Tuesday, December 02, 1997


The Daily Dow
by Robert Sheard

LEXINGTON, KY. (Dec. 2, 1997) -- A number of readers have asked how much money it takes to get started with a Dow Dividend portfolio, and with the increasing competition in deep-discount rates and the desire to get started with tax-deferred or tax-free IRA accounts (which limit your annual contributions), it's a very important question.

My rule is that one's annual trading costs should be no more than 2% of the total portfolio value in any one year. If you know the cost you're paying per trade and the number of trades you expect to make in a given year, you can work your way to a minimum investment requirement figure.

For example, a four-stock Dow portfolio typically sees half the stocks turn over each year. So for two sales and two new purchases, you're going to average around four trades a year -- very little trading. So if you're using one of the deep-discount brokers that charge only $8 to $10 per trade, the minimum investment to stay at or below my 2% benchmark is pretty low.

Four trades at $8 each will run $32 for the whole year. The minimum you'd need to keep commissions at 2% would be $1,600. If you're paying $10 a trade, the minimum would be $2,000.

At some brokers, this minimum may even be lower than their requirement to open an account, but for an IRA especially, where in the first year you have $2,000 at most, it's important to consider costs.

The same test applies regardless of how many stocks you intend to hold. Let's assume your Dow stocks are only part of a larger, more diversified portfolio (a Foolish plan). If you need to make ten trades per year, for example, and you're paying $8 a trade, the minimum investment to keep that $80 total reasonable would be $4,000. With twenty trades a year, the minimum would be $8,000, and so on.

There are Unit Investment Trusts designed by a number of brokers to allow you to invest in the Dow Dividend stocks without having to pay commissions, but the management fees they charge (and one has to ask how hard it is to manage a portfolio that a seventh-grader can administer in thirty minutes a year) are typically higher than the cost of buying the stocks through a deep-discount broker.

The cheapest UIT I'm aware of is Schwab's, which buys all ten high yielders and charges 1.75% of your total the first year, and then 1% in each year thereafter. This is considerably cheaper than most of the UITs available, but the returns for the High-Yield Ten have also historically lagged the other more-concentrated Dow variations.

So do the math on your own portfolio. If the commissions to manage a Dow portfolio add up to more than 2%, you might consider the Schwab UIT until you've saved a bit more; then strike out on your own. The best factor about commissions at the deep-discounters, though, is that they're fixed, regardless of your portfolio size. Whether you're buying 5 shares or 5,000 shares, it still only costs $8 to $10 per trade.

With the Unit Investment Trusts, the bigger your portfolio, the more you'll pay in fees because the management fee is a percentage of your assets, not a fixed-dollar amount. For example, if you have $10,000 and do it yourself, making ten trades a year on a High-Yield 10 portfolio, your commissions (at $8 each) would be 0.8% for the year, already lower than Schwab's preferred-customer management fee (that is, someone who has rolled over a previous trust account).

But look at the difference when your portfolio starts to swell. By the time it reaches $50,000, your ten trades would still cost you just $80, or 0.16% of your total. The management fee in the Schwab UIT would be $500 -- for executing precisely the same trades.

Except for the investor who is just getting started, the Unit Investment Trusts are no bargain. Do a little calculation and see what you can "afford" in commissions before deciding which route to take. Fool on!

TODAY'S NUMBERS
Stock  Change   Last
--------------------
T    -  11/16  56.25
GM   +   1/4   62.00
CHV  -1  1/8   78.50
MMM  -   5/16  98.31

           
                  Day   Month    Year
        FOOL-4   -0.78%   0.34%  26.52%
        DJIA     +0.07%   2.50%  24.36%
        S&P 500  -0.32%   1.71%  31.18%
        NASDAQ   -1.49%   0.36%  24.43%

    Rec'd   #  Security     In At       Now    Change

   1/2/97  479 AT&T          41.75     56.25    34.73%
   1/2/97  153 Chevron       65.00     78.50    20.77%
   1/2/97  120 3M            83.00     98.31    18.45%
   1/2/97  179 Gen. Motor    55.75     62.00    11.21%


    Rec'd   #  Security     In At     Value    Change

   1/2/97  479 AT&T       19998.25  26943.75  $6945.50
   1/2/97  153 Chevron     9945.00  12010.50  $2065.50
   1/2/97  120 3M          9960.00  11797.50  $1837.50
   1/2/97  179 Gen. Motor  9979.25  11098.00  $1118.75


                             CASH   $1409.35
                            TOTAL  $63259.10