<FOOLISH FOUR PORTFOLIO>
How to Lose Money
On a winning investment
[Editor's Note: Ann Coleman is on vacation through August 26.]
HOUSTON, TX (August 13, 1999) -- Yesterday we celebrated the fabulous year that the Foolish Four is having. However, we should remain unemotional and stick to our strategies in good and bad periods in the market.
Lots of studies have shown that emotional reactions and frequent trading cause poor results. Our Fool on the Hill from June 10, 1998, cited a study by Brad Barber and Terrance Odean that indicates "trading is hazardous to your wealth."
More surprising, a number of studies have shown that mutual fund investors receive lower returns than the funds they invest in!
How can that be?
Invest emotionally and it's easy. Since we've had a roller-coaster market this year, you may have done this yourself.
People see the market going up and feel that they are missing out. So they jump in. By the time that they do this, the market has had a large run-up.
When the market goes down, they feel pain and sell.
This leads to buying high and selling low.
Some sites that reference these studies include Dalbar's site (the research organization which did one of the studies) and Jim O'Shaughnessy's site (a book excerpt -- look for "Short-term thinking destroys performance").
What can you do about this? The easiest thing to do -- which guarantees you won't perform this way -- is to buy good companies and just hold them. We poked some good-natured fun at the Rule Breaker and Rule Maker portfolios, but their performance is a testimony to the power of buy and hold. The Rule Breaker portfolio (formerly the Fool Portfolio) has smoked the performance of the Foolish Four over the last five years. And practically any other investment strategy as well.
Another way to avoid this is to have a disciplined strategy (or strategies) you follow. Around here, we like the Foolish Four.
And after all, it goes up 25% a year without fail, right?
Next week, we'll talk about when it doesn't go up.
Fools Wanted: Apply Within.
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Stock Change Last -------------------- CAT +1 1/16 62.25 JPM +6 1/4 133.75 MMM + 15/16 97.69 IP + 1/4 54.00
Day Month Year History FOOL-4 +1.92% 6.86% 31.34% 33.29% DJIA +1.54% 2.99% 20.31% 19.83% S&P 500 +2.27% -0.08% 8.59% 8.85% NASDAQ +3.46% -0.03% 20.30% 21.95% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 62.25 44.50% 12/24/98 14 3M 73.57 97.69 32.78% 12/24/98 9 JP Morgan 105.51 133.75 26.77% 12/24/98 22 Int'l Paper 43.55 54.00 24.00% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1494.00 $460.00 12/24/98 14 3M 1030.00 1367.63 $337.63 12/24/98 9 JP Morgan 949.62 1203.75 $254.13 12/24/98 22 Int'l Paper 958.12 1188.00 $229.88 Dividends Received $49.99 Cash $28.26 TOTAL $5331.63