Short Run vs. Long Run
Is that the question?
by Al Levit (

Glendale, CA (Nov. 10, 1998) -- Last week, Phil wrote a column about making a Cash-King investment in October when his wife would just as soon have planted the money in the mattress. It turns out that I was writing a column at exactly the same time about a very similar issue. This week, I'll share with you how my family dealt with the situation. You'll see that the outcome was different, but that a number of Foolish principles apply.

First, though, I need to give some background about asset allocation, which is a fancy and Wise word that means how much of your money you've got in the stock market, as opposed to cash, bonds, or other stuff. The Foolish line on this, which we repeat often, is that you shouldn't put anything in the market that you will need in the next five years, and preferably not in the next ten years. Thus, for example, a Fool hoping to make a down payment on a house in a couple of years would not normally be investing in the stock market.

In addition, as we've also noted before, Fools generally don't invest in the stock market when they are paying off non-deductible debt, especially credit-card debt. Stock market investments will wait until that high-interest debt is eliminated. In fact, in many cases, it makes sense to sell stock to eliminate the high-interest debt (although tax considerations may make it smarter to keep the stock and pay off the debt slowly).

In any event, once you've gotten past the investing "hurdles" of big purchases and debt, there is still at least one more question that needs to be addressed: How much of my "investable income" should I be putting in the stock market? Several years ago, when I first began to learn about investing, a friend told me that his rule for retirement assets was "as much in equities as he could stomach."

I was in my thirties at the time, and I thought this rule made tremendous sense since equities perform so much better than other investments over long periods of time. I also had a very strong stomach for equity investing in my retirement portfolio, since I couldn't touch the money for 30 years anyway. In fact, I found that I was willing to put 100% of my retirement assets in equities.

A few years went by and the Fools came on-line. When I learned of the Foolish attitude towards stock market investing (that is, investments don't belong in the market unless they will stay there at least five years), I felt that it went hand-in-hand with the attitude I'd already developed about allocating assets for retirement. Once again, I used my stomach to decide how much of my total assets should be in equities (a combination of Foolish Four, Cash-Kings, Dell, and Warner-Lambert, as I've detailed at other times). I wasn't willing to put 100% of my family's non-retirement assets into equities, because I didn't have the 30-year time horizon that I did with retirement. However, my stomach was still pretty strong and about 80% of my family's assets were allocated this way.

Enough of the background, time for the family part. First a brief introduction about my wife. Kathy is no fool (although she's really no Fool either). She's a senior executive with a large regional bank, and she used to be the Treasurer. She definitely knows her way around money and investing.

Ironically, even though Kathy is more professionally qualified, I have always run the day-to-day family finances and investments. If our family was a corporation then she would be the CEO and I would be the CFO. For example, I have always picked the stocks, but I have always told her how much I was going to buy before I bought them. She has the right to tell me not to invest (i.e., to keep the money in cash), and she has exercised that right more than once. Thus, I felt that the 80% equity allocation was a joint decision.

There was one thing that I hadn't counted on. Things got rocky at the beginning of October this year. My rule to invest in "as much equities as I could stomach" was holding up for MY stomach, but not for Kathy's. I had inadvertently put us in more risk than Kathy could comfortably handle (Okay, I'm not so sure I was COMFORTABLY handling it for a few days, but I was handling it). At any rate, there was only one thing to do that made any sense. We sold some of our losers (at that point we had several), and cut back our allocation to 70%.

Selling was no fun. There weren't really any dogs in the portfolio, just some companies that were more deserving to remain than others. In some cases I sold half positions so that I could keep both companies in the portfolio. Regardless, there was no question it had to be done; the portfolio is there for my family's happiness. When the portfolio interferes with the family's happiness then changes have to be made.

One really neat thing happened that day. I got a solid confirmation that a 70% allocation was low enough for Kathy and me when I told her late in the day that the Nasdaq was down over 100 points and we both laughed!

We realized some losses that day. That's part of the game. There have been plenty of other days when we realized bigger gains, and there be will plenty more. The important point to me is that our portfolio contributes to the wealth of our family without causing us undue stress. We found out last month that an 80% allocation was too high to achieve that goal. We also found out that a 70% allocation would let us lead our lives comfortably and not cause us to do silly things with our portfolio.

In the end, then, my family was a seller last month and Phil's family was a buyer. In hindsight, buying certainly was the better thing to do financially for the short-term. But for me, and I think for Phil, too, the more important thing is what makes your family more comfortable for the long run. I know that our current allocation will fit that bill, even if it means we will have a little less money in the end. Judging by Phil's column of last week, I'd say that his purchases last week will also make his family more comfortable in the long run as well. For me, that is one Foolish ending for both of us.

That's it for today. Tomorrow I'm going to answer a question I was asked last month, and try to explain why one company is a Cash-King and the other is a Merchant-King. Until then...

Fool on,

Al (CashKingAl)

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11/10/98 Close

Stock  Change    Bid 
 AXP   -2 1/4   92.75 
 CHV   -1 15/16 80.50 
 CSCO    ---    67.00 
 KO    +  9/16  72.13 
 GPS   +1 3/8   69.63 
 EK    -  5/8   78.56 
 XON   -1 7/8   70.13 
 GM    +1 1/4   67.25 
 INTC  +1 9/16  97.56 
 MSFT  +1 3/8   112.06 
 PFE   +  3/8   108.63 
 SGP   -  5/16  106.63 
 TROW  -2 3/4   31.94 
                  Day     Month   Year    History 
         C-K      -0.46%   4.04%  15.64%  15.64% 
         S&P:     -0.17%   2.69%  12.15%  12.15% 
         NASDAQ:  +0.25%   5.32%  11.96%  11.96% 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    112.06    43.18% 
     5/1/98   37 Gap Inc.      51.09     69.63    36.28% 
     2/3/98   22 Pfizer        82.30    108.63    31.99% 
    2/13/98   22 Intel         84.67     97.56    15.22% 
    6/23/98   34 Cisco Syst    58.41     67.00    14.71% 
    8/21/98   22 Schering-P    95.99    106.63    11.08% 
    2/27/98   27 Coca-Cola     69.11     72.13     4.37% 
     2/6/98   56 T. Rowe Pr    33.67     31.94    -5.15% 
    5/26/98   18 AmExpress    104.07     92.75   -10.87% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     78.56    24.41% 
    3/12/98   20 Exxon         64.34     70.13     9.00% 
    3/12/98   15 Chevron       83.34     80.50    -3.41% 
    3/12/98   17 General Mo    72.41     67.25    -7.12% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   24 Microsoft   1878.45   2689.50   $811.05 
     5/1/98   37 Gap Inc.    1890.33   2576.13   $685.80 
     2/3/98   22 Pfizer      1810.58   2389.75   $579.17 
    6/23/98   34 Cisco Syst  1985.95   2278.00   $292.05 
    2/13/98   22 Intel       1862.83   2146.38   $283.55 
    8/21/98   22 Schering-P   2111.7   2345.75   $234.05 
    2/27/98   27 Coca-Cola   1865.89   1947.38    $81.48 
     2/6/98   56 T. Rowe Pr  1885.70   1788.50   -$97.20 
    5/26/98   18 AmExpress   1873.20   1669.50  -$203.70 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1571.25   $308.30 
    3/12/98   20 Exxon       1286.70   1402.50   $115.80 
    3/12/98   15 Chevron     1250.14   1207.50   -$42.64 
    3/12/98   17 General Mo  1230.89   1143.25   -$87.64 
                               CASH    $120.62 
                              TOTAL  $25276.00 
 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.

*The year for the S&P and Nasdaq is as of 02/03/98