<THE FOOLISH FOUR>

Let's Talk Money, Part 1
by Ann Coleman
(TMF AnnC)

Reston, VA (September 21, 1998) -- Let's talk about money.

Today: How much do you need to start? Wednesday: How much will you have when you're "finished"? Friday: What to do then? Next week we will contemplate that ugly word: Taxes.

First, though I have to talk stocks -- specifically, Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %>. What's up with this stock? Friday, it announced that it won't meet its third quarter estimates and tells us that next year looks pretty grim, too. Today it's our big gainer, rising $2 -- over 5%! I give up. I guess this is an example of investors feeling better knowing the worst than suspecting the worst.

Back to money. First, let's look at starting a Foolish Four portfolio. How much money do you need to start a cost-effective investment plan? The easy answer is: As much as possible. The more you start out with and can add along the way, the more you will end up with. But what's the least you can get started with?

Back in the olden days (the '70s) commissions were a big factor in investing. A typical trade could cost $300 to $600, plus many brokers charged a higher commission for "odd lots." (An odd lot is an order for less than 100 shares.) Today, that same trade could cost you less than $10, and a broker will happily sell you a single share, or a thousand shares, for the same flat fee.

The discount broker revolution, and especially the on-line, discount broker revolution, has truly made it possible for the average person to invest profitably by reducing the buy-in point. Not only have commissions been dropping like, well, kind of like global markets recently, but the minimum amount needed to open a brokerage account has also been dropping steadily. Today some brokers have no minimum and many others have minimums between $500 and $2000. But there is still a point below which it is just not reasonable to invest in stocks.

In You Have More Than You Think, Tom and David Gardner suggest starting the Foolish Four with a minimum of $1000 per stock. If you don't have $4000, they suggest buying the first two or three stocks on the list in equal dollar amounts, still investing at least $1000 per stock. Their rule of thumb was that one should not spend more than 2% of one's capital on commissions. That advice is still sound, but commissions have dropped since the book came out. At the time it was written, an "average" discount broker's flat trading fee was around $20.

What if you have a broker that charges significantly less than that? Simply divide your commission rate by 0.02 to get your own, personal minimum investment per trade. (This is a good idea for any strategy.) For example: Your broker charges $10 per trade: $20 / 0.02 = $1,000. (In other words, $20 is 2% of $1000.) Another broker charges $15 per trade: $15 / 0.02 = $750.

Using this formula it would not be unreasonable to start out with as little as $500 per stock, or $1000 total for the two stock strategy, if your commission rate is $10 or less. (By the way, I am not advocating finding the lowest cost broker just so that you can jump into the Foolish Four. There are a number of factors to consider when choosing a broker. Visit our Discount Brokerage Center for some guidelines in choosing one that is right for you.)

Then what do you do if you don't have a thousand bucks? Start saving. A savings account is still the first step (OK, it's the Second Step) to investing Foolishly. Meanwhile, visit our personal finance area and our Living Below Your Means message board for tips on how to make that bank account get up and run. And don't forget to keep it running while your first stocks are working for you. Next year, when it comes time to renew your portfolio, you can add in all the pennies and nickels you've scraped together during the year. And the next year... and the next year... and the next.

Fool on and prosper!

Current Dow Order | 1998 Dow Returns

What Happened to Robert Sheard?

09/21/98 Close
Stock  Change   Last 
 -------------------- 
 UK   +2        39.31 
 IP   ---       43.56 
 MO   +  15/16  47.19 
 EK   +   3/8   85.38 
  
 
 
                    Day   Month    Year 
         FOOL-4   +1.69%   9.36%  10.79% 
         DJIA     +0.48%   5.23%   0.32% 
         S&P 500  +0.37%   6.93%   5.51% 
         NASDAQ   +1.00%  12.09%   7.01% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     85.38    40.97% 
  12/31/97  276 Philip Mor    45.25     47.19     4.28% 
  12/31/97  289 Int'l Pape    43.13     43.56     1.01% 
  12/31/97  291 Union Carb    42.94     39.31    -8.44% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  17587.25  $5111.38 
  12/31/97  276 Philip Mor 12489.00  13023.75   $534.75 
  12/31/97  289 Int'l Pape 12463.13  12589.56   $126.44 
  12/31/97  291 Union Carb 12494.81  11439.94 -$1054.88 
  
  
                              CASH    $754.73 
                             TOTAL  $55395.23