<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (Jan. 29, 1998) -- I've received a number of letters recently asking for the best way to add new money to the market on a regular basis. There's no ideal way for all investors, but there are a number of possibilities. Today I want to outline just one among many.

I have often argued that a diversified portfolio should go beyond the Foolish Four stocks, but that the Foolish Four makes an excellent core holding within a portfolio of ten to twenty stocks. But if you're starting small, buying even the Foolish Four stocks at one time might be a challenge because of commissions.

So let's look at a simple plan -- the Fool-of-the-Month Portfolio, which will allow you to add new money every month and yet keep commissions reasonable.

If you buy and sell a stock every year, you have to make two trades for it. With deep-discount commissions available in the $7- to $10-per-trade range, it takes $700 to $1,000 in a single position to make those annual trading costs reasonable (at or below 2% of the amount invested). Since $1,000 is a nice round number, let's work with that.

In January (or the first month you get started) you take one-twelfth of your investment account (or $1,000, whichever is larger) and buy the highest-ranking Foolish Four stock in the current list. For a year (and a day), you'll leave this stock alone, as with the traditional Foolish Four approach.

While you're setting this plan up during the first year, you may wish to leave the balance of your money in an S&P 500 Depository Receipts <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %> until it's needed each month. That way it's still invested in stocks and not idle as you set up your plan.

In February, you take another twelfth of your portfolio and buy another Foolish Four stock -- the highest-ranked stock you don't already own. And then in March and April you do the same thing: buy the highest-ranking Foolish Four stock you don't already own with another one-twelfth of your portfolio.

In May you begin layering growth stocks on top of your Foolish Four foundation. You can choose these stocks using any number of strategies: Cash-King, Keystone, Small-Cap Growth, etc. Whatever strategy you use, you'd simply add a new stock each month with another twelfth of your portfolio until by the end of the year you are holding twelve stocks, four from the Dow Dividend Approach and eight from other growth strategies.

In January, when your original stock has been held a year and a day, you sell it if it's not still in the Foolish Four rankings and replace it with the current highest-ranking candidate. At this time you can also add any new money you've saved since your December purchase or received in dividends.

Each month from then on you do the same thing. Evaluate the stock that's now a year old and replace it if necessary using your selection of strategies. As you adjust that month's stock, you add your new money (from savings or dividends). In this way, you're managing a diverse, fully invested portfolio of twelve stocks without running up unnecessary commissions. At the same time you've given yourself twelve opportunities a year to add new money.

What if you don't have the $12,000 to begin this kind of approach right from the start? No problem. Even if you're only starting with $2,000, you still have enough to begin.

Start the first month with $1,000 and one stock and then pick up your second stock the second month. Let those two stocks ride throughout the following year as usual. Whenever you've saved your next $1,000, you will add your third of the Foolish Four stocks, even if that's several months later. There's no law that says your four Dow components have to be purchased in the first four successive months.

Just keep the master plan of twelve monthly slots in mind and fill each one as you can afford to. There's no reason they all have to be filled in sequence as you're saving new money. Even if it takes you a couple of years to fill all twelve slots, that's fine. Eventually you'll hold twelve stocks, each one a month older than the next, and then you can follow a regular monthly routine of updating one at a time. There's no reason you must update your entire portfolio all on the same date, even when using a mechanical update as we do with the Foolish Four strategy.

So your portfolio might end up looking like this by the time you fill up all twelve slots: Foolish Four choices in January, February, May, and August, and Growth choices for the other eight months. It makes no real difference as long as you keep a relatively stable balance among the values of the twelve positions.

Let me repeat that this is just one among many ways of setting up a portfolio mechanically yet flexibly enough to allow for new money coming in every month. Find a system that works for you and let time and proven strategies work for you. Then go read that book, tend your garden, whip your kids at miniature golf, whatever makes life meaningful to you. You've done your homework; go play, Fools.

[Still confused about the changes to the Foolish Four? Visit our special collection which explains why the Fools have modified our beloved Dow Approach.]

[Want to be the first Fool on your block to get a copy of Robert Sheard's forthcoming book? Click here to pre-order your copy of The Unemotional Investor.]

TODAY'S NUMBERS
Stock  Change   Last 
 -------------------- 
 UK   -   7/16  43.06 
 IP   +   3/16  47.69 
 MO   +   5/16  41.63 
 EK   -   1/4   65.56 
 
            
                    Day   Month    Year 
         FOOL-4   -0.07%   2.77%   2.77% 
         DJIA     +0.73%   0.82%   0.82% 
         S&P 500  +0.82%   1.55%   1.55% 
         NASDAQ   +0.54%   3.13%   3.13% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     47.69    10.58% 
  12/31/97  206 Eastman Ko    60.56     65.56     8.26% 
  12/31/97  291 Union Carb    42.94     43.06     0.29% 
  12/31/97  276 Philip Mor    45.25     41.63    -8.01% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  13781.69  $1318.56 
  12/31/97  206 Eastman Ko 12475.88  13505.88  $1030.00 
  12/31/97  291 Union Carb 12494.81  12531.19    $36.38 
  12/31/97  276 Philip Mor 12489.00  11488.50 -$1000.50 
  
  
                              CASH     $77.19 
                             TOTAL  $51384.44