Streetwise: Dow Jones small dogs are usually safe bets

March 4, 2012 3:21 pm

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Having taught students at all levels, from college to adult education, I have learned the value of repetition. So let me state once again that despite the angst regarding the seemingly endless variety of proffered economic scenarios depicting doomsday by so-called experts, investing in common stocks at this time is both prudent and appropriate. Furthermore, anyone with a modicum of common sense should have no difficulty building a successful portfolio.

Yes, it is that easy and, no, 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."

Yet, there are investors or would-be investors who continue to look for Wall Street's Holy Grail, that flawless method for deciding which stocks to buy and when. Regrettably, there is no Holy Grail and to make matters worse, Wall Street offers no guarantees. 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.

Meanwhile, you can dramatically increase your probability of investment success if you pay attention to two simple and often repeated rules. The first states that the higher the return, the higher the risk. The second is that capital appreciation takes some amount of "time," an admittedly indeterminate variable at the onset of an investment. Nonetheless, like baking a cake or brewing beer (as a matter of disclosure, I have never done either), capital appreciation cannot be rushed. Over time, a portfolio with quality ingredients can and will produce outstanding results.

Furthermore, 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 $35 and you do not have to look at your portfolio for a year.

Developed 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.

Lauren Rudd is a financial writer and columnist. You can write to him at Phone calls accepted between 9 a.m. and 3 p.m. at (941) 346-5444. For back columns please go to
First Published 2012-03-03 23:22:37

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