<THE FOOLISH FOUR>

Seasonality
by Bob Price
(TMF Sandy)

Houston, TX. (Sept. 22, 1998) -- Hi, Fools... I'm going to be writing a column a week here. Today I'm going to dive right in with a complicated subject! Watch for hyperlinks (sections of text that are underlined) for more information. Fasten your seat belts...

Taking Advantage of Seasonality in Your Dow Dividend Investing

The start of the year is the best time to start your Dow Dividend investing plan. So what do you do if you have money to invest NOW?

If you buy now and then switch in January, some unpleasant things happen. First, you've made two sets of trades in less than three months. That's more commissions (and spreads) than you need to pay.

And if your portfolio is taxable (not an IRA) you have another problem -- a short-term gain (we hope). That gain will be taxed at your normal income tax rate, not at the lower long-term capital gain rate of 20% for most of you or 10% for those of you in the 15% tax bracket.

So what to do?

We've found that for random starting months, holding periods that are longer than one year generally do better on average -- so we can take advantage of this. If you have enough to invest without paying too much in commissions, put your money in the current Dow selections and wait until the end of the next year. Then if your portfolio is taxable, you can pay the lower long-term capital gains taxes.

Then What?

For your IRA money, just trade on the first trading day in January.

For your taxable money (you are saving more than $2,000 each a year, we hope?) things are a bit more complicated. To claim long-term capital gains, you need to hold for MORE than one year -- at least a year and a day. If you start on Jan. 4 of 1999 and 35 years from now you will retire, your Dow trading date will have drifted way into February. Historically, February hasn't done very well as an anniversary date, so you may want to start in early December to allow for this. December has historically done much better than February, but not as well as January. These all have slight effects, but they can add up over time.

As Your Portfolio Grows

Time has gone by. You've accumulated a lot more money. Great! You should start to diversify outside the Dow stocks -- for instance, in Cash-Kings or Boring stocks or even those wild Fool Portfolio stocks. If you have a margin account, the time will come when your Dow trading amounts are comfortably under your margin limits -- then you can play a more sophisticated game, if you are so inclined. Move your Dow trading date to the first trading day in January and do the following:

1. If you have any losing positions that are not carried over to the next year, sell them prior to the end of the year. That will get you a short-term loss, which is at your higher tax bracket. However, there is one thing to watch out for -- you *must not* buy these same shares back within 30 days or you'll run afoul of the wash sale rules.

2. Buy your stocks for the new year on the first trading day of the year. Note that you haven't sold your winners yet, so you are buying these positions using some margin. Don't worry, you won't have this margin position out for long.

3. On the second trading day of the year, sell your winners that are not carried over into the new year. They have been held for a year and a day, and hence are long term.

Make sure you are careful not to go over a reasonable amount of margin (say 20%) doing this.

And, of course, keep up with our message boards here on taxes and on the Dow Dividend approach.

By the way, thanks and a tip of my belled cap to Roy Lewis (TMF Taxes) for help on the tax aspects of this article.

Current Dow Order | 1998 Dow Returns

What Happened to Robert Sheard?

09/22/98 Close
Stock  Change   Last 
 -------------------- 
 UK   +1  1/8   40.44 
 IP   +  13/16  44.38 
 MO   +  13/16  48.00 
 EK   -1 15/16  83.44 
  
 
 
                    Day   Month    Year 
         FOOL-4   +0.70%  10.13%  11.57% 
         DJIA     -0.45%   4.75%  -0.14% 
         S&P 500  +0.58%   7.55%   6.12% 
         NASDAQ   +1.03%  13.25%   8.11% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     83.44    37.77% 
  12/31/97  276 Philip Mor    45.25     48.00     6.08% 
  12/31/97  289 Int'l Pape    43.13     44.38     2.90% 
  12/31/97  291 Union Carb    42.94     40.44    -5.82% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  17188.13  $4712.25 
  12/31/97  276 Philip Mor 12489.00  13248.00   $759.00 
  12/31/97  289 Int'l Pape 12463.13  12824.38   $361.25 
  12/31/97  291 Union Carb 12494.81  11767.31  -$727.50 
  
  
                              CASH    $754.73 
                             TOTAL  $55782.54