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In a message dated 98-01-29 19:45:13 EST, you write:

<< Subject: Re: Beating the Dow with Payroll Deductions???

Greetings, Hillmp, and welcome.

<<My question: Am I right in thinking that twice monthly contributions defeat one of the main purposes of the Beating the Dow strategies (including the Almighty Foolish Four!), which is to cut down on transaction costs? The 10 highest yielders on January 31st might not be the same on March 15th or August 31st, etc.
Am I missing something or does a Beat the Dow strategy sound reasonable when coupled with 24 separate contributions throughout the year? Anything else I should be considering that I haven't mentioned?>>

Nope, you're not missing a thing. In this case, because you can invest solely in mutual funds and because no mutual fund monthly investment can ever emulate a Dow strategy successfully, the most Foolish path would be to stick to an index fund.

Regards.....Pixy >>

I was ready to go with an S&P 500 index fund when a nagging thought sent me to The Motley Fool Investment Guide, page 86 to be precise. It's the page showing a comparison of average annual growth rates. The two that interest me here are S&P 500 11.2% - The Dow Ten 17.2%

Now, it's true that my bimonthly salary deductions won't mirror the Dow Ten strategy in the first year. But the second year and each successive year, more of my money will be acting in a true Dow Ten fashion. It's only the current year's contributions that dilute the overall effectiveness. And with each year, assuming that my contributions stay level (which I hope they *don't*!), the dilution effect would get smaller.

After 10 years, 90% of the money would be following a true Dow Ten strategy and 10% would not. Since I'm planning on having this money in the account for at least 20 years (it's my retirement account), I'm thinking the sizable (6%) difference between the average growth rates of the Dow Ten and the S&P 500 strategies might overcome the ever decreasing dilution effect, and thus make the Dow Ten strategy the way to go.

I'd love to hear your thoughts on my thinking.

With thanks,
Hillmp

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Hillmp,

<<Now, it's true that my bimonthly salary deductions won't mirror the Dow Ten strategy in the first year. But the second year and each successive year, more of my money will be acting in a true Dow Ten fashion. It's only the current year's contributions that dilute the overall effectiveness. And with each year, assuming that my contributions stay level (which I hope they *don't*!), the dilution effect would get smaller.

After 10 years, 90% of the money would be following a true Dow Ten strategy and 10% would not. Since I'm planning on having this money in the account for at least 20 years (it's my retirement account), I'm thinking the sizable (6%) difference between the average growth rates of the Dow Ten and the S&P 500 strategies might overcome the ever decreasing dilution effect, and thus make the Dow Ten strategy the way to go.>>

As long as the money accumulates to a size where your trades will consume no more than 2% to 2.5% of your stake initially (the ratio will decline as the portfolios grow), you can buy into the Dow strategies at any time. Your biggest problem will be in keeping track of the anniversary dates of each portfolio. You'll have six - all with a different anniversary date - to worry about. That's not really a problem, just a minor hassle. And if the Dow theories hold up, you should do better than the index fund. After awhile (but not for a year or longer), every time money goes into the account, it will coincide with one of your anniversary trading dates and can be incorporated with the changes you make on that date. I see no reason why that approach won't work. The initial hurdle will be the fees, and those will consume less of each portfolio as time passes.

Regards….Pixy

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You are missing a neat, simple trick! When you make the buy, use margin. Use enough margin so that your periodic deposits just pay it off at the end of the holding period. This is not "margin for leverage", but rather "margin to reduce transaction costs with small periodic deposits". If you want to keep your money invested, this is about the only way to do it, other than a mutual fund.

I would agree with Pixy, that if you want to do this with a mutual fund you should go with a passively managed fund. Although I'd use one of the O'Shaughnessey Cornerstone funds instead of an S&P500 index fund. In fact, that's exactly what I did!

Regards,
Ray
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"Although I'd use one of the O'Shaughnessey Cornerstone funds instead of an S&P500
index fund. In fact, that's exactly what I did!

Regards,
Ray"

What does O'Shaughnessey Cornerstone have over the Vanguard S&P 500 Index fund?

Also, can one put individual stocks into a Roth IRA? If so, how would one do that?
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Respectable,

<<What does O'Shaughnessey Cornerstone have over the Vanguard S&P 500 Index fund?>>

In theory, a market beating strategy O'Shaugnessey wrote about in his book, "What Works on Wall Street." In practice, it's too early to say. His funds have only been open since November 1996. As of 12/31/97, they failed to beat Vanguard or the S&P index. The jury is still out on this one.

<<Also, can one put individual stocks into a Roth IRA? If so, how would one do that?>>

It's like any other IRA. Just tell the broker of your choice you want to establish a self-directed account. Once it's established, you're free to trade at will.

Regards…..Pixy
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