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Dogs of the Dow Investment Strategy - is it Good? Does it Work? - YouTube
Channel: Learn to Invest - Investors Grow
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Hey I'm Jimmy in this video.
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I'm going to work for a popular
strategy called
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the dogs of the dog.
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So this strategy first came about in
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a book called Beating the Dow
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back in 1991 I believe there's
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a link in the description below to
the updated
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version if you're interested.
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Now our question for this video
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is what is the dogs
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of the Dow
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and does this strategy work.
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OK. So what is the dogs of the Dow
strategy.
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It's actually quite simple.
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So what we do is we buy
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the 10 highest dividend yielding
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stocks in the Dow Jones industrial
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average. Now there are only 30
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stocks in all of the Dow.
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So essentially we're gonna be doing
is going to be buying
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the top third of the highest
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dividend yielding stocks.
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And here's the theory behind the
strategy.
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So the Dow Jones Industrial Average
consists
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of many of the world's largest
companies.
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You may have seen some of the videos
that we've done
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on this channel called the Dow our
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Dow 30 analysis where we're
analyzing
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all 30 stocks in the Dow Jones
Industrial
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Average.
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And for me it's been a very
interesting exercise
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because I get to analyze many
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different companies in many
different industries.
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But one thing that all these
companies have in common
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is that they all pay a dividend.
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Now they don't all pay great
dividends
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but they all pay a dividend visa as
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an example has a dividend yield of
just
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it's about one half of 1 percent
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while a company like IBM on the
other hand
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has a dividend yiled of over 4
percent.
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Now it's important remember how a
dividend
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yield is calculated.
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So it's simply the dividend you get
over the past
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year. Divide that by the current
price
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and what you end up
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with is a dividend yield.
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So imagine that you had a stock
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that paid out what it cost
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ten dollars to buy the shares
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and paid her a dollar in dividends.
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Well you take the dollar you divide
it by 10 in
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over the 10 percent dividend.
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Now this is why it's important for
this strategy
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because that ten dollars that you
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paid is crucial to the whole thing.
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So what happens if our ten dollar
stock
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falls down to five dollars per
share.
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Sure I'm being a bit extreme you've
dropped by 50
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percent but the concept remains
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the same.
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If it fails if it fell down from ten
dollars
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to five dollars
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and since the dividends paid over
the
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last year doesn't change.
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Well now it's a dollar divided by
five.
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Therefore we have a 20 percent
dividend yield.
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So that's how you end up
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with when you screen for the highest
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companies in the Dow the ones that
have
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the highest yields what you might
end up
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with is the companies that have
fallen the most.
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Hence the term dogs of the Dow.
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The theory is just because the price
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is fallen well these companies
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are still blue chip companies
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and are probably safe now.
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We're not going to say they're
always safe
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and we'll see some examples in a
second.
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But that's the whole strategy.
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Basically you buy the 10 highest
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yielding companies assuming
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you're buying them cheap because the
price fell.
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That's why the yield went up
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and that goes
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into our portfolio.
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We buy them once a year
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and we equal weight them every year.
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So does it work.
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Well I actually went ahead
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and ran a back test on the dogs
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of the Dow strategy going all the
way back
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to the year 2000
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and this is what the portfolio
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would have looked like had we
followed the
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rules according to the book
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that was written about this.
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It's called beating the Dow
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and sure this looks pretty good.
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But the book claims that this
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strategy is designed to beat
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the actual Dow Jones Industrial
Average.
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So this chart
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this is the strategy versus
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the Dow Jones Industrial Average.
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And as you can see it looks like the
dogs of the Dow strategy
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did in fact beat the Dow.
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But let's look a bit closer at some
of the individual
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years and then we'll look for some
holes that the
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strategy may have.
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So this is the annual returns for
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the dogs of the Dow
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and for the Dow Jones index going
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back to 2000
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and then this is how they did
relative
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to each other.
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Now these are all total return
numbers.
