<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (June 3, 1998) -- I hope it was just a misprint. If not, we can't set the accountability bar much lower.

In this morning's Investor's Business Daily (page B1), the topic was planning and saving for retirement. The gist of the article is that most Americans don't know what they need for retirement and all too many of them haven't begun saving and investing for it. So far so good.

The survey pointed to the fact that most respondents, savers and non-savers alike, believed they could scrape together $20 a week relatively easily. And that section of the article concluded with the following sentence: "For a 25-year-old, saving just that much can mean more than $100,000 in retirement savings 35 years later if it's put into a high-quality growth mutual fund."

Come again?

Twenty bucks a week is $1,040 in new savings a year. Let's assume one stashes the $20 a week into a piggy bank until the end of the year and only deposits the annual $1,040 on New Year's. If we start the clock with the first annual deposit of $1,040, to reach $100,000 in 35 years only requires a growth rate of a little better than 5.25% a year. Surely that's not what investors in "high-quality growth mutual funds" should expect!?

It's beside the point that $100,000 won't represent much of a retirement in 35 years. Let's look at the same scenario invested in something a little bit higher on the "quality" ladder. The long-term S&P 500 average return (since 1926) of 11% a year would get one to $394,000. The S&P 500 return for the last several decades (14%) would boost it to $822,000. Even better, if one used the Dow High-Yield approach and then branched out into growth stocks as the portfolio grew, it wouldn't be unusual to see an average 18% return. That would place our 25-year-old new saver into the $2.2 million club after 35 years. We're suddenly and relatively easily a long way from $100,000.

I applaud IBD for focusing on the need for individuals to begin saving now. But the numbers they used were at best discouraging, at worst nonsensical. If just over 5% is the best one can hope for in growth funds, who would bother? Of course, I'm no fan of funds anyway, but even their mediocre record is better than this. Naturally, the long-term record for stocks is better yet, and the Foolish Four approach is a great way to start, even with the $20-a-week plan. I think you can save even more than this over the course of the 35 years, of course.

Imagine if you invested the whole $2,000 allowed each year in a Roth IRA and made that 18%?! Can you handle nearly $4.3 million in tax-free money? I imagine! Despite their messed-up numbers, the message in IBD was good. Save as much as you can, even if you think it's a negligible amount. It won't be in 35 or 40 years. Fool on!

Current Dow Order | 1998 Dow Returns

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

TODAY'S NUMBERS

Stock Change Last -------------------- UK - 7/16 49.44 IP --- 47.00 MO - 15/16 36.63 EK -1 9/16 69.69

Day Month Year FOOL-4 -1.32% -0.77% 5.70% DJIA -0.98% -1.08% 11.32% S&P 500 -0.94% -0.74% 11.57% NASDAQ -1.12% -2.07% 10.94% Rec'd # Security In At Now Change 12/31/97 291 Union Carb 42.94 49.44 15.14% 12/31/97 206 Eastman Ko 60.56 69.69 15.07% 12/31/97 289 Int'l Pape 43.13 47.00 8.99% 12/31/97 276 Philip Mor 45.25 36.63 -19.06% Rec'd # Security In At Value Change 12/31/97 291 Union Carb 12494.81 14386.31 $1891.50 12/31/97 206 Eastman Ko 12475.88 14355.63 $1879.75 12/31/97 289 Int'l Pape 12463.13 13583.00 $1119.88 12/31/97 276 Philip Mor 12489.00 10108.50 -$2380.50 CASH $415.96 TOTAL $52849.40