<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (April 3, 1998) -- On Wednesday, my column discussed the history for a retired investor who had the misfortune of leaving the work force right as the bear market of 1973-1974 hit. My argument was that if one invested Foolishly in stocks and limited initial withdrawals from the portfolio to 5%, it was possible to ride out weak markets.

A number of readers complained, and rightly so, that I used an average for inflation rather than real CPI numbers, which were higher than my 4% average figure during much of that period.

And investing in a simple index fund, inflation would indeed have done a tap dance on the retiree's head after about 15 years. But since we're reloading the inflation numbers to use real historical figures, let's also reload the base level investment and use the High Yield 10 Dow Approach.

Again the assumptions: The retiree has $1 million in a tax-deferred retirement account going into 1973 and needs $50,000 for that year's spending needs. (That $50,000 must also cover the taxes on the portion he's pulling out of his retirement account, just as if it were a regular salary.) Each year, that annual salary will be adjusted upward for the previous year's actual inflation. The returns for the portfolio are the High-Yield 10 returns, taken from our Dow Spreadsheet (available in FoolMart).

Because the Dow Approach fared so much better than the Standard & Poor's 500 Index during the bear market of 1973 - 1974 (actually turning a profit instead of losing a huge chunk), the portfolio is never in jeopardy, even with the much higher inflation rates in 1974, 1979, and 1980.

In 25 years, the portfolio grew from $1 million to nearly $20 million, even after pulling out enough money to cover the investor's typical standard of living and accounting for the CPI rate each year.

So, to amend Wednesday's column, with historical inflation rates in effect, the S&P 500 Index investor would eventually have run into trouble, but the basic Dow High-Yield investor never even hiccuped from 1973 through 1996.

Thanks to those who pushed me to look at this even closer. If nothing else, it reaffirms my faith in the Dow Approach for a baseline investment approach. Have a Foolish weekend. 

Year         Open  Withdraw     Invested  Return      Balance Infltn 
 1973   $1,000,000   $50,000     $950,000   3.89%     $986,955   8.80% 
 1974     $986,955   $54,400     $932,555   1.04%     $942,254  12.20% 
 1975     $942,254   $61,037     $881,217  50.99%   $1,330,549   7.01% 
 1976   $1,330,549   $65,315   $1,265,234  33.24%   $1,685,797   4.81% 
 1977   $1,685,797   $68,457   $1,617,340   1.17%   $1,636,263   6.77% 
 1978   $1,636,263   $73,092   $1,563,171   2.55%   $1,603,032   9.03% 
 1979   $1,603,032   $79,692   $1,523,340   8.24%   $1,648,864  13.31% 
 1980   $1,648,864   $90,299   $1,558,565  31.23%   $2,045,305  12.40% 
 1981   $2,045,305  $101,496   $1,943,809   4.25%   $2,026,421   8.94% 
 1982   $2,026,421  $110,570   $1,915,851  20.85%   $2,315,306   3.87% 
 1983   $2,315,306  $114,849   $2,200,457  39.22%   $3,063,476   3.80% 
 1984   $3,063,476  $119,213   $2,944,263   6.36%   $3,131,518   3.95% 
 1985   $3,131,518  $123,922   $3,007,597  30.50%   $3,924,914   3.77% 
 1986   $3,924,914  $128,594   $3,796,320  26.20%   $4,790,956   1.13% 
 1987   $4,790,956  $130,047   $4,660,909   9.09%   $5,084,585   4.41% 
 1988   $5,084,585  $135,782   $4,948,803  17.96%   $5,837,609   4.42% 
 1989   $5,837,609  $141,783   $5,695,825  29.68%   $7,386,346   4.65% 
 1990   $7,386,346  $148,376   $7,237,970 -10.01%   $6,513,449   6.11% 
 1991   $6,513,449  $157,442   $6,356,007  43.95%   $9,149,471   3.06% 
 1992   $9,149,471  $162,260   $8,987,212   6.24%   $9,548,014   2.90% 
 1993   $9,548,014  $166,965   $9,381,048  23.68%  $11,602,480   2.75% 
 1994  $11,602,480  $171,557  $11,430,923   2.43%  $11,708,695   2.67% 
 1995  $11,708,695  $176,138  $11,532,557  37.16%  $15,818,055   2.54% 
 1996  $15,818,055  $180,611  $15,637,444  27.47%  $19,933,050   3.32%

Current Dow Order | 1998 Dow Returns

[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   -  15/16  50.06 
 IP   -   5/8   49.31 
 MO   ---       40.00 
 EK   -1 13/16  64.56 
 
 
                    Day   Month    Year 
         FOOL-4   -1.52%   0.33%   7.15% 
         DJIA     -0.04%   2.09%  13.60% 
         S&P 500  +0.24%   1.90%  15.69% 
         NASDAQ   +0.13%   1.07%  18.15% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  291 Union Carb    42.94     50.06    16.59% 
  12/31/97  289 Int'l Pape    43.13     49.31    14.35% 
  12/31/97  206 Eastman Ko    60.56     64.56     6.60% 
  12/31/97  276 Philip Mor    45.25     40.00   -11.60% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  291 Union Carb 12494.81  14568.19  $2073.38 
  12/31/97  289 Int'l Pape 12463.13  14251.31  $1788.19 
  12/31/97  206 Eastman Ko 12475.88  13299.88   $824.00 
  12/31/97  276 Philip Mor 12489.00  11040.00 -$1449.00 
  
  
                              CASH    $415.96 
                             TOTAL  $53575.34