<FOOLISH FOUR PORTFOLIO>

The Old Switcheroo
Rolling over an existing portfolio

by Ann Coleman
([email protected])

Alexandria, VA (December 18, 1998) -- As we move closer to next week's Foolish Four portfolio creation, I have been talking a good bit about the mechanics of getting started, picking a broker, setting up an account, deciding on a strategy, and tracking your portfolio. Today, let's give the old-timers a break and talk about the mechanics of the switch over for someone already holding a Foolish Four portfolio.

Managing the actual rollover to a new Foolish Four portfolio (or any Dow strategy) seems to be a topic fraught with questions. It should be simple, but it doesn't seem to be. I think the trick is to work backwards. Start with where you want to be. When the dust clears, you want to be holding approximately $X worth of stocks A, B, C and D.

Step 1: Check Today's Stock Picks for your list of stocks or do the math yourself. However you do it, get the stocks you plan to buy and their current prices. (It's easiest to do this when the market is closed.)

Step 2: Get your account balance. By now you should have sent in any monies you want to add to the account. Your balance will be the value of your current stock holdings plus the cash in your account, which will probably include last year's dividends, cash added, and whatever was left over after your trades last year.

Current Account: 

Stock A      $2,300
Stock B      $2,100
Stock C      $1,100
Stock D      $2,000
Cash         $1,200

(Dividends, money left over from last year, and cash added this year) 

Total        $8,700

Step 3: Divide by 4. This is the target value for each of your stock holdings when we finish.

Target Value: $2,175

Step 4: Check your account and note the stocks that are staying on for another year. Most of the time 2 or 3 stocks stick around for a second or even a third year. This is the source of most of the confusion. This year, stocks C and D are the slow starters. Steel yourself -- you're going to have those dogs around for another year. (Hopefully you will like them better by the end of next year.)

Step 5: Sell any stocks that are not on your new stock list.

Sell A & B: Proceeds equal $4,380 ($4,400-$20 -- Commission of $10 x 2)

Step 6: Compare the value of each stock that is sticking around for a second year with your target value. If the values are close (say, closer than $200, or whatever number is 20 times your commission rate, or whatever seems reasonable to you, just don't obsess over being totally balanced), forget about that stock -- it can stay just as is. If there is a big discrepancy between the value of that stock and your target value, then buy or sell enough shares to bring it close to (but not over) the target value.

Stock C: Target value = $2,175.
Stock holding = $1,100.
$2,175-$1,100 = $1,075
Buy $1,075 worth of Stock C.
Stock C is trading at $35.
$1,075/35 = 30.71.
Buy 30 shares for $1,060 ($1,050 + $10 commission).
Total value of holding = $2,150.

Stock D: Target value = $2,175.
Stock holding = $2,000.
$2,175-$2,000 = $175.
Let this one stick as is.

Step 7: Adjust the cash in your account. (Don't forget commissions.)
$1,200+$4,380-$1,060 = $4,520

Step 8: Divide the cash by the number of companies whose stocks you are buying: $4,520/2 = $2,260. Note: This is a higher target value than the original target. Don't worry about it.

Step 9: Divide the new target value by the price of each new stock and round down. That's the number of shares of each new stock you will buy.

You will end up with a small amount of cash left over in your account. That's normal. Just let it sit there until next year.

For small accounts and brokerage accounts: With deep discount brokers, which have very low commissions, and Dow stocks, which have fairly hefty prices, this process will almost always leave you with enough cash in your account to cover the commissions for your last trades and any small fluctuations in price between the time you do the calculation and the time your trade executes. (When you round down a $45 stock, you end up with an average of $22.75 of leftover cash.) BUT, before you place your last trades, double-check. If it looks close, drop a share. If it looks like you will have more money left over than you expected, you can add a share. (Which stock should you add or subtract the share from? It's your money -- you pick.)

For larger IRA accounts: Don't try to cut it too close -- it isn't worth it. Calculate the number of shares to buy based on a price that is a dollar higher than the current price. You might even want to use a limit order to be sure you don't buy at too high a price. In an IRA-type account, spending more than is in the account can cause a major hassle. You don't want to know more than that!

Next week I will discuss the mechanics of placing a trade online, and I will attempt to talk you OUT of investing in the Foolish Four.

Fool on and prosper!

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Current Dow Order | 1998 Dow Returns

12/18/98 Close
Stock  Change   Last
--------------------
UK   -1 13/16  40.63
IP   +   1/4   41.75
MO   -  25/27  52.20
EK   +   7/8   74.31

                   Day   Month    Year
        FOOL-4   -0.96%  -4.16%   9.39%
        DJIA     +0.31%  -2.34%  12.59%
        S&P 500  +0.68%   2.09%  22.42%
        NASDAQ   +2.07%   7.01%  32.84%

    Rec'd   #  Security     In At       Now    Change

 12/31/97  206 Eastman Ko    60.56     74.31    22.70%
 12/31/97  276 Philip Mor    45.25     52.20    15.36%
 12/31/97  289 Int'l Pape    43.13     41.75    -3.19%
 12/31/97  291 Union Carb    42.94     40.63    -5.39%


    Rec'd   #  Security     In At     Value    Change

 12/31/97  206 Eastman Ko 12475.88  15308.38  $2832.50
 12/31/97  276 Philip Mor 12489.00  14406.98  $1917.98
 12/31/97  289 Int'l Pape 12463.13  12065.75  -$397.38
 12/31/97  291 Union Carb 12494.81  11821.88  -$672.94


               Dividends Paid YTD  $1092.81
                            TOTAL  $54695.79

</FOOLISH FOUR PORTFOLIO>