<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (Feb. 11, 1998) -- The power of compounded growth is no secret, and I write about the subject frequently because it's so crucial to long-term investing success. But compounding by itself is only half the story. The other half is regular savings.

A Foolish reader wrote to me today from California, telling me that she and several friends have started an investment club (a terrific way to learn about investing) and are starting their portfolio with a $5,000 investment in the Foolish Four.

What she really wanted to see, though, isn't just the power of how that $5,000 can grow using Foolish Four historical returns, but rather how much more impressive it would be if her investment club puts in another $5,000 each year as they update their portfolio.

Let's look at the assumptions I'll use in this scenario. From 1971 through 1997, the Foolish Four has returned an annualized pre-tax return of 21.97%. The maximum intermediate-term tax rate for stocks held at least one year is 28%. Since the portfolio typically will not turn over completely every year, the actual tax rate would be lower, but since I'm not accounting for minimal commissions in order to keep things simple, let's just call the tax rate 28% and move on. That puts the annual after-tax return at 15.82%.

At a growth rate of 15.82% a year, here's how a one-time investment of $5,000 would grow over 25 years:

 5 years    $10,420 
 10 years    $21,717 
 15 years    $45,261 
 20 years    $94,328 
 25 years   $196,589 
 

After 25 years, then, $5,000 grows to nearly $200,000 -- the magic of the Compounding Clown in peak form. The total return for the full two and one-half decades would be 3,832%.

But compare that to the growth of a portfolio following an identical strategy with the same tax rate, but a portfolio where, instead of a one-time $5,000 investment, the club invests an additional $5,000 every time they update their portfolio.

 5 years      $39,685 
 10 years     $122,389 
 15 years     $294,755 
 20 years     $653,981 
 25 years   $1,402,644 
 

The difference is staggering, isn't it? Instead of $200,000 -- an impressive total given the original investment -- the club that saves regularly amasses over $1.4 million, a difference of 613%, even though the two portfolios achieved identical annual returns and faced identical tax rates.

As important as it is to let the Compounding Clown dance year after year, it's so much more beautiful when you buy him a new pair of dancing shoes each year. Save regularly, Fools. It's so simple to do if you think of it as part of your monthly set of bills. Have your bank direct-deposit five percent to ten percent of every check into your investment account. Then pay the rest of your bills and enjoy what's left. You can enjoy what you earn, knowing that you're saving for your future. Foolish investing will get you where you want to be if you let it. Fool on!

[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 - 7/8 48.50 IP + 5/8 48.19 MO - 15/16 42.56 EK + 15/16 66.69

Day Month Year FOOL-4 -0.26% 5.25% 7.20% DJIA +0.23% 5.16% 5.14% S&P 500 +0.10% 4.05% 5.11% NASDAQ -0.03% 5.51% 8.80% Rec'd # Security In At Now Change 12/31/97 291 Union Carb 42.94 48.50 12.95% 12/31/97 289 Int'l Pape 43.13 48.19 11.74% 12/31/97 206 Eastman Ko 60.56 66.69 10.11% 12/31/97 276 Philip Mor 45.25 42.56 -5.94% Rec'd # Security In At Value Change 12/31/97 291 Union Carb 12494.81 14113.50 $1618.69 12/31/97 289 Int'l Pape 12463.13 13926.19 $1463.06 12/31/97 206 Eastman Ko 12475.88 13737.63 $1261.75 12/31/97 276 Philip Mor 12489.00 11747.25 -$741.75 CASH $77.19 TOTAL $53601.75