DRIP PORTFOLIO
Drips and the Foolish Four

Combining different investment strategies can have mixed results, so you need to consider the goal of each strategy and determine if the process of one strategy can mix well with another strategy. Buying Rule Makers through Drips makes sense, for example, but when you try to combine the Foolish Four with a Drip investment strategy, you hit snags.

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By George L. Smyth
July 26, 2000

A number of people have considered the possibility of mixing Drip investing with the Foolish Four.

We know that Drips are an excellent strategy, and we may have read about the power of the strategy known as the Foolish Four. One might think that if one great strategy is a good idea, then two great strategies might be twice as good. Well, not exactly. Even The Unemotional Investor, the book that covers the Foolish Four and mechanical investment methods, doesn't believe that Drips and the Foolish Four mix well.

When thinking about bringing together strategies, one must first understand the goals, then see if the means by which different strategies work are compatible. With Drips and the Foolish Four, the mix may be one of water and oil.

Drips utilize a long-term strategy, where the strength lies in the fact that risk is reduced through the power of dollar cost averaging. When making numerous purchases over a long period of time, the actual cost of each purchase will almost certainly be different. So, the attempt to time one's purchase is normally taken out of the mix.

There are several Foolish Four strategies that one can employ, but they all work in the same direction. This strength of the strategy lies at least partially in the proper timing of one's purchase. A single purchase is made, held for a year, then sold (or retained if it still fits the initial criteria, which happens about half of the time).

The execution of the two strategies is diametrically opposed in concept, so combining the two would be difficult indeed.

Also, the companies that are normally considered for each strategy are on opposite ends of the spectrum. Drip selections are usually growing companies that are selected because of their superior long-term potential. The Foolish Four choices are "value stocks" that have been beaten down and thus are selected for their short-term profitability potential and dividend yield.

Even if one is able to identify a company that fits both categories, finding the means of combining the strategies is problematic. Assume that one decides on a company the last day of the year. The purchase of a share and entry into the Drip could take a month or two, depending on the route taken. This is not a problem for someone who will be making regular purchases for the next decade or longer, but poses a major difficulty for the investor looking to combine the strategies.

One might make the first purchase of a Foolish Four in a Drip (following the initial share purchase and enrollment) in February or March. It is certainly possible that by this time the company will no longer be considered a Foolish Four qualifier, so it no longer fits the profile for selection.

An alternative is to purchase all 30 stocks in the Dow Jones Industrial Average, start a Drip or pseudo-Drip with each, and then make purchases only at times when the companies fit the Foolish Four criteria. Besides the expense involved in the purchase of the first shares (well over $1,000) and commissions to start Drips in most companies (they don't all offer Drips, let alone fee-free Drips, so some would need to go the Pseudo-Drip route), the resources would be inadequately placed, as 26 companies will always be held that don't fit the selection criteria.

Finally, it is my opinion that the addition of Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC) to the Dow has changed the dynamics of the Foolish Four system. Of the 30 companies, these two are the least likely to fit the selection standard of the Foolish Four. This is because Intel pays a minuscule dividend and Microsoft offers none. However, holding a steady amount of these two companies over the past decade would have outperformed the Foolish Four nine of the ten years.

So, before deciding upon the marriage of two investment strategies, consider the intent of each strategy and the direction it takes to get there. If the strategies complement one another, combining them could ease the plethora of Drip possibilities. In the case of the Foolish Four strategy and Drips, many complications and a "strategy clash" make a happy marriage unlikely.

Your Turn:
What do you think about combining the Foolish Four with Drips? Have you tried it? What were the results?

Suggested Links:
Combining Drips with Foolish Four, From the Drip Port FAQ
Foolish Four Area

Drip Portfolio

7/26/2000 Closing Numbers
Ticker Company Day Chg % Chg Price
CPBCAMPBELL SOUP-1 9/16-5.47%$27.00
INTCINTEL CORP-1 7/8-1.33%$139.00
JNJJOHNSON & JOHNSON-2 3/4-2.94%$90.75
MELMELLON FINANCIAL CORP-1 11/16-4.27%$37.88

  Day Week Month Year
To Date
Since
7/28/1997
Annualized
Drip -2.50% -1.48% -.20% 30.76% 69.88% 19.34%
S&P 500 -1.50% -1.88% -.15% -1.15% 54.71% 15.67%
S&P 500(DA) -1.50% -1.88% -.15% -1.15% 57.34% 16.32%
S&P 500(DCA) n/a n/a n/a n/a 26.16% 8.06%
NASDAQ -1.04% -2.61% .54% -2.01% 154.06% 36.48%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/199722.9909INTC45.671$139.00204.35%
11/14/199715.019JNJ78.956$90.7514.94%
11/5/199834.9399MEL34.051$37.8811.23%
4/13/19988.337CPB54.179$27.00-50.17%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/199722.9909INTC$1,050.02$3,195.74$2,145.72
11/14/199715.019JNJ$1,185.84$1,362.97$177.14
11/5/199834.9399MEL$1,189.74$1,323.35$133.60
4/13/19988.337CPB$451.69$225.10($226.59)
  Cash: $0.08  
  Total: $6,107.24  


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

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.