<FOOLISH FOUR PORTFOLIO>

When, Oh When?
Invest now, invest later?

by Ann Coleman
(TMF [email protected])

Reston, VA (March 30, 1999) -- They continue to be the most asked questions I get: When should I start a Foolish Four Portfolio? Should I start now or wait until December? Should I start now while the market is so high, or wait for it to fall first?

Let's take that last question today. It's an old friend. I've been getting it since I first started doing some customer service work for the Fool in the fall of 1996. Let's see, the Dow was around, what... 5900 then, right? Of course, twice since then it has dropped significantly -- October of '97 and July/August of '98 both saw the Dow take major dives.

Those were buying opportunities, no doubt about it. Of course, that's easy to say in retrospect, because in both cases the markets recovered within a few months and continued their relentless climb as though nothing had happened.

But I suspect that those very folks who were waiting for the market to take a dip would have seen those dips, without the benefit of hindsight, as very bad times to invest. There was certainly enough fear-mongering going on at the time. I don't recall any letters asking me if this was that dip they had been waiting for.

Buying the right stocks when the market tumbles can really make you look good. For example, back last September I bought a few shares of Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, and Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> fairly near the market low. In a few months I was sitting on 50% to 60% gains! Whoa! Was I smart or what?

Not particularly. Here's why: The money I invested had recently come out of a rather anemic mutual fund left over from the bad old days. So for the entire year it had been doing essentially nothing. I could have bought those same stocks for LESS in January than I paid for them at the bottom of the dip, and my overall gain for the year would have been much higher. Of course, then I couldn't have bragged about the 50% gain in three months.

Here's how it worked out (all prices are split-adjusted and rounded to the nearest dollar)

On September 8, 1998, I bought Cisco at $62, Intel at $81 and Microsoft at $50. That little sub portfolio is now up 70%, and most of that gain came before the end of the year. But if I had gotten on the stick and sold that silly fund back in January 1998, I could have bought Cisco for around $39, Intel for $72, and Microsoft for $33.

Now, this little example is by no means universally applicable. It just illustrates that there are risks to waiting as well as to buying. Here is something that's a bit broader. At the same time, I also bought some Dow Diamonds at $79 and change. They are up a nice healthy 25% since September 8th, and I would have paid about the same thing had I purchased them the previous January. A 25% gain over 6 months is much better than a 25% gain over 15 months, but unless I had something better to do with my money for the first 9 months of that period, I can't say I was better off waiting.

That's the trick. Other than bonds or money market fund, which would have netted me 3% or 4% over that time period, most places I could have put my money would probably have dropped when the market fell. Of course, with perfect foresight I could have sold in mid-July, but don't kid yourself -- such strokes of luck are just that, luck.

Buying on the dips sounds good, and for someone who has a goal of accumulating shares in a specific company over time, it makes sense. But for timing your entry into the market, I very much doubt that it works for the majority of people who try it. More often, I expect that they wait too long or get scared off when the market does dip, or they have to sell something else at a loss to have the money to buy on the dips.

Of course, it's easy to come up with examples that are polar opposites to the ones I cited above. It is quite possible that if you buy one week, your return for the year might be around 10%, but if you wait a week, the return for the year will be closer to 50%. The fear of buying just before the market crashes is not completely irrational. But I wonder if what fuels that fear is not so much the fear that the market will drop and not recover for years but a hazier fear that the market will drop and you will feel stupid for not having waited.

Get over it.

The risk of looking dumb is probably the worst risk in investing, but it's all part of the game, the price of admission, the reason stock investing pays off better over the long run for those willing to take the chance.

You don't have to throw yourself off a cliff, though. If fear is keeping you out of the market or in mutual funds, take baby steps. No one is suggesting that anyone should dump their entire life savings into the market all at once. Statistically, that might be the best thing to do, since the market is more likely to be going up than down, but statistics are not always useful when combating fear.

I did a study once that was a very stringent look at what happens over time to an investment that had a payout element. (The yearly payout increased the possibility that you will go broke if you enter the market at a bad time.) Even with an annual payout equal to the interest from one year US Treasury bills, as long as you entered the market gradually, over a period of 10 years, there was no time from 1961 on when investing in stocks was not better than a fixed income (bonds) strategy. Baby steps.

Don't "take the plunge," just take one step.

Tomorrow: Once more with the seasonality thing.

Fool on and prosper!

Today's Stock Lists | 1999 Dow Returns

03/30/99 Close

Stock Change Last -------------------- CAT - 5/16 46.94 JPM - 3/8 125.44 MMM -1 1/16 70.25 IP -1 9/16 42.63

Day Month Year History FOOL-4 -1.40% 2.91% 3.95% 5.50% DJIA -0.93% 6.52% 8.36% 7.93% S&P 500 -0.72% 5.04% 6.14% 6.39% NASDAQ -0.50% 8.40% 13.12% 14.67% Rec'd # Security In At Now Change 12/24/98 9 JP Morgan 105.51 125.44 18.89% 12/24/98 24 Caterpillar 43.08 46.94 8.95% 12/24/98 22 Int'l Paper 43.55 42.63 -2.12% 12/24/98 14 3M 73.57 70.25 -4.51% Rec'd # Security In At Value Change 12/24/98 9 JP Morgan 949.62 1128.94 $179.32 12/24/98 24 Caterpillar 1034.00 1126.50 $92.50 12/24/98 22 Int'l Paper 958.12 937.75 -$20.37 12/24/98 14 3M 1030.00 983.50 -$46.50 Dividends Received $15.04 Cash $28.26 TOTAL $4219.99 </FOOLISH FOUR PORTFOLIO>