By John Slatter, CFA
You can't go wrong investing in the Dow 30. In fact if you compare investing in mutual funds, hedge funds and financial advisors with investing in the Dow 30, the better choice is the Dow. Below is the evidence to support my case.
* If you own most of the 30 Dow stocks, you are not likely to be left at post when the market makes a major move. In effect, you are the market. And remember, precious few investors of any stripe are successful in outperforming the S&P 500 or the Dow 30.
* There are no fees to pay to advisers, hedge fund managers or investment advisers.
* There are no capital gains taxes to pay unless you sell one or two of your stocks. Incidentally, the best ones to sell are the ones that are up the least or the ones that have been big disappointments. Once again, the IRS is kept out of your wallet.
Wealth Management Research Simplified
* When you concentrate on the Dow 30, your research is simplified. You don't have to examine the performance of 10,000 mutual funds or 5,000 hedge funds, or 3000 stocks listed on the Big Board. Your 30 candidates are there in plain sight, with instant information readily available in the Wall Street Journal, the New York Times as well as other leading journals. Of course, you can also read the company's annual report or check in at its Web site.
* Investors often fret as how to determine when to sell. With the Dow 30, the decision is made by Dow Jones & Company, which publishes the Wall Street Journal and Barron's. Every so often, the staff decides to do a little surgery on the Index by deleting two or three components and replacing them with stocks it likes better.
* On average, about one stock per year is shunted aside and replaced with a new candidate. That's when you sell the issue discarded stock and invest the proceeds in the new kid on the block. Normally, the stock dumped is deleted because it was a dog. That means you may not have to pay Uncle Sam a nickel when the Wall Street Journal wields the ax.
* Fees paid to stock brokers can be kept at a minimum by dealing with a discount broker, such as Charles Schwab, Fidelity or Scottrade.
A Beat the Market Approach
* If you want to beat the market, you can do it by buying all 30 stocks, but giving greater weight to those you like best. Here is a simple strategy: Invest 4 percent in each of the 10 stocks you like best. Invest 3 percent in the next 10 and only 2 percent in the 10 with the least appeal. Save 10 percent for a money-market fund or a short-term bond.
* Since you are making large stock purchases, you are not likely to disturb the market when you buy a Dow 30 stock. By contrast, if you invest in a Nasdaq stock or some other outfit with fewer shares outstanding, your purchase of 25, 000 or 100,000 shares could cost you an extra two or three points when you buy or sell
In order to liquidate some of your current holdings, here are some steps to take:
* Sell stocks from your IRA, since there will be no taxes to pay - unless you have reached the age when the IRS makes it mandatory for you to begin withdrawing part of your IRA, all of which is taxable.
* Simply cut back on your largest holdings, which will enhance your diversification.
* Sell the stocks that show the worst profit - assuming you don't have any stocks in your IRA. If you don't like to pay capital gains taxes, this is a good strategy.
* A fourth alternative is to sell a holding that makes up only 1 percent of your list. Such small stocks are rarely large enough to make you much richer, even if they double.
If concentrating on the Dow Jones Industrial Average makes sense, you can find the list frequently in the Wall Street Journal (notably on Monday in the Money & Investing section) or in Barron's. As of March 2007, these were the 30 stocks in the Index: American International Group (AIG), Alcoa (AA), Altria Group (MO); American Express (AXP), AT&T (T), Boeing (BA), Caterpillar (CAT), Citigroup (C), Coca-Cola (KO), Walt Disney (DIS), Du Pont (DD), General Electric (GE), General Motors (GM), Hewlett-Packard (HPQ), Honeywell (HON), International Business Machines (IBM), Intel (INTC), Johnson & Johnson (JNJ), JPMorganChase (JPM), McDonald's (MCD), Merck (MRK), Microsoft (MSFT), Pfizer (PFE), Procter & Gamble (PG), 3M Company (MMM), United Technologies (UTX), Verizon Communications (VZ), and Wal-Mart Stores (WMT).
John Slatter has written 13 books on investing, including Safe Investing, Straight Talk About Stock Investing and 11 editions of The 100 Best Stocks You Can Buy. He is also a portfolio manager for Klopp Investment Management, headquartered in Cleveland, Ohio.
