<FOOLISH FOUR PORTFOLIO>

Foolish 4 Alternatives
And one good reason to invest

by Ann Coleman
([email protected])

Reston, VA (December 22, 1998) -- Still reading? If I didn't scare you off yesterday, congratulations. Last night, we discussed reasons for not investing in the Foolish Four -- some good reasons, some not so good.

Here's the single best reason FOR investing in the Foolish Four: Over the past 25 years (1973-1997), the Foolish Four strategy we will be using tomorrow has compounded at a rate of 24.62% annually. That's phenomenal, folks. It means anyone following the strategy for that time period (which, of course, wasn't possible, since we only discovered it last year) would have seen their money double on average every 3.2 years. (Don't believe me? Get out your calculator and enter 100 -- or think big and enter 10,000. Now multiply by 1.246 once, twice, three times. Two more months will put you over. Close enough?)

Am I implying that it will continue to perform like that in the future? Nope. But I know of no reason why it shouldn't, either. Do I even think it will return 25% next year? Actually, I'm pretty sure it won't. If it does, it will be sheer coincidence. A compounded average annual return is only meaningful over multiple years. Individual years vary widely. In fact, you could say that this is a strategy that virtually guarantees that you will underperform the market some years (like this one) and even have negative returns occasionally. If the past holds true, it also virtually guarantees years of 50% or higher returns. That's why it is so important to commit to it for at least 5 years -- 10 is better.

One question I get asked a lot has to do with portfolio allocation. That's a hot topic amongst the Wise. They love to issue urgent bulletins informing their privileged subscribers that their New Harmonic Oscillator Model has revealed that economic times call for a shift from 50% stocks, 30% bonds, and 20% cash to a model of 60% stock, 20% bonds, and 20% cash for the coming future -- "economic times" meaning until the oscillator (and the company's need for cash-generating commissions) indicates that a change is again warranted.

Portfolio allocation is something best decided by the person who knows your financial situation and goals best: You. There is no one-size-fits-all allocation plan -- comforting as the idea may be.

That said, I know that deciding on how much to put into stocks in general or the Foolish Four in particular is a big decision. For some people, the Foolish Four represents their first foray into owning stocks directly and feels like the riskiest part of their investment portfolio. For others, these four stocks are the conservative anchors that guard against a total disaster in a portfolio full of high flying, risky ventures. (See David Gardner's Rule Breaker portfolio.)

While I must decline to offer guidelines other than to assess your own situation, I will offer some alternatives to the Foolish Four for the more conservative investors -- you risk-takers already know how to find risky stocks.

First, the market. Risk is often measured against the market as a whole. The Standard & Poor's 500 Index is the most often used benchmark that defines "The Market." Simply buying the S&P 500 guarantees you that your returns will be very close to market returns (18% annualized over the past 15 years).

You can use an index fund to invest in the market -- anyone who did that 3 years ago is convinced that index investing is a wonderful deal. The S&P has returned a compounded average of 31.15% each year over the last three years. Or you can buy Spiders <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %> to represent the S&P 500 or Dow Diamonds <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: DIA)") else Response.Write("(AMEX: DIA)") end if %> to represent the Dow Jones Industrial Average. Even though the S&P has outperformed the Dow this year and last, their long-term average returns are virtually identical. The Dow has averaged 27.63% annualized over the last three years, but over the last 20 years, both the S&P and the Dow have averaged within a quarter of a percentage point of 16% annually.

For conservative stock strategies designed to beat the market, take a tour of our Rule Maker, DRIP, and Boring Portfolios.

If you can stand NOT to beat the market, consider bonds. US Treasury bonds are extremely safe. They are used as the standard for a "risk-free" investment by people who like to come up with risk-adjusted investing strategies (more about them some other time).

I am far from an expert on T-bonds, but they are certainly popular among some investors. The problem with bonds is that you can lose a bundle if interest rates go up and you need to sell them before maturity. However, your interest payments and repayment of the principal is guaranteed by no less than the full faith and credit of the U.S. Government. If interest rates drop, you can do very well investing in bonds -- even beating the market some years. I don't like an investment that requires me to guess which way interest rates are going, because I always guess wrong. (I'm even wrong when I say to myself, "OK, you know you are always wrong, so pick the one you wouldn't normally pick." Very annoying.)

If reason #8 from yesterday's column resonates with you ("8. The whole market is wildly overpriced and is likely to come crashing down"), a few U.S. Treasury bonds in your back pocket may be a reasonable price to pay for sleeping well next year. Do take the time to educate yourself about bond investing, first. Here are a couple of places to start: Bondsonline and Investing In Bonds.com.

Finally, there is one investment that is often overlooked. Your own business. Most people are probably better off working for someone else, but those who have the entrepreneurial spirit may find that there is no better place to invest than in themselves. Ask Bill Gates.

Tomorrow: Stock Announcement Day and a word or two hundred on online trading. (Pssst. If you want advance notice on the stocks we will probably pick tomorrow, send me $20 by e-mail and click on the Today's Stock List link below.)

Fool on and prosper!

<% =headlines %>

Get the Fool's new book - The Foolish Four

Today's Stock Lists | 1998 Dow Returns

12/22/98 Close

Stock Change Last -------------------- UK +1 1/2 42.13 IP - 3/16 42.75 MO +1 1/16 53.38 EK - 9/16 73.44

Day Month Year FOOL-4 +1.02% -2.64% 11.13% DJIA +0.62% -0.79% 14.37% S&P 500 +0.06% 3.43% 24.02% NASDAQ -0.80% 8.79% 35.06% Rec'd # Security In At Now Change 12/31/97 206 Eastman Ko 60.56 73.44 21.26% 12/31/97 276 Philip Mor 45.25 53.38 17.96% 12/31/97 289 Int'l Pape 43.13 42.75 -0.87% 12/31/97 291 Union Carb 42.94 42.13 -1.89% Rec'd # Security In At Value Change 12/31/97 206 Eastman Ko 12475.88 15128.13 $2652.25 12/31/97 276 Philip Mor 12489.00 14731.50 $2242.50 12/31/97 289 Int'l Pape 12463.13 12354.75 -$108.38 12/31/97 291 Union Carb 12494.81 12258.38 -$236.44 Dividends Paid YTD $1092.81 TOTAL $55565.56 </FOOLISH FOUR PORTFOLIO>