Streetwise

Lauren Rudd

Sunday, March 2, 2014

A 20 Minute Portfolio

As someone who regularly teaches courses in investment analysis, it is often apparent that while the consensus is to learn, the risk of dealing with Wall Street continues to be of concern. It is not just an inherent distrust of the Street; the concern often embraces a repugnant opinion of those who are purveyors of its products.

That Wall Street has engendered such a paramount level of suspicion is a curse of its own making, a consequence of having gorged itself on the spoils of several financial bubbles, while at the same time decimating the very nest eggs delegated to it for growth and safe keeping.

Tragically, for many it is too late to prevent the victimization perpetrated by those denizens of the financial world that have an uncanny ability to ferret out a combination of ample financial assets and a lack of investment sophistication.

They proffer as evidence a stream of letters after their name, or an association, however tenuous, with a firm or person of some repute, and last but not least, a gratuitous dinner offer.

And while often sufficiently on the side of the law so as to avoid prosecution; the promised returns are rarely forthcoming. Rather an intoxicating idea often degenerates into a situation whereby the invested funds become seriously depleted, illiquid, or possibly lost altogether.

To further complicate matters there are a seemingly endless variety of economic scenarios being proffered up depicting an apocalyptic outlook for the equity world. However, assistance in negotiating such treacherous shoals is available...for a small fee of course.

Ignore it all. Investing in common stocks is prudent and appropriate at virtually any point in time and generally entails little more than a modicum of common sense.

You do not need professional advice or specialized computer software or expensive newsletters and whatever else is being touted these days by those claiming to have an “inside track,” to the Holy Grail of investing, that flawless method for deciding what to buy and when.

Not only is there is no Holy Grail, there should never be even a hint of a guarantee as to an investment’s performance. Yet, for some the search has become an obsession, while for others it is a hopeless crusade. In either case, their frustration leaves them vulnerable to the vultures that prey on the uninformed.

Nonetheless, there is one method anyone can use to build a decent portfolio...in a period of about 20 minutes. Your total commission cost, using a discount brokerage house, should not exceed $45 and you do not have to look at your portfolio for a year.

Yes, it is once again time to revisit the investment theory developed and promulgated by money manager Michael O’Higgins. This often maligned methodology is most often referred to as the Dow Five theory or Small Dogs of the Dow and it was originally described in his book “Beating the Dow,” (Harper Collins Publishers, 1991 and since revised). The strategy limits your horizon of possible investment candidates to the 30 companies that make up the Dow Jones Industrial Average.

The theory consists of selecting the five lowest priced of the Dow’s 30 stocks from the ten with the highest dividend yield. You buy an equal dollar amount, not an equal number of shares, of each of these five companies and hold the shares for one year.

On the anniversary of your purchase, you again identify the five lowest priced stocks out of the ten with the highest yield and adjust your portfolio accordingly. Using a “Dogs of the Dow” mutual fund defeats the low cost, low turnover, aspect of the strategy.

By implementing the strategy, you become a contrarian investor. Does the Dow Five theory work every year; no, of course not. Still, for 2013 the return was 30.6 percent, as compared to 31.9 percent total return for the S&P 500.