The Daily Dow
Monday, August 11, 1997
by Robert Sheard

LEXINGTON, KY. (August 11, 1997) -- For investors in the Dow Approach who use the stock market not as a speculation arena but as a life-long savings vehicle, savings deposits are regular events. With the traditional Dow model requiring a twelve-month holding period, and now with the new eighteen-month holding period required to receive the lower 20% long-term capital gains maximum rate, the issue of where to park new cash between portfolio updates comes up regularly.

In the past, I've written often about running multiple portfolios and staggering them at intervals throughout the year so one will have several opportunities a year to add new cash to the Dow portfolios.

I've also written about using a regular (yet conservative) level of margin leverage so that one's regular cash infusions go to work even before they arrive at the broker. When they do arrive, they go to pay off the margin balance without adding new commission costs. (This is the plan I personally use.)

A third alternative frequently discussed is parking the regular cash deposits in an index fund, so that it at least stays even with the S&P 500 instead of languishing for as much as a year at money market rates.

Many of these index funds have fairly large minimum deposit requirements, which take them out of the feasible range as a parking place. After all, if you were going to park $3,000 there, you have enough simply to buy more Dow stocks, so why bother?

One potential way around the use of index funds is through a vehicle called a "spider" for the S&P 500. The spider is a proxy for the S&P 500, mimicking the movements of the index, but it trades just as any stock would rather than as a mutual fund does. You buy and sell these shares through your broker in the same fashion as any other stock transaction. (The security is listed on the American Stock Exchange under the ticker symbol SPY.) The advantages are that you don't have to set up an account with a fund, there's no large minimum investment to get in, and the ability to get in or out is just as quick as any other stock transaction.

The disadvantage, however, is that you must pay a commission for each trade as with any stock transaction. Let's say, for example, that you're using an 18-month Dow approach and want to put away an additional $500 a month. Obviously, spreading $500 over four stocks each month isn't cost-effective. If you don't want to run several Dow portfolios, then putting the $500 a month away into S&P spiders will cost you one deep-discount commission each month (which could be as low as $120 a year).

It's a borderline call whether this is more cost effective than finding an Index Fund with a low minimum investment, but it's an option worth considering for your regular investments if you're not thrilled with the paperwork involved in maintaining a mutual fund you plan to empty every time you roll your Dow portfolio over. The shares you accumulate in the spider can be sold in a matter of seconds and reinvested in your new list of Dow stocks. Future cash deposits can be used to begin buying shares of the spider all over again. Just another option you might look into. Fool on!

(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. ________________________________

Stock  Change   Last
--------------------
T    +   3/16  40.44
GM   -1  5/16  62.75
CHV  -   5/16  77.69
MMM  -1  1/8   94.81

           Day   Month    Year
        FOOL-4   +1.37%   4.58%  10.76%
        DJIA     +0.38%  -1.95%  25.03%
        S&P 500  +0.37%  -1.81%  26.50%
        NASDAQ   -0.74%  -0.44%  22.90%

    Rec'd   #  Security     In At       Now    Change

   1/2/97  153 Chevron       65.00     80.06    23.17%
   1/2/97  120 3M            83.00     95.06    14.53%
   1/2/97  179 Gen. Motor    55.75     61.38    10.09%
   1/2/97  479 AT&T          41.75     41.69    -0.15%


    Rec'd   #  Security     In At     Value    Change

   1/2/97  153 Chevron     9945.00  12249.56  $2304.56
   1/2/97  120 3M          9960.00  11407.50  $1447.50
   1/2/97  179 Gen. Motor  9979.25  10986.13  $1006.88
   1/2/97  479 AT&T       19998.25  19968.31   -$29.94


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                            TOTAL  $55379.10