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Those of you whose stocks are up are probably quite happy to give it another whirl. Unless of course I scared you off last week. Those who are holding Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> and/or Goodyear <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %> really need a sense of commitment right now. Do keep in mind that the Foolish Four has always been very volatile in its first months (meaning the stocks are likely to move dramatically -- but it can be down as well as up), and some companies need two years to turn around. Some even need three, our old friend International Paper being a case in point.
But inevitably there will be some of you, perhaps even some who are doing well with the strategy, who have decided that this strategy is not for you. Perhaps it's too dull in these hot market days, perhaps it's too "exciting" and you want something more stable. Or perhaps you are just looking for an additional strategy to diversify a little -- a great idea in general.
Today and tomorrow we will discuss alternatives to the Foolish Four that you can use right now. Today we will take on the less risky, lower (probably) return options. Tomorrow we will look at some more exciting and potentially more remunerative options.
Note: I'm only going to be talking about 100% equity investments. Bonds and the like are outside my jurisdiction, but our new Foolish Retirement area will have some information on fixed-rate investments for those who are interested.
Option 1: Index funds are a Fool's best friend. If you just want to participate in the growth of the U.S. economy and "match the market," index funds are a cheap and extremely easy way to do that. Any good fund company will be happy to set you up and even handle the onerous chore of making periodic deposits into your account for you. (They take it out of your bank account automatically, and, no, there's no problem with letting them.)
Index funds are best suited to someone who wants to make small, frequent deposits. If you just have a big chunk of cash to invest or if you will be adding to your investment once a year in large chunks (say $2000 or more), see the next option.
There is always the question of which index fund. We usually mention the Vanguard 500 Index fund as the archetypal index fund. It was the first index fund and is still, as far as I know, the one that matches the index most closely and charges the lowest maintenance fee. It's hard to beat, but there are some other good ones. If you are a captive investor -- i.e., investing through a 401(k) -- then you will have to take what you are offered, but most 401(k)s offer some kind of index fund.
We have a whole area devoted to index funds in our Mutual Funds area as well as a chart that compares beaucoup funds -- not only the S&P 500, 400, and 600, but the Russell 200, the Wilshire 5000, the Dow 30 , the Nasdaq 100, and a couple of growth and value indices. Whew! Index funds are big business.
I guess that was actually options 1-33.
Options 34-37: You don't have to invest in an index fund to get market returns. You can invest directly in the market. The American Stock Exchange, perhaps in an effort to get something trading on its exchange as most stocks migrated to the New York Stock Exchange or the Nasdaq, came up with a really nifty idea about seven years ago. They created depository receipts for the S&P 500. But what to call them? SPDRs? Somehow they became known as Spiders, although I think they were supposed to be called SPYs since that is the catchy ticker symbol that the AMEX assigned them.
When you buy Spiders you buy a "depository receipt" for a basket of stocks that has been put together and balanced so that the return on it matches the return of the S&P 500. A single "share" of SPY sells for one-tenth of the index value of the S&P 500, and dividends are distributed to owners just as though you owned a mutual fund.
You buy and sell Spiders just like shares of stock. In my opinion, the introduction of Spiders was a pivotal point in the history of investing. They let investors buy into the market simply and easily through any broker.
Your broker will charge you the same flat rate to buy Spiders that he charges for stocks, which is why I said above that you are better off with an index fund if you want to make small, periodic investments. You don't want to be paying $10 a month to invest $200. But for investing big chunks of cash, Spiders are great. They also make a nice place to park spare cash while waiting to make an investing decision.
Spiders have a maintenance fee that is about equal to the fee charged by Vanguard and much lower than fees charged by most other index funds.
Success breeds success. Spiders were quickly followed by Webs (World Equity Benchmark Series), Diamonds (tracks the Dow stocks), and the Nasdaq 100, which tracks the 100 largest companies traded on the Nasdaq -- what a beginning they have had, up 60% since starting in March. Not bad for an index.
For more on these index share options, see the American Stock Exchange website.
I don't think it's a coincidence that the S&P took off right after Spiders were introduced, and certainly the Nasdaq 100 has helped the Nasdaq beat all comers this year. Diamonds were also introduced this year and after being clobbered by the S&P 500 last year, and being beaten by it for three years in a row, the Dow staged a comeback this year. Very interesting, although certainly many, many other factors have influenced this roaring bull market.
Tomorrow we will take a tour of The Motley Fool's Strategies area and go over Options 38 through 96 in great depth and excruciating detail. OK, I'll make a deal with you. Click here and tomorrow I'll try not to bore you to tears.
Fool on and prosper!