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Author: venkdaddy One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Re: F4 and a Roth IRA Date: 1/3/2000 4:50 PM
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Obviously, I'm new or I wouldn't be asking these questions! Sorry, I can't find the exact answers I'm searching for on the message boards and I'd be grateful for some hand holding as I lurch away from the safety of Fidelity Mutual funds. I'd like to open a Roth IRA using the F4 approach, but:

1) By the time I get a discount brokerage account open (I just discovered the Fool site in mid-Dec) and the IRA rolling, it will be Feb or so. If I buy the current F4 stocks in Feb, then sell them in Dec and buy the next F4 picks, am I correct in understanding that there's no tax ramification (because the transactions are done within a Roth IRA)?

2) I reinvest the dividends - right?


A few things.....first, you're right that there are no tax ramifications because you're in the IRA. Second, please make sure you fully understand the F4 strategy before you invest anything in it. Try to ignore TMF's "Crush the Market in 15 Minutes A Year(tm)" hype (which is, IMHO, not helpful at all), and focus on the fact that you are investing in a mechanical, value-based Dow Dividend strategy that has been pretty well backtested. And keep in mind also that: 1. Some people consider the F4 to be little more than data mining, and 2. Both the Dow and the market in general seem to be placing less emphasis on dividends these days, and that could have unpredicatable effects on F4 returns.

Please note that I am not trying to scare you away from using the F4. I personally think it is a valid strategy, though I'm not sure what the future holds for it. My main point is this: The F4 is NOT a strategy for beginners! It is certainly a low-maintenence way to invest, but it requires at least an intermediate level of knowledge to understand why you are picking those stocks, as well as an ability to understand that the strategy WILL be very volatile on occasion, and you need to be able to ride those periods out. I was a beginning investor when I discovered the Fool and got drawn in to the F4 by the "Market-Crushing" returns it seemingly offered. If I had the money to invest back then, I know I would have wholeheartedly jumped in with both feet, which would have been a mistake because I didn't fully understand why I would have been doing what I was doing. The only "why" I understood then was "because I'll most likely 'crush the market' over time". Now, six months later, I have a much better understanding of the theory behind the strategy, and of the reasons I might choose not to use it. Right now, I'm still putting all my money into index funds, which I will probably continue to do for several years until my portfolio gets big enough to really play around with; and I may well decide to invest part of my port in the F4. Until then, I'm watching the official F4, as well as a "paper" F4 I created a few months ago, plus a "paper" value port I made for myself.

Well, I went off on a bit of a tangent there, didn't I? Sorry about that. To get back to your other question, reinvesting the dividends usually ends up being more trouble than it's worth. The impact on your total return is very minimal, and since you know you'll be selling the shares relatively soon, there's no point in letting fractional shares accumulate.

-john
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