<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (April 28, 1998) -- In our Dow Approach message folder on America Online, reader Met61 asked a question today that's near and dear to my heart: "Is there any way to use dollar-cost averaging with the Foolish Four?"

The reason this question is so important is that it's based on the idea of continuous savings over a long period of time -- the surest wealth-building technique I know. Instead of plowing regular savings into a bank account or a mutual fund, where there may not be any front-end sales charges, the stock investor has to be careful regarding trading costs.

There are a couple of ways, however, that an individual can add money regularly to an existing portfolio without unduly running up trading costs. Let's look at a few possibilities today.

1) Keep an index fund open and put your monthly deposits in it until your regular stock portfolio update, then take most of the money out to add to your stocks (leaving just enough in the index fund to keep it open). You only have one set of commissions a cycle this way, but you still have a lot of accounting work to do, tracking all of your deposits and withdrawals from the fund.

2) Run more than one Dow portfolio, staggered with different starting dates. This way you can add new money every time one of the portfolios comes due for renewal. It does create more commissions, of course, and you also need to be careful about share amounts and dates of purchase and sale. When you hold the same stock in more than one portfolio (as is likely), you have to be careful with the accounting method you use (first in, first out) in order to qualify for the long-term holding period on all your sales.

Another version of this is to use the Dozens Approaches, where you hold twelve stocks, but only one is purchased or updated each month. With staggered purchase dates, you can add new money every month to your portfolio as you're updating one stock. This caps your total trades for the year at 24.

3) The easiest, and perhaps most effective way (but also the most aggressive and therefore one that takes on more risk and should only be considered by more experienced investors) is to figure out approximately how much you're planning to add through the cycle and then borrow that amount on margin when you make your portfolio adjustment at the beginning of the period. Then your monthly deposits go to paying down that margin balance without creating any additional trades or accounting problems. The interest you pay on the margin balance is usually tax deductible and the money you plan to add is working for you already, even before you deposit it. The danger, of course, is that a market downturn affects you even more dramatically if you're using margin, so keeping the amount you borrow somewhat conservative (no more than 20% of the total value of your portfolio) is important to limit your risk.

For example, let's say you have a $25,000 portfolio and you want to add $250 a month over the next 18 months. Go ahead and buy stocks worth $29,500 ($4,500) on margin. That's only 15% of your overall portfolio value, so you're reasonably sheltered against a margin call in a market correction. And each month your $250 deposit reduces that margin balance while the money is already at work for you.

All three plans are feasible, and there are undoubtedly several more possibilities that may fit your needs even better. I prefer #3 simply because I am willing to be a little more aggressive by using a small amount of margin, and it's the easiest of the three to keep track of.

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   +   3/16  48.19 
 IP   +  11/16  52.00 
 MO   ---       37.69 
 EK   -1  1/4   70.00 
 
 
                    Day   Month    Year 
         FOOL-4   -0.01%   1.66%   8.58% 
         DJIA     -0.21%   1.13%  12.53% 
         S&P 500  -0.13%  -1.51%  11.82% 
         NASDAQ   +0.63%  -0.21%  16.65% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     52.00    20.58% 
  12/31/97  206 Eastman Ko    60.56     70.00    15.58% 
  12/31/97  291 Union Carb    42.94     48.19    12.23% 
  12/31/97  276 Philip Mor    45.25     37.69   -16.71% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  15028.00  $2564.88 
  12/31/97  206 Eastman Ko 12475.88  14420.00  $1944.13 
  12/31/97  291 Union Carb 12494.81  14022.56  $1527.75 
  12/31/97  276 Philip Mor 12489.00  10401.75 -$2087.25 
  
  
                              CASH    $415.96 
                             TOTAL  $54288.27