FOOLISH FOUR PORTFOLIO

Foolish Four Portfolio
Portfolio Allocation
Everybody wants to know

By Ann Coleman (TMF AnnC)

RESTON, VA (Nov. 11, 1999) -- The Wise have done a wonderful job of educating the public about "portfolio allocation." In its simplest form, portfolio allocation goes something like this: You should keep 50% of your money in stocks, 40% in bonds, and 10% in cash or a money market fund. Vary the mix as market conditions change.

Most of us Fools find that kind of thinking strange and attribute its popularity to two things: One, it's a very comforting idea that gives people the feeling that they are prepared for any eventuality. Two, it gives brokers a reason to call their clients and churn some stocks. ("Market conditions indicate that it is time for a change in your portfolio allocation from 50% stocks to 55% stocks. Have you heard of FreshFruitsDotCom?")

If we can be said to have an official position on portfolio allocation, it could be summed up as: Yeah, right.

We favor a 100% stock strategy, with a few caveats. Instead of a percentage allocation based on some market forecast, we suggest that people carefully arrange their finances so that cash for the usual kind of unusual expenses (new furnace, new roof, a Florida vacation while they are being installed) are covered, and anticipated expenses (such as orthodontics, a new car, down payment on a house, college tuition, that trip to the Aegean Islands) are safely in a risk-free account. After that, stocks are IT for the long run.

Todd Beaird wrote an excellent essay on Foolish Portfolio Allocation in our Foolish Workshop area. Click it out.

I won't go into the whole, stocks-beat-bonds-over-the-long-term shtick again. Anyone doubting that can review the 13 Steps. Today's question is, Given that you have all your financial ducks in a row and are only investing with long-term money, how much of your portfolio should be in the Foolish Four strategy?

Of course, there's no quick answer.

Let's start small. Say you are just venturing into investing waters with an IRA. It would make perfect sense to keep all of your money in either an index fund or a relatively safe, easy-to-implement strategy like the Foolish Four or Beating the S&P. All offer a fair amount of diversification and keep commissions and other expenses to a minimum. Diversification is great, but not if the expense of owning different stocks significantly eats into your annual returns.

Somewhere around $20,000 most people have enough to consider splitting their investments among more than one strategy. It's not necessary to venture into new territory at this point, it's merely possible.

Over $50,000, though, one should definitely consider other possibilities. One option might be to simply run multiple Foolish Four portfolios, perhaps one that starts December 1 and one that starts in the middle of January. Another good option would be to split your cash between the Foolish Four and Beating the S&P. Or you could branch out into Rule Maker-type stocks, or, if you are the adventurous type, Rule Breaker-type stocks.

Note that I am not suggesting that $50,000 is the most that one should put into the Foolish Four strategy -- not at all! Readers have reported to me on Foolish Four portfolios of up to $1 million dollars. But I don't believe any of them were putting all of their money into that one strategy. (You toss a million here, a million there, and pretty soon you get diversified.)

The point is not to follow some silly rule about X% of your dollars here and X% there, just to make yourself feel secure. The point is to think about what kind of investments make you comfortable and then do the homework and invest that way.

No matter how large your portfolio, if you are comfortable with the Foolish Four (in multiple portfolios or combined with BSP) and the returns are satisfactory, there is no logical reason to start looking for a biotech company for kicks OR to keep some percentage of your long-term money in bonds.

Just be sure you have the cash for that Aegean cruise in the bank. You wouldn't want to give that up if the market turns south for a few years.

Fool on and prosper!

Today's Stock Lists | 1999 Dow Returns

Read More Foolish Four Reports


Top Dow Stocks
( RP Order )

11/11/99

1. Philip Morris
   (NYSE:MO)
2. * General Motors
   (NYSE:GM)
3. * Eastman Kodak
   (NYSE:EK)
4. * Caterpillar
   (NYSE:CAT)
5. * DuPont
   (NYSE:DD)
6. AT&T
   (NYSE:T)
7. SBC Comm.
   (NYSE:SBC)
8. JP Morgan
   (NYSE:JPM)
9. Exxon
   (NYSE:XON)
10. Int'l Paper
   (NYSE:IP)

NOTE: Today's Foolish Four stock selections are marked with an asterisk.

Foolish Four Portfolio

11/11/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CATCATERPILLAR INC1/4$55.00
IPINTL PAPER1/2$54.44
JPMMORGAN (JP)3/4$132.75
MMMMINNESOTA MIN'G/MFG-3/4$94.00

  Day Week Month Year
To Date
Since
12/24/98
Annualized
Foolish Four .73% -.94% .67% 26.81% 28.70% 33.02%
S&P 500(DA) .58% .82% 1.36% 12.96% 13.03% 14.85%
NASDAQ 1.31% 3.06% 7.78% 45.82% 47.17% 54.80%
DJIA (DA) -.02% -1.02% -1.25% 16.79% 16.96% 19.38%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
12/24/9814MMM73.571$94.0027.77%
12/24/9824CAT43.083$55.0027.66%
12/24/989JPM105.514$132.7525.81%
12/24/9822IP43.551$54.4425.00%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
12/24/9824CAT$1,034.00$1,320.00$286.00
12/24/9814MMM$1,030.00$1,316.00$286.00
12/24/989JPM$949.63$1,194.75$245.13
12/24/9822IP$958.12$1,197.63$239.50
  Cash: $119.51  
  Total: $5,147.89  

Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.
• DJIA (DA) = dividend adjusted. Dividends have been added to the total return of the DJIA.

Note
The Foolish Four Portfolio was launched on December 24, 1998, with $4,000. Additional cash is never added, all transactions are discussed and explained publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen once per year using a formula based on dividend yield and price. See The Foolish Four Explained for details.