<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (April 23, 1998) -- Many mutual fund investors are justifiably frightened of investing in individual stocks because Wall Street has taught them that to do so is far too expensive. The image of the full-service broker, with the requisite marble lobby, mahogany desk, and plush carpeting screaming out "high dollar," is enough to make most new investors assume that the game is out of reach. Brokers don't help any by scoffing at small accounts. But it's not nearly as bad as it once was for individual investors. In fact, commissions are quickly becoming a non-issue for investors able to make trades via the Internet.

A full-service broker might charge upwards of $100 for a simple trade in one of our Dow stocks. For a small account, trying to manage even a simple four-stock Dow portfolio would be impossible. Who's going to pay $600 to $800 in commissions every year on a portfolio of a couple thousand dollars? (Any guesses why the mutual fund industry has exploded in popularity?)

The game is changing today, though, and even with as little as a $1,000, an investor can invest in common stocks (maybe only one at a time, sure, but it's a start). Deep-discount brokers charge as little as $5 to $8 per trade these days, regardless of the number of shares one buys or sells (no penalties for "odd lots," less than 100 shares). With that kind of cost, managing a portfolio is reasonable for the likes of you and me. And don't be fooled that you somehow get better prices on your trades with a full-service broker. Deep-discounters (if they're doing their job correctly) will get your orders executed within seconds at the prevailing market price. And if you're buying the Dow heavyweights the high-yield approaches use, the spread between the bid and the ask prices is generally very small.

If you assume any position will incur two trades a year (one purchase and one sale), it's a good rule of thumb to consider $1,000 as the minimum requirement to buy a new position. Let's say you pay $8 for each trade. The total cost of $16 for the two trades that position might incur in a year only represents 1.6% of your original starting value. Of course, if the stock rises during the year, your cost ratio drops a little more. Given that the average stock mutual fund's expense ratio is more than 1.4%, even at this minimum level of investment, your costs are competitive with an industry that loses to the Standard & Poor's 500 Index more often than not.

And as your portfolio grows? Your trading costs are fixed because you pay a cost per transaction, not a percentage of the assets. So whether you're buying $1,000 worth of Exxon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %> or $100,000 worth of General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>, your transaction cost is the same.

So what does it cost to manage a Foolish Four portfolio these days? Let's assume the worst and pretend that all four stocks turn over after twelve months. That would require eight trades a year. At $8 a trade, your entire cost for the year is $64. On a $4,000 portfolio, that's 1.6% of your starting value. On $10,000, it's only 0.64%.

And if you use the Foolish Four as the core of a more diversified portfolio? I've often argued for a 20-stock portfolio, which theoretically could cost you forty trades a year. Once your account is larger than $15,000, however, you can even get commissions as low as $5 a trade. That represents only $200 a year for a full-blown portfolio (or 1.0% on a $20,000 portfolio).

In other words, if you're making your own choices and managing your portfolio directly, the costs have never been lower, and I predict they'll continue to go even lower. Eventually we'll see some brokers offering no-commission trading. (They still make a profit on margin interest, the spread, and they sometimes get paid for directing their order flow.) So don't let the old myths about having to start with a fortune to buy stocks keep you away from a great long-term savings and investing vehicle. In the spirit of do-it-yourselfers everywhere, Fool on!

Current Dow Order | 1998 Dow Returns

[Robert Sheard is the author of The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and soon at your local bookseller.]

TODAY'S NUMBERS
Stock  Change   Last 
 -------------------- 
 UK   -1        49.94 
 IP   -   9/16  53.88 
 MO   -   5/16  38.50 
 EK   -  13/16  72.75 
 
 
                    Day   Month    Year 
         FOOL-4   -1.24%   5.11%  12.26% 
         DJIA     -0.36%   3.90%  15.62% 
         S&P 500  -0.94%   1.62%  15.37% 
         NASDAQ   -1.89%   2.49%  19.81% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     53.88    24.93% 
  12/31/97  206 Eastman Ko    60.56     72.75    20.12% 
  12/31/97  291 Union Carb    42.94     49.94    16.30% 
  12/31/97  276 Philip Mor    45.25     38.50   -14.92% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  15569.88  $3106.75 
  12/31/97  206 Eastman Ko 12475.88  14986.50  $2510.63 
  12/31/97  291 Union Carb 12494.81  14531.81  $2037.00 
  12/31/97  276 Philip Mor 12489.00  10626.00 -$1863.00 
  
  
                              CASH    $415.96 
                             TOTAL  $56130.15