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So for both the dogs of the Dow
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and for the Dow Jones index itself
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we assume that all dividends get
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reinvested into the portfolio.
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I also assume that they were equal
weighted
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at the start of each year because
that's what the book
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said. So during
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this time period but we had 19 19
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different time periods.
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And in all those years the dogs of
the Dow
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lost to the Dow Jones index
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five times.
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Now this means that the dogs of the
Dow were about
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to beat the Dow Jones Industrial
Average
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about 74 percent of the time.
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And frankly this fascinated me
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is it really that simple.
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So I thought to myself well maybe
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it's only working because it's being
compared to
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the Dow Jones industrial average
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and not something like the S&P 500
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after all the Dow is
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a price weighted index
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and the S&P 500 is a market cap
weighted
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index plus the S&P 500 as so
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many more companies.
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Well this is what the chart looks
like for
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the dogs of the Dow versus the S&P
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500.
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And it turns out that this wasn't
even
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close.
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So I thought that it was really
interesting.
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But now let's see if we can find
some holes
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in the individual strategy every
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strategy has them.
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So I was curious what this one was.
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So if we switch back to the annual
performance
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well we could see that this time
period
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jumps out at me.
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In fact that could easily make a
case that this five
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year time period we could analyze
that
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but 2006 was such
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a good year that a price makes sense
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to focus on the three year time
period.
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Now to down even more.
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2009 was the worst of
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all the years.
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So I assure you I could jump in
there
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and look at that specific year
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to see what we could identify.
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Okay so these are the holdings
during
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the 2009 holding period.
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And this actually brings us to the
key
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weakness of this strategy.
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In my opinion 10 stocks
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really isn't enough to
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fully diversify a portfolio.
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Studies have shown that somewhere
between
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20 and 40 companies
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gives enough of the benefits of
diversification.
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So that's a risk
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and I actually think that it's the
biggest
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risk. Since less companies
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mean.
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It means that you're more
concentrated in
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each company that you own
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and your less you're less likely to
be
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spread out amongst more
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and more sectors.
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OK so what happened in 2009.
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So we know that's when the Great
Recession was going on
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and we know the banks were getting
killed at the time
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and Citigroup was down more than
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50 percent in that year.
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And that really hurt hurt the
portfolio because
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once again it's a large part of the
portfolio.
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But the biggest issue
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in this year was General Motors
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General Motors filed for bankruptcy
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in 2009
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and the stock was down more than 85
percent
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that year. This is a danger of
having such
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big weightings on every holding
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but the same can be true on the
upside.
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2003 was the best
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year for the dogs of the Dow.
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They posted up more than a 40
percent gain
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Beating the Dow Jones index by more
than
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12 percent.
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And in that year Caterpillar was
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up more than 80 percent.
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And since that was such a big piece
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of the whole portfolio the entire
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portfolio did very well.
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So I think that that's the biggest
risk.
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And also one of the biggest benefits
I think
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that you're likely to get increased
volatility
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with this type of strategy.
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But overall history has proven
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it seems to be working.
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But what do you think.
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Do you like the dogs of the Dow
portfolio.
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Actually got this idea for a video
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from a comment on another video that
I
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had done
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and that subscriber
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had told me that they had been
implementing
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the dogs of the Dow strategy
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on their own portfolio for the past
few years.
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They said they've had a quite a lot
of success
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with it so I can see
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how they'd have a ton of success
look what the returns
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have been like over the past five
years
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or so. So congrats to them on that.
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That's awesome. So to everyone else.
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Have you ever tried this strategy.
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Is this the type of thing you would
implement in your
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portfolio.
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Are there any other strategies that
you've heard
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about or that you've tried
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or you want to try.
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Let me know what you think in the
comments below.
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I'd be curious to make a video
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on other types of strategies that
have
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histories that has a history of
being
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successful.
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So if you haven't done so already at
the
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subscribe button.
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Thank you for sticking with me all
the way into the video
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and I'll see in the next video.
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