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First, the strategies I'm going to be mentioning here are all more complicated and require more (some of them far more) of a time commitment, both in the initial stages while you are learning how they work and as time goes by. They are not for beginners, although beginners can certainly begin to learn them.
Our Rule Breaker portfolio is amazing. Started just five and a half years ago with $50,000 and with no cash added since, that portfolio is pushing the magic one-million-dollar mark. It may very well be the most successful stock strategy ever demonstrated in the real world over a comparable time period. BUT (there's always a "but") it is also the most demanding. Rule Breaker stocks are not picked out of thin air. ("Hey, they just opened a new Starbucks. Man, those things are everywhere. I better buy me some stock in that company!")
No, it's a little more complicated than that. Sure you can just duplicate the portfolio. If you had done that five years ago when no one had ever heard of The Motley Fool, you would be one happy camper today. But it wouldn't really have been very smart. Five years ago, you couldn't have known what was coming. Even now, the Rule Breaker portfolio exists as a demonstration of investing principles, not a set of stock picks. And there have been times in its short life when the portfolio plunged. Not too long ago it dropped over $200,000 in just a few months.
No, Rule Breaking investing can be very rewarding, but you have to love reading annual reports, and be willing to go out on a limb, and have a rock-solid stomach for volatility. But if you've got the goods, you may find it more rewarding and certainly less boring than our dull Foolish Four.
The Rule Maker portfolio is a slower and steadier ride. Right now it's returning around 30% per year, but it's been in operation for less than two years so the long-term average is anyone's guess. Rule Maker stocks are true buy-and-holders. The portfolio looks for companies that can be held for at least 10 years.
If you are investing outside of a tax-advantaged retirement account, you might want to give the Rule Maker a closer look. The really, really long-term buy-and-hold approach is the best way to reduce your capital gains taxes. It's simple: You don't trigger taxes until you sell your stocks. As long as you have companies that are growing nicely year after year, your portfolio actually compounds exactly as though the money were in an IRA. But here's the kicker. When you eventually do sell, you will pay less in taxes than if the money were in a traditional IRA or 401(k) or any retirement plan other than a Roth IRA.
Here's how it works. Hold your stocks for five years or longer (check here for some caveats to that) and you can reduce your top tax rate to as low as 8% (not now, but by the time you sell). A hefty IRA withdrawal plan can generate tax rates twice as high -- you pay at the regular "earned income" rate on most retirement plan distributions.
Again, though, to use the Rule Maker strategy, you have to pick your stocks carefully after considerable due diligence, and you do have to keep at least half an eye on them, even if your plan is to hold forever.
Now, for the really adventurous, we come to my favorite: The Foolish Workshop. The Workshop is the spawn of the Foolish Four, but it is not limited to large companies. Indeed, it often seeks out the same kind of small, fast-growing companies that the Rule Breaker portfolio loves.
The Workshop is also a mechanical approach to picking stocks, but if the Foolish Four is a nice BMW sedan, the Workshop is the space shuttle. OK, I'm exaggerating. But the Workshop strategies are more complex, and the sheer number and variety of the strategies that have been developed there (mostly by readers) requires a serious investment in time. It can be very, very rewarding, though, and, if you have a quantitative soul, even fun.
Most Workshop strategies have beaten the Foolish Four over the last 12 years, but 12 years is the extent of our backtested history for them. The strategies all start with stock screens that are based on ratings by Value Line or Investors Business Daily, kind of like how we start with the Dow. Then other parameters such as earnings growth, market cap, and recent price performance are used to refine the list to 5 or 10 stocks that have a pretty good chance of performing well over the coming months.
To see how this year's Workshop strategies have been doing, see 1999 Workshop Returns. For some historical returns and an explanation of each of these screens that will be fairly incomprehensible to most of you, see Workshop Screen Explanations. Like I said, there's a lot of background to catch up on before this stuff makes sense.
So between today and yesterday, you have a round-up of other investing options both Motley (today) and Wise (yesterday). I hope that this will help those of you who are debating the future of your investments come to a conclusion about what will best suit your investing style and risk tolerance.
Finally, if you're looking to air your thoughts on the millennium, check out how you can get on The Motley Fool radio show.
Fool on and prosper!
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