FOOLISH FOUR PORTFOLIO

<FOOLISH FOUR PORTFOLIO>

IP Reports Earnings
And a way to smooth the ride

by Ann Coleman
(TMF AnnC@aol.com)

Alexandria, VA (April 13, 1999) -- IP, IP Hooray! IP, IP Hooray! Sorry if I sound a bit giddy, but after months of just sitting there, International Paper (NYSE: IP) has actually moved up significantly two days in a row!

The company announced earnings today. I can't say the headlines were anything to cheer about. Mostly they were some version of "International Paper Does Less Badly Than Expected." What it boils down to is that earnings declined, but they declined much less than analysts had predicted, which doesn't sound like something to get excited about, but it is really good news. (The company isn't losing money, mind you, they are just making less than they did in the first quarter of last year.)

The reason this is good news is because the stock price over the last couple of months has reflected what the analysts EXPECTED the company to report -- somewhere in the neighborhood of $0.05 per share, down from $0.25 per share in the same quarter of last year. When it turned out that things were not as bad as expected -- the company actually reported $0.14 per share and 2% revenue growth -- the price adjusted to a new perspective on the company prospects.

This is good news for Foolish Four investors, but I wouldn't break out the champagne just yet. The company said that prices for some key products are starting to rise and the recovery in Asian markets is helping, but they aren't out of the woods yet. (Although with all their trees planted in straight rows, it's hard to see how they can stay lost so long.)

Caterpillar (NYSE: CAT) is looking good, too. It's back in first place for overall gains as J.P. Morgan (NYSE: JPM) slows up a bit.

Yesterday I promised to talk about ways to reduce the risk of Foolish Four investing. One way, which we discussed yesterday, is to add a few more stocks to your portfolio. When we backtest such a strategy, the additional stocks reduce the overall return slightly, but some of the volatility is reduced as well.

An even better way to reduce volatility is to use an alternating two-year strategy. Here is how that works: You start your Foolish Four portfolio as usual, but at the end of the first year, you don't sell. You hold those stocks for a full two years (or until the end of the second calendar year if you need to get into the December cycle), then rebalance your portfolio as usual.

In the meantime, you start a second Foolish Four Portfolio the December after you start the first one. That portfolio, too, you hold for two years. Once you get set up, you have two parallel portfolios running, one that renews in December of even-numbered years and one that renews in December of odd-numbered years. Each portfolio is held for two years instead of one. I'll let you figure out how to divvy up the cash.

The advantage to such a system, which is really not much more complicated than a normal, one-year portfolio once you grasp the concept, is that the longer holding period reduces the volatility of your returns. It will also reduce your overall returns, but not by very much -- around one to two percent per year on average.

I wouldn't recommend this strategy for anyone with a long time horizon -- those investors want every percentage point they can get. But for someone who wants to keep all or a portion of his retirement stash in stocks, perhaps pulling some out for living expenses, having alternating two-year Foolish Four portfolios can provide a smother, more comfortable ride.

Is this like buying a great big Caddy when you retire?


Would you work for a bunch of Fools?

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Foolish Four Portfolio Archives »  

Today's Stock Lists | 1999 Dow Returns

04/13/99 Close
Stock  Change   Last
--------------------
CAT  +3  3/8   54.75
JPM  -   3/16  129.31
MMM  +1  7/8   72.88
IP   +2  1/4   48.63

                Day   Month    Year   History
         FOOL-4   +3.48%  10.45%  13.59%  15.28%
        DJIA     +0.54%   6.22%  13.60%  13.15%
        S&P 500  -0.65%   4.93%  10.13%  10.39%
        NASDAQ   -0.59%   4.94%  17.82%  19.44%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     54.75    27.09%
 12/24/98    9 JP Morgan    105.51    129.31    22.56%
 12/24/98   22 Int'l Paper   43.55     48.63    11.65%
 12/24/98   14 3M            73.57     72.88    -0.94%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1314.00   $280.00
 12/24/98    9 JP Morgan    949.62   1163.81   $214.19
 12/24/98   22 Int'l Paper  958.12   1069.75   $111.63
 12/24/98   14 3M          1030.00   1020.25    -$9.75

              Dividends Received      $15.04
                             Cash     $28.26
                            TOTAL   $4611.11

</FOOLISH FOUR PORTFOLIO>