<THE FOOLISH FOUR>

It Works! It Works!
by Ann Coleman
(TMF AnnC)

Reston, VA. (Oct. 7, 1998) -- I have received some wonderful feedback on the Foolish Four columns I've written recently. Some praise, some questions, and one or two interesting challenges. I have enjoyed them all. Today and Friday, I want to share a couple with you.

On September 25 in Let's Talk Money, Part 3, I suggested that retirement need not be the time for ultra-conservative investing -- that keeping a portion of your funds in a strategy like the Foolish Four might provide for some extras that fixed income securities like bonds and annuities, which are usually touted as the only reasonable alternative for retirees, might not be able to provide. Bill Pitts wrote in to share how he has used the stock market instead of fixed income securities to fund his retirement for the past 11 years. Here's what he wrote:

"I was offered early retirement in 1986, so I did what you did -- looked at my money on a spreadsheet under different scenarios. At that time, Peter Lynch was getting over 20% each year in his Magellan fund, so that is the model I started with. I looked at 20% growth, and taking out 10%, or half the growth each year. Projected out for 30 years (by then, I figured, I may no longer be here) and the results were very promising. I also looked at many other scenarios -- earn 10%, remove half, earn 20%, remove enough each year to have zero at the end of 30 years, and several others. Anyway, it looked good enough that I thought I could do it, and I did.

"The only bad thing was that the retirement took place in January 1987, and I rolled over my retirement money (from my company) into an IRA (so that I could manage it) in the spring of that year -- and then the big crash of '87! Well, I had no choice but to stay, and eventually everything turned out OK. I keep a spreadsheet now with actual performance and projected performance based on my original plan. It has worked out very well. I have taken out more than I would have earned if I had kept my job, and I have more in the funds today than I did at the beginning [italics mine]. Keep up the good work."

Whew! I thought upon reading his letter. It really can work! In case you missed it, Bill started his plan just a few months before the "biggest one-day drop in the Dow ever!" The rest of 1987 wasn't such a picnic, either.

It is also interesting that his projected return of 20% is slightly less than the Foolish Four has averaged over the past 25 years, and well below the RP4's average return. (Foolish Four: 21.86%, RP4: 24.62%. Compounded average annual returns, 1973 - 1997.) Check out how Magellan has done over the past 10 years, during which the Foolish Four has returned 20.91% and the RP4 has returned 23.25%.

The market has been incredibly strong these last 10-15 years. Every bad year has been followed by an outstanding one. It would be na�ve to assume that the next 30 years will be as good as the last ten, but I have enough faith in the future to believe that in spite of the rocky patches that are undoubtedly ahead, one will be better off planning (carefully) for a good future than a bad one.

Current Dow Order | 1998 Dow Returns

10/07/98 Close

Stock Change Last -------------------- UK + 9/16 42.25 IP - 7/16 45.13 MO - 3/8 48.88 EK +1 7/16 77.63

Day Month Year FOOL-4 +0.42% 0.28% 11.14% DJIA -0.02% -1.29% -2.11% S&P 500 -1.76% -4.56% 0.03% NASDAQ -3.19% -13.65% -6.86% Rec'd # Security In At Now Change 12/31/97 206 Eastman Ko 60.56 77.63 28.17% 12/31/97 276 Philip Mor 45.25 48.88 8.01% 12/31/97 289 Int'l Pape 43.13 45.13 4.64% 12/31/97 291 Union Carb 42.94 42.25 -1.60% Rec'd # Security In At Value Change 12/31/97 206 Eastman Ko 12475.88 15990.75 $3514.88 12/31/97 276 Philip Mor 12489.00 13489.50 $1000.50 12/31/97 289 Int'l Pape 12463.13 13041.13 $578.00 12/31/97 291 Union Carb 12494.81 12294.75 -$200.06 CASH $754.73 TOTAL $55570.86