 IFG Primer
TMF Sheard's model for finding high growth stocks! Get more info or order.
|
| |
<THE FOOLISH FOUR>
Foolish Four Report
by Robert Sheard
LEXINGTON, KY. (March 24, 1998) -- Investors convinced that regular savings and investment in top-flight companies are the two prongs of a life-long strategy for building tremendous wealth often ask for advice on the best ways to add money to the market regularly without getting nailed on commissions.
If we assume a deep-discount commission rate of somewhere in the $7-to-$10-per-trade range, it makes sense to keep all of our positions at a minimum of $1,000. (Expect two trades per stock each year, one to sell it and one to replace it.) That minimum investment keeps us at or below 2% of our original investment each year, a goal worth keeping in mind.
And there are a number of possible methods for adding new money. The one I've become enamored of recently is the use of a "Dozens" portfolio. This is a strategy where one buys (or updates) one stock each month, holding a total of a dozen great positions.
By staggering the purchase points across the twelve months, and then holding each position a year (or, if it's a taxable account, a year and day), you give yourself twelve opportunities to add new money to your portfolio each year without running up extra trades. (You're updating a position each month already; just add the new money when you buy your monthly replacement stock.)
How you determine which strategy to use to select those dozen stocks is largely up to you and your comfort level with different approaches, but an obvious one for the Dow investor is to combine four to six Dow Dividend stocks with six to eight stocks from a growth approach (perhaps Cash-King or Keystone, or even something more aggressive from the Workshop models).
A typical calendar might simply alternate stock groups each month, updating a Dow stock in January, March, May, July, September, and November, and updating a growth stock in alternate months. Any such schedule you like will work -- just set your strategy at the beginning and stick to it with a rigid discipline.
This approach is also a good way to begin for an investor who doesn't have $12,000 to start with a full Dozens portfolio but who is adding regularly through disciplined savings. Let's say you're starting out with only $3,000. You would buy your January, February, and March stocks with $1,000 apiece. Then if you don't have another $1,000 saved up until August, no problem. With that next $1,000, fill up your August slot and keep saving to fill in the next open slot.
It may take you a couple of years to fill in all twelve slots, but that's no problem as long as you're saving constantly and adding your savings to your portfolio regularly. Then once you have a full dance card, each month your new money simply gets added to the stock you're currently replacing.
If you already have $12,000 or more and want to implement a Dozens portfolio, the first year's transition leaves you at least two alternatives. You can either sell your current holdings when you buy your first Dozens stock and park that cash in an index fund (or Spyder) until its needed so that it keeps pace with the market, or if you like what you're already holding, hang on to it for another year, selling enough each month to fund your next Dozens purchase.
By the end of the first year, you'll be set up fully to begin updating one stock per month. The first year might run you into some short-term gains depending on what you're already holding and how you handle the transition, so look at your tax bracket and current holdings to see what course is best for you during the transition.
The Dozens method is easy and completely mechanical if you're using something like the Dow Approach or Keystone Model (or combining them). It's tax efficient in that every position is held a full year, limiting your capital gains rate at 28% (or lower, depending on your tax bracket). And it doesn't rack up unnecessary trading costs. When you first begin, you may have to pay $8 - $10 per trade, and on a maximum of 24 trades a year that represents a total of $192 - $240 per year. As your portfolio gets larger (above $15,000), you can even get an account charging as little as $5 per trade, lowering the maximum total trading expense to $120 per year. With $15,000, that's a cost ratio of only 0.8%. With $50,000 (and you'll get there), it's a cost ratio of only 0.24% -- nearly as cheap as the lowest-cost index funds and likely to produce much higher returns.
If you had started a program like this at the beginning of 1998, your first three Dow stocks would have been Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> at the end of December, International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> at the end of January, and AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> at the end of February.
So far in 1998, such a portfolio would be up 15.4% versus the Standard & Poor's 500's gain of 13.9%. Both are on outrageous paces so far. If one annualized these first-quarter gains, the S&P 500 would gain 77.5% and the Dow Dozen portfolio would gain 87.6%. Obviously, I don't expect the market to sustain such a torrid pace, but it's a nice start and fun to fantasize about as spring starts to kick in.
That aside, the Dozens approach, regardless of which screens you combine to select the dozen stocks, might be a good way for you to take advantage of a small but rapidly growing portfolio, or for an established portfolio, to add new money every month without running up a slew of extra trading costs. Fool on!
[Robert Sheard is the author of the forthcoming book, The Unemotional Investor, due out from Simon & Schuster on May 12. To pre-order your copy, please visit Amazon.com, where it's available at a discounted price.]
TODAY'S
NUMBERS
Stock Change Last -------------------- UK +1 49.00 IP - 7/16 49.13 MO +1 3/16 43.88 EK +1 1/8 64.38 |
Day Month Year
FOOL-4 +1.35% 3.18% 8.49%
DJIA +1.00% 4.20% 12.60%
S&P 500 +0.92% 5.37% 13.93%
NASDAQ +1.11% 2.37% 15.41%
Rec'd # Security In At Now Change
12/31/97 291 Union Carb 42.94 49.00 14.12%
12/31/97 289 Int'l Pape 43.13 49.13 13.91%
12/31/97 206 Eastman Ko 60.56 64.38 6.30%
12/31/97 276 Philip Mor 45.25 43.88 -3.04%
Rec'd # Security In At Value Change
12/31/97 291 Union Carb 12494.81 14259.00 $1764.19
12/31/97 289 Int'l Pape 12463.13 14197.13 $1734.00
12/31/97 206 Eastman Ko 12475.88 13261.25 $785.38
12/31/97 276 Philip Mor 12489.00 12109.50 -$379.50
CASH $415.96
TOTAL $54242.84
|
|
|||||||||
