 18-month holding period?

(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. ________________________________


1997 Foolish Four Model
Stock  Change   Last
--------------------
T    -   7/8   36.13
GM   -   5/8   55.38
CHV  +   1/16  73.88
MMM  +   3/4   102.00

             Day   Month    Year
        FOOL-4   -0.53%   2.61%   3.05%
        DJIA     -0.46%   4.41%  18.70%
        S&P 500  -0.60%   4.17%  19.30%
        NASDAQ   -0.68%   2.58%  11.26%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  120 3M            83.00    102.00    22.89%
   1/2/97  153 Chevron       65.00     73.88    13.65%
   1/2/97  179 Gen. Motor    55.75     55.38    -0.67%
   1/2/97  479 AT&T          41.75     36.13   -13.47%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  120 3M          9960.00  12240.00  $2280.00
   1/2/97  153 Chevron     9945.00  11302.88  $1357.88
   1/2/97  179 Gen. Motor  9979.25   9912.13   -$67.13
   1/2/97  479 AT&T       19998.25  17303.88 -$2694.38


                             CASH    $767.60
                            TOTAL  $51526.48