<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (June 10, 1998) -- The Motley Fool is, in my completely biased opinion, perhaps the best teacher and resource for investors wanting to learn how to invest what they've saved. One area we probably don't spend enough time on, however, is the very nature of saving. The online model portfolios opened with $50,000, but that may seem like a pipe dream to you if you're just starting out and don't have a $50,000 stash sitting around.

What if you're fresh out of school with no savings to your name and a modest salary of, say, $20,000 or so a year? Enough to live on maybe, but you're despairing of ever retiring comfortably. Is your future destined to be bleak and spartan? Not if you're Foolish!

The only savings plan I've come across that makes any practical sense is a form of forced savings. People who tell themselves they'll save whatever's left at the end of the month never get around to saving anything. If you can force yourself to skim a certain percentage off the top of every paycheck (5%-10%), you can still set yourself up for that easy-chair retirement you've felt was always going to elude you. And if you can make yourself pay the monthly deposit into your retirement fund, you don't have to think about saving anything else the rest of the month. You can relax and spend every penny of what you earn beyond that with the comforting assurance that you're taking care of your retirement painlessly.

Let's look at how it can work. Let's assume you're 30 years away from retirement and you haven't got a penny put away. You bring home $20,000 a year, or $1,667 a month. (It's better to work from your actual take-home pay because we all know what income taxes do to your gross salary.) You decide to pay yourself first and you commit to saving $165 every month for your retirement (just under 10% for this simplified example).

If you are starting from scratch, an obvious way to get started is through a tax-free Roth IRA. You can begin with the Dow approach, and as your portfolio grows you can branch out into other Foolish investments. Let's assume you are able to average 20% annually on your investments.

So, you're putting away $165 a month and your portfolio grows at an annual rate of 20%. At the end of the first year, you'd have $2,156 in your retirement fund. Still a long way to go, but an excellent start.

Let's flash forward a few years to see how your fund would grow: 

Beginning    $          0 
   1 Year     $      2,156 
  5 Years     $     16,041 
 10 Years     $     55,955 
 15 years     $    155,274 
 20 Years     $    402,411 
 25 Years     $  1,017,369 
 30 Years     $  2,547,579
In 30 years, you can start with nothing and still build a tax-free portfolio worth over $2.5 million dollars simply by paying yourself first from every paycheck! The most important factor I've left out, of course, is that you're not going to be bringing home $20,000 a year forever. These numbers assume that your monthly paycheck and savings contributions never change. As your salary increases, of course, you'll save more and your retirement fund will grow even more rapidly. (For you inflation hawks, at 4% a year average inflation, that's still a tax-free nest-egg worth nearly $800,000 in today's dollars.)

You don't have to be born rich to make yourself wealthy, but it does take a little discipline. No one will send in that 10% contribution each month if you don't. But if you can make yourself do it every month before you pay any bills or buy anything extra, you'll all but guarantee yourself a wealthy retirement without having to worry about it constantly or pray the government will be there to help you when you're old. How Foolishly easy and self-reliant is that?!

Rankings Note: Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> raised its quarterly dividend 20%, paying $1.20 per year now. That's enough to throw it back into the High-Yield 10. 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   -1  5/8   47.88 
 IP   -   3/4   46.19 
 MO   -1  7/8   38.38 
 EK   -1  9/16  70.25 
  
 
 
                    Day   Month    Year 
         FOOL-4   -2.82%  -0.94%   5.52% 
         DJIA     -0.86%   0.81%  13.45% 
         S&P 500  -0.55%   1.97%  14.62% 
         NASDAQ   -1.53%  -0.32%  12.92% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     70.25    16.00% 
  12/31/97  291 Union Carb    42.94     47.88    11.50% 
  12/31/97  289 Int'l Pape    43.13     46.19     7.10% 
  12/31/97  276 Philip Mor    45.25     38.38   -15.19% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  14471.50  $1995.63 
  12/31/97  291 Union Carb 12494.81  13931.63  $1436.81 
  12/31/97  289 Int'l Pape 12463.13  13348.19   $885.06 
  12/31/97  276 Philip Mor 12489.00  10591.50 -$1897.50 
  
  
                              CASH    $415.96 
                             TOTAL  $52758.77