A Simple Investment Strategy
By Saghir Aslam
Irvine , CA

 

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)

Wall Street would like individual investors to believe that successful investing necessarily involves complicated strategies, endless analysis and reams of data. I disagree, and to support my contention that individuals can be very successful, I offer a simple strategy called "The Dogs of the Dow" and its anything-but-simple returns.

In its simplest form, the Dogs of the Dow is the ten Dow Jones Industrial Average stocks which pay the highest dividends. These ten issues are held for one year, after which time adjustments are made so that the current ten highest dividend payers are held. This process is repeated annually thereafter.

The "Dow 10" strategy has produced average annual returns of 16.17% since 1972 vs. just 12.76% for the Dow itself. This success can most directly be explained by two important factors: the discipline of buying major, blue chip shares when they are out of favor and long term adherence to an investment system. Since a higher dividend is usually the result of a relatively low share price, the practice of buying the highest yielding Dow stock is, in effect, buying out of favor Dow companies. Since it is quite reasonable to expect that Dow companies will recover from virtually any troubles that befall them, buying these shares when they are out of favor is akin to buying them on sale. When they return to their full value, investors benefit from significant price appreciation, all the while receiving above average dividends.

Just as important is sticking with a "system". Certainly, the Dogs of the Dow is a system for selecting blue chip stocks. The annual adjustment process updates the portfolio in a very defined, methodical way. There is no guesswork. There is no need for "a sense of the market." It is truly a system, and it works for the reason outlined above.

This simplistic method of identifying timely blue chip stocks confounded a lot of market watchers when it was first outlined by Michael O'Higgins in his book "Beating the Dow." But O'Higgins did not just stop with the Dow 10. He reasoned that because lower priced issues tend to exhibit more volatility, the five lowest priced stocks selected from the Dow 10 should produce even stronger returns. In fact, when he tested his theory using historical price and dividend information, he found that the "Dow 5" portfolio produced average annual return of 19.11% over the past 25 years.

The returns produced by the Dogs of the Dow are impressive. Even more impressive though, are the consistency of this strategy and its defensive characteristics in the face of weak markets. The Dow 5 has outperformed the market (as defined by the Dow itself) in 19 of the past 25 years (that is 76% of the time). During the same period, it has had only three down years vs. the Dow's five down years. During these down years, the Dow averaged a decline of 10.63% while the Dow 5 averaged a decline of only 0.32%.

Many mutual fund managers have come under fire in recent years because 90% of all funds underperform the market. This suggests that beating the market is difficult. The Dogs of the Dow strategy has consistently outperformed the market, it has proved itself a safe heaven during bear markets, and, above all, it is the simplest system for success in the market anyone has ever divulged. So, the next time you are frustrated with the performance of your stock portfolio, you might do well to adopt this simple strategy.

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)

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Editor: Akhtar M. Faruqui
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