<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (April 29, 1998) -- Today I need to clarify a point I made in yesterday's column on regular savings and dollar-cost averaging with the Dow Approach.

I often "hear" regular monthly savings when someone says dollar-cost averaging, even though they're not technically the same thing. As several quick readers noticed in last night's column, one of my alternatives for adding new money to a portfolio regularly isn't, in fact, true dollar-cost averaging.

Dollar-cost averaging is a practice where one invests the same dollar amount each month, regardless of the price of the stock or mutual fund. When the security's price is low, one buys more shares, and when it's high, one buys fewer shares, effectively keeping the average cost per share down.

My explanation yesterday, however, of buying an amount on margin at the beginning of the year and then using the monthly savings deposits to pay off the margin balance doesn't fit this description, because the purchase of the securities is made all at one time and the subsequent price changes in the securities don't affect the average cost per share.

That technical distinction aside, I nevertheless believe that buying the shares up front using a conservative level of margin (no more than 20%) is a more powerful savings plan simply because of the probability that the market will go up during the course of the average year. The market rises 71% of the time, which means that the sooner you buy your shares, the better the chances are of a gain. Dollar-cost averaging over the long run will work less well based on the historical returns for the major market indices or the Dow models we follow here. With dollar-cost averaging, your entire investment is not at work for you throughout the year, which means it's not getting the full advantage of that 71% success ratio for the market. The market rises more than twice as often as it falls, so dollar-cost averaging in a typical year generates a higher cost per share than does buying the whole ball of wax at the beginning of the year.

So I stand corrected in labeling yesterday's response a dollar-cost averaging method, but I nevertheless believe the method a sound one. Thanks to the several readers who asked me to clarify the distinction. 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   +   5/16  48.50 
 IP   -   3/16  51.81 
 MO   -   1/4   37.44 
 EK   +1  9/16  71.56 
 
 
                    Day   Month    Year 
         FOOL-4   +0.53%   2.20%   9.16% 
         DJIA     +0.59%   1.72%  13.19% 
         S&P 500  +0.88%  -0.65%  12.80% 
         NASDAQ   +1.08%   0.87%  17.91% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     51.81    20.14% 
  12/31/97  206 Eastman Ko    60.56     71.56    18.16% 
  12/31/97  291 Union Carb    42.94     48.50    12.95% 
  12/31/97  276 Philip Mor    45.25     37.44   -17.27% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  14973.81  $2510.69 
  12/31/97  206 Eastman Ko 12475.88  14741.88  $2266.00 
  12/31/97  291 Union Carb 12494.81  14113.50  $1618.69 
  12/31/97  276 Philip Mor 12489.00  10332.75 -$2156.25 
  
  
                              CASH    $415.96 
                             TOTAL  $54577.90