The Dow Approach
The Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, KY. (Feb. 18, 1997) -- Two aspects of the Dow Dividend Approach bear repeating from time to time. And it seems this is especially true since the market has been up lately, because that's, of course, when people get the most nervous. The first aspect that's crucial to keep in mind is that what happens in the short run is virtually impossible to predict with any degree of consistency or accuracy. For proof, just look at all the pundits, making 6- and 7-figure salaries, who have been calling for a major crash for more than two years. I can't predict it any better than they can, naturally. But at least I'm willing to admit publicly I haven't any idea what's around the next corner. They'll swear that they do, and then charge you a hefty fee for the prediction. If you're a long-term Dow investor, where "the market" is today simply doesn't matter. You're going to stay fully invested all the time and simply rotate into the most out-of-favor stocks each year, come what may. Over many decades, that's the plan that allows Dow investors to boast compound returns that are twice as high as the DJIA and S&P 500, the indices the mutual fund industry loses to year after year. The second aspect is that you're not buying the whole market. Using the Dow Dividend Approach, you're buying four or five of the best-known, most durable, blue chips trading in America. These are companies everyone knows, but are currently out of the public's favor. So when the "market" goes down, these stocks often hold up very well. And when the "market" goes up, these often go up even faster since they're recovering anyway. That's how you can end up with a performance like we saw in 1973-1974. Buying an equal-dollar share of all 30 Dow stocks at the beginning of 1973 and again in 1974 would have netted you a loss of some 26%. Many smaller stocks lost quite a bit more during that period, the last full-blown lengthy bear market we've seen. (There's a good case to be made that we've seen a number of mini-bear markets since then, but that one's the universal benchmark in the last 25 years.) Yet, while "the market" lost more than 25%, the Dow Dividend approach scored gains during the same period of between 35% and 40%, depending upon which approach one used. The out-of-favor stocks pointed out by the Dow Approach have already been immunized to a degree against potential down turns. Don't get me wrong. This approach has lost money in the past and will undoubtedly again in the future. In 1990's recession, for example, the approach lost 15% to 19% depending upon the variation. But the following year, the gains more than made up for the short-term pain, with returns approaching 90% in 1991.
So while it's human nature to be nervous that a correction of some magnitude
could be in our immediate future, there's plenty of evidence to suggest that
it's still better to be invested for the long term rather than sitting on
the sidelines waiting for the correction. (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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