Know Thyself --
Your "Risk Profile"

Invest for sound sleep

by Ann Coleman (TMF

Alexandria, VA (June 25, 1999) -- Investing, even mechanical investing like the Foolish Four, is not a one-size-fits all activity. Sure, everyone wants to make as much money as they can, but how much you can make as an investor is closely tied to your personality in a very practical way.

Here's why: Let's say you are, by nature, an extremely conservative investor. The thought of losing money under any circumstances is painful to you. But you know you need to increase your investing returns -- a bank CD is not going to fund much of a retirement.

You invest in an index fund, and the market turns down. You're the investor who is most likely to panic and sell because the fear of losing more money is more than you can stand. All of the rationalization about how the market fluctuates is no good against the threat of watching your account balance drop. You sell, and the market goes back up. Congratulations. You've managed to lose money investing in an index fund during a bull market.

It happens. In fact, it happens all the time. For some folks, education about how markets work is the key to overcoming this kind of panic behavior. Or the discipline to just not look at your account if you suspect it's down. But until you realize that you fit this risk profile and that it is counterproductive to making money in stocks, you won't know that you need to do something about it.

Here's another way that an investor and his investments can clash: You're an impatient and aggressive investor. You invest in the Foolish Four and watch your stocks daily. They go up a bit, they go down a bit. Meanwhile, your friends are making (or not) fortunes in Internet stocks. They talk about P/E ratios and cash flows and earnings (or lack thereof).

You start worrying about International Paper's high P/E and thinking that J.P. Morgan is really vulnerable in Asian markets. You write to me and ask if I don't think that Sears is so flawed as a company that we should avoid it no matter what the numbers say.

Pretty soon, you decide to modify the Foolish Four strategy by selling stocks as soon as they are up 30% and putting the money into the new Foolish Four stocks, or by only buying Foolish Four stocks below a certain P/E ratio, or selecting those that are at or near their 12-month low.

The chances are pretty good that your home-grown modifications will backfire on you at some point -- and you know that, but you CAN'T HELP IT!

You're bored.

Face it, folks, the Foolish Four isn't very exciting on a day-to-day basis. I suspect that the most successful F4 investors are those that DON'T read this column daily. (I'm hurt, but what can I do?)

The point is that if you're temperamentally unsuited for a nice boring strategy like the Foolish Four, you need to branch out a bit before you kill the goose that's working on your golden retirement.

Remember how in the 13 Steps we advise that you to invest only money that you won't need for the next 5 to 10 years? The same principle applies here. Do a little planning. Figure out your bottom-line needs for retirement or whatever you are investing for (more about that next week) and see how much cash you need to have now to get there by retirement day. That is batch one. Hopefully there will be a batch two as well. Pop quiz: Which batch should stay in the Foolish Four, and which batch do you "play" with?

For some people, batch #1 will be all or most of what you have now. Fine. That tells you that you can't afford to play around with your retirement, right? That's a good thing to know. Think about that for a while next time you get the urge to mess with success. (And see if you can stash a bit of cash away to play with.)

In my opinion, the Foolish Four is about as good as you can get for a basic retirement or legacy-building strategy. For your more discretionary investment cash, there are lots of options. First, you might want to visit our Foolish Workshop -- we have mechanical strategies there where you can trade as often as every month. They don't have the proven track record that the Foolish Four does, but some of them have extremely impressive 12 year records.

Or visit our other portfolio areas. The Rule Breaker has a certain bungee-jumping quality that can get your adrenaline pumping on a fairly regular basis.

Don't get me wrong, by the way. Modifying the Foolish Four is fine with me. We mess around with it ourselves and intend to continue to do so. The problem is that when you modify it based on a theory, without backtesting that theory, you are no longer following a mechanical investing approach. You've just unsnapped your safety wire. Again, that's OK with me. But I'd rather see you do that because you have planned to, not because you are just bored out of your gourd.

Fool on and prosper!

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06/25/99 Close
Stock  Change   Last
CAT  -   3/8   58.63
JPM  +   5/8   128.56
MMM  -   1/2   88.25
IP   -   3/4   52.25

                  Day    Month   Year   History
        FOOL-4   -0.53%   1.99%  23.84%  25.68%
        DJIA     +0.17%  -0.07%  15.72%  15.26%
        S&P 500  -0.04%   1.03%   7.58%   7.84%
        NASDAQ   -0.05%   3.32%  16.42%  18.01%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     58.63    36.08%
 12/24/98    9 JP Morgan    105.51    128.56    21.85%
 12/24/98   22 Int'l Paper   43.55     52.25    19.98%
 12/24/98   14 3M            73.57     88.25    19.95%

    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1407.00   $373.00
 12/24/98    9 JP Morgan    949.62   1157.06   $207.44
 12/24/98   14 3M          1030.00   1235.50   $205.50
 12/24/98   22 Int'l Paper  958.12   1149.50   $191.38

              Dividends Received      $49.99
                             Cash     $28.26
                            TOTAL   $5027.31