Here are answers to some questions I have been asked (perhaps
not all that frequently) about the strategies and implementing
them. You probably should read the other pages on this site before
this one since I may assume some background knowledge.
Q. You used to update your rankings for the coming year only every couple of weeks or so during November and December and not at all during the rest of the year. How can I get the current rankings at other times?
A. If you choose the link, you will see that I no longer even do that much updating. One site that still tracks the Dow dividend strategies is Dogs of the Dow.
Q. How important is it to have the same amount of money invested in each stock (counting the PPP as 2 stocks if using the MF4 strategy)?
A. You should try to achieve balance, but don't go overboard and pay extra commissions in the process. The assumption of an equal dollar amount in each stock is needed to perform the historical research, but there is no ideological reason why exact equality is critical. Try to get fairly evenly balanced, but don't worry too much about it. Unless your portfolio is way out of balance, your returns should be close to those from following the strategy exactly. Personally, when rolling over from one year to the next, I set a threshold based on my total value. My current threshold is $1,000, but others may want to set it lower or higher. If a stock being carried over from one year to the next requires less than the threshold to bring it into balance, I don't buy or sell any shares. If your broker charges about $20 per transaction, then the commission on buys and sells above the threshold is less than 2%, which seems reasonable. However, a $10,000 portfolio may well be out of balance after the transition from one year to the next if the threshold is set at $1,000.
Q. Wouldn't these strategies be improved by using some type of market timing?
A. Market timing is very hard to do consistently and accurately, and most investors are much better off not trying. To see why, assume that your basic posture is to be in the market, but you want to exit for some time when it looks like the market may go down. You have two timing decisions to make: when sell and when to buy. Suppose you have a 70% chance of being right on each decision meaning that after you sell the market does not go much higher and after you buy back in the market does not go much lower. The probability of being right on both decisions, which should mean that you buy back in at a lower level than you sold, is only 49%. I doubt that many investors are going to be right on 70% of such decisions.
Q. But I am afraid that the market will go down right after I buy. Isn't it too high to buy now?
A. I'll let Robert Sheard, who was the Fool's MF Dowman, answer since he has said things so well:
"Should we wait to start a new portfolio now until a correction occurs?" "Isn't it dangerous to buy stocks when the market is at an all-time high?" "Should we buy half a position now and wait for six months to see what happens?"
All of these questions are prominent in our message folders of late, and my answer is always the same. No one knows with any certainty what lies ahead for the stock market over the next few weeks, months, even over the next year or two. And anyone who declares otherwise is simply full of bluster.
Our position has always been that since no one can predict the short-term movements of the market with a reasonable degree of accuracy and consistency, why bother? For the long-term investor (read someone who measures time in decades, not hours), what happens in the short run is of little consequence.
So, if you're ready to start a savings program in the stock market for years and years to come, now is as good a time as any. And for those of you still inclined towards waiting for "the big correction," keep in mind that the very same questions were on investors' minds two years ago, when the market was at 3,900! (Waiting for the correction then would have you still waiting, while the market's up more than 65%.)
That's not to say the market won't drop the day after you invest;
it very well might. The point is no one knows and the long-term
odds are that the market will continue to rise at about 11% a
year, and the Dow Approach should continue to do roughly twice
that well. Everything else in between is just noise.
Q. You recommend implementing the strategies near the end of the year or just after the start of the year, which is supported by your research. What should I do at other times if I have money to invest? Should I go ahead or should I wait?
A. This is not clear cut, but my preference would be to invest right away unless it is already September. Even in that case, you may want to do some buying. The How To Do It page has some suggestions and ideas. Earlier in the year, you probably should get started unless the market has been falling for some time. (Contrast this with the previous question where the worry is that the market is too high.) In that case, I would wait until it looks like the drop is over, but would realize that I may be wrong in trying to do that. This is not the same as market timing because once the money is invested, it will stay invested. All I am really saying is that I don't think it is a good idea to buy into a market that is falling.
Q. Suppose it is in the middle of the year and I am going to buy in. Do I buy the stocks in the strategy, say the BTD5, at the end of the prior year or those according to the current rankings?
A. Probably you should buy based on the current rankings. The one exception could be if the stocks as of the end of the prior year ranking are selling for less than they are currently. My logic is that had you been ready to buy at the end of the prior year, you would have paid more than you will now. That means that your return for the rest of the year will be better than that of a strategy you were willing to pursue earlier and at a time my research shows was the best of the year. If you don't like that reasoning, then go ahead and buy based on the current rankings.
Q. I have bought stocks using one of the strategies in the middle of the year following the above. Do I roll over at the end of the year or do I wait until one year after I bought?
A. It depends on what you did, your overall strategy, and possibly the tax effects. If you bought the stocks based on the rankings at the end of the prior year because they were cheaper, then you should rollover at the end of the year since you are in effect using a strategy that calls for end of year rollovers. Some investors like to spread out their investments over several times of the year, so they may have two or more Dow strategy "programs" in effect. Such investors will certainly want to roll over close to the aniversary dates of the initial purchases for the particular program. The fuzzy case is if you bought in the middle of the year and are only going to have one set of Dow strategy stocks. If taxes are not a consideration (in a retirement account), my preference would be to roll into the new group at the end of the year since that is the time my research indicates is the best time to buy. I think that effect is due to tax loss selling and portfolio window dressing late in the year. In a taxable account, the situation is more complicated and varies by investor. If you have losses in stocks that would not be carried over and can use the losses, then you probably should sell to take the losses and roll over into the stocks based on the end of year rankings. On the other hand, if you have considerable gains and can benefit from the lower rate from long-term (1 year) capital gains, you probably should wait until a year after you bought to roll over.