fool.com: Retiring with Dogs (Foolish Four) May 5, 1999

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Retiring with Dogs
-- the kind that keep you warm at night

by Ann Coleman (TMF AnnC)

Reston, VA (May 5, 1999) -- I've been inspired! Ethan Haskel, who writes a weekly Foolish Workshop column on his Beating the S&P 500 strategy every Wednesday, has a good one today. Actually, every week he has a good one that would probably interest any Foolish Four fan.

I always enjoy Ethan's work, but today he has inspired me to duplicate his work using a Dow strategy instead of Beating the S&P. (In science this is known as verifying results, not plagiarism, if you please!)

The rest of this column will make more sense if you read Retiring With BSP first. Go ahead. I will wait.

Ethan uses the BSP strategy to construct a retirement plan based on a starting portfolio that is twenty times your anticipated annual gross income needs. That doesn't mean you have to die after 20 years, of course. Actually, the goal of the plan is to create a perpetual account that will never run out of money and will actually grow over the years to cover inflation, long-term health care, and even make you your family's favorite ancestor some day.

I ran the same scenario that Ethan ran (start with $1,000,000 and take out $50,000 the first year, then increase the payout by 4% each year), but instead of the BSP numbers, I used the returns from High Yield 10 (Dogs of the Dow). I picked that strategy because, even though it has provided the lowest average annual return of any of our Dow investing strategies, it has provided the most consistent returns. In fact, its standard deviation (a measure of volatility, or risk) is lower than that of the Standard & Poor's 500 Index or the Dow Jones Industrial Average, and its risk-adjusted return would be higher than either Spiders <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %> or Dow Diamonds <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: DIA)") else Response.Write("(AMEX: DIA)") end if %>.

The results are not as impressive as the Beating the S&P strategy, where the portfolio hits $6 million after just 12 years, but that wasn't the point. The BSP numbers show what a higher return can do over a relatively short time period. But it is also good to see what a very low risk strategy can do over a long time period.

Our Dow numbers go back much farther than the BSP history, so I decided to look at a different time span than Ethan covered. Also, one criticism of these forward projections is that the recent Great Bull Market has raised expectations too high. (Plus, the numbers just get embarrassingly big after a while.) For all those reasons, I started in 1961 and ran the numbers up only through 1988, which lets us see what effect the Great Crash of 1987 would have had (essentially none) but eliminates much of the market's huge recent gains.

Here are the numbers:

                            Annual
                  Annual    Payout
                  Return    Inflation-
      Starting    High      indexed
Year  Balance     Yield 10  at 4%    
1961  $1,000,000  26.91%    $50,000
1962  $1,205,609   0.15%    $52,000
1963  $1,155,366  21.06%    $54,080
1964  $1,333,259  20.28%    $56,243
1965  $1,535,996  19.34%    $58,493
1966  $1,763,242 -17.90%    $60,833
1967  $1,397,655  25.68%    $63,266
1968  $1,677,112  14.68%    $65,797
1969  $1,847,850 -12.77%    $68,428
1970  $1,552,263   4.73%    $71,166
1971  $1,551,146   5.71%    $74,012
1972  $1,561,543  23.79%    $76,973
1973  $1,837,718   3.89%    $80,052
1974  $1,826,071   1.04%    $83,254
1975  $1,760,889  52.17%    $86,584
1976  $2,547,837  33.24%    $90,047
1977  $3,274,829   1.17%    $93,649
1978  $3,218,508   2.44%    $97,395
1979  $3,197,121  14.21%   $101,291
1980  $3,535,722  27.95%   $105,342
1981  $4,389,341   4.87%   $109,556
1982  $4,488,162  20.87%   $113,938
1983  $5,287,201  38.43%   $118,496
1984  $7,155,066   7.45%   $123,236
1985  $7,555,931  30.61%   $128,165
1986  $9,701,290  29.43%   $133,292
1987 $12,383,860   8.56%   $138,623
1988 $13,293,652  17.96%   $144,168

You're dying to know what happens if you run this on through 1998, aren't you? OK, I'll tell you, if you promise to remember that you have to live to be 103 for it to work. Compounding one million dollars for 38 years at 14.98% annually with the payout stipulated above gives you over $65 million. (Personally, I would start moving that payout up a bit at some point.)

Friday: What happens if you start in a bad year, and should you go with a Dow Unit Investment Trust?

Fool on and prosper!

Today's Stock Lists | 1999 Dow Returns

05/05/99 Close

Stock Change Last -------------------- CAT - 5/16 65.13 JPM +5 1/2 139.00 MMM -1 9/16 92.38 IP + 11/16 56.50

Day Month Year History FOOL-4 +0.66% 3.32% 33.22% 35.20% DJIA +0.64% 1.54% 19.71% 19.23% S&P 500 +1.15% 0.91% 9.92% 10.19% NASDAQ +1.98% -0.33% 15.58% 17.17% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 65.13 51.17% 12/24/98 9 JP Morgan 105.51 139.00 31.74% 12/24/98 22 Int'l Paper 43.55 56.50 29.74% 12/24/98 14 3M 73.57 92.38 25.56% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1563.00 $529.00 12/24/98 9 JP Morgan 949.62 1251.00 $301.38 12/24/98 22 Int'l Paper 958.12 1243.00 $284.88 12/24/98 14 3M 1030.00 1293.25 $263.25 Dividends Received $29.45 Cash $28.26 TOTAL $5407.96

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