The X Allocation

By Scott Lummer
Chief Investment Officer, mPower

In This Story Brand X The X Strategy Xcuse Me

Sorry I haven't written a new column in a while. Some of you have actually sent e-mails asking whether I passed away (expressing sympathy) or was fired (expressing delight). Thank you for your concern, but rumors of my demise have been greatly exaggerated. Life in the online advice industry is never dull, particularly because there was no such industry five years ago. Sometimes writing a column, even a lame one, is more than my schedule can handle. Thanks for your indulgence.

This week's question is typical of many I have received over the past month:

You say that investors should not make many changes to their investment strategy. I have all of my 401(k) in a small company growth fund and it did awfully last year, losing 43 percent. Should I stick with this fund?

Brand X

Technical Terms Diversification Growth stock Value investing

When you write for a Web site, it's all about hits and page views, and my colleagues have been chiding me about being too boring. All of this stuff about diversification (yawn), buy-and-hold (closing eyes), and investing for the long term (zzzzzz) does not lead people to come back very frequently. However, as that great philosopher, Descartes, once said, "I yam what I yam" (it was actually Popeye, but I wanted to provide some appeal to the college-educated demographic). I can only write about what I believe in.

However, I've also come to the realization that getting attention is all about branding. And, in this era, it's brand X that gets the buzz going. If you want to attract viewers to a really insipid program on a cable channel, call it the "X Show." If you want someone to watch a contest in which prepubescent "athletes" ride on skateboards and Schwinn Stingray bikes, call it the "X Games." And, if you want news media to follow football of the same quality you used to play when you wore Velcro flags on your hips, call it the "XFL."

So, I am calling my investment strategy the "X Allocation."

I have written about asset allocation before, in my article "A Simple Plan." But, few people actually read the article. I know that because the week we ran the column, the most common question I received from readers was "How should I allocate my money?" So, without changing my philosophy, I can get your attention by focusing on the most exciting part of the allocation. That isn't the large company stocks, which should make up over half of your equity holdings. Nor is it the international investments, which should be about another quarter of your equity holdings. It isn't even the "value"-oriented smaller companies, which should be about half of the remaining equity allocation. No, I will focus on the smaller company growth stocks — which I will now refer to as X-stocks — which should be no more than 10 percent of your overall equities.

You might consider it misleading to name the allocation strategy for the component that is given the smallest weight. But, hey, that's show biz! The XFL focuses on the cheerleaders and they count for way less than 10 percent of the score (although, I hear that NBC is proposing some new rule changes to solve that problem).

The X Strategy

With my new focus, I can now re-formulate the key to a successful overall investment strategy, focusing on X-stocks. The strategy has three components:

1. Buy low.
2. Sell high.
3. Make sure you have no more than one-tenth of your money in X-stocks.

It's simple (even the hosts of the X Show can understand it) and effective. It can prevent most of the investment disasters that people have experienced over the past few years, particularly last year. In fact, for those people who only watch the X Show, X Games, and XFL, the strategy can be further simplified — only follow rule No. 3.

To specifically answer the reader's question at the beginning of this column, yes, you should use a different strategy. Following a consistent path is important, but it needs to be a path that makes sense (remember your mother's admonition, "if Johnny jumped off a bridge, ...). Investing all of your money in growth stocks, particularly small company growth stocks, does not make sense. It is too risky.

Last year, X-stocks lost 22 percent — the trend has continued so far this year as they have lost 7 percent for the first two months of 2001. Meanwhile, small company value stocks gained 23 percent last year (betcha didn't know that) and have returned 3 percent so far this year. The same is true for large company stocks — over the past 12 months, large company growth stocks have lost 26 percent while value stocks have gained 14 percent. And, this isn't just a short-term phenomenon. Even though the late '90s were supposedly a great period for growth stocks, small-cap value indexes have outperformed X-stocks over the past five years.

Xcuse Me, but Why Didn't You Tell Us That Last Year?

I did. I certainly didn't predict the dramatic collapse in growth stocks, but I (and most advisors) have been preaching the benefits of broad diversification through the late '90s — some of you just weren't listening. Indeed, some of you did well with a concentrated growth stock portfolio in 1998 and 1999. However, recognize the risk you are taking. And, don't act shocked when you suffer large losses. That's like driving 90 miles per hour down the highway and being surprised when you get pulled over (not that I have any personal experience with that).

Related Reading A Simple Plan The Value of Asset Allocation The Upside to the Down Market

Hopefully, with my new branding strategy, I'll get some real publicity. To prepare, I'm shaving my head, growing a goatee, and getting my tongue pierced. Maybe Vince McMahon is paying attention. Hey, given the low number of XFL viewers last week, even a middle-aged guy rambling about the benefits of long-term investing philosophies would get better ratings ... especially if he acts like he belongs to gen X. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

The X Allocation

By Scott Lummer
Chief Investment Officer, mPower

In This Story Brand X The X Strategy Xcuse Me

Sorry I haven't written a new column in a while. Some of you have actually sent e-mails asking whether I passed away (expressing sympathy) or was fired (expressing delight). Thank you for your concern, but rumors of my demise have been greatly exaggerated. Life in the online advice industry is never dull, particularly because there was no such industry five years ago. Sometimes writing a column, even a lame one, is more than my schedule can handle. Thanks for your indulgence.

This week's question is typical of many I have received over the past month:

You say that investors should not make many changes to their investment strategy. I have all of my 401(k) in a small company growth fund and it did awfully last year, losing 43 percent. Should I stick with this fund?

Brand X

Technical Terms Diversification Growth stock Value investing

When you write for a Web site, it's all about hits and page views, and my colleagues have been chiding me about being too boring. All of this stuff about diversification (yawn), buy-and-hold (closing eyes), and investing for the long term (zzzzzz) does not lead people to come back very frequently. However, as that great philosopher, Descartes, once said, "I yam what I yam" (it was actually Popeye, but I wanted to provide some appeal to the college-educated demographic). I can only write about what I believe in.

However, I've also come to the realization that getting attention is all about branding. And, in this era, it's brand X that gets the buzz going. If you want to attract viewers to a really insipid program on a cable channel, call it the "X Show." If you want someone to watch a contest in which prepubescent "athletes" ride on skateboards and Schwinn Stingray bikes, call it the "X Games." And, if you want news media to follow football of the same quality you used to play when you wore Velcro flags on your hips, call it the "XFL."

So, I am calling my investment strategy the "X Allocation."

I have written about asset allocation before, in my article "A Simple Plan." But, few people actually read the article. I know that because the week we ran the column, the most common question I received from readers was "How should I allocate my money?" So, without changing my philosophy, I can get your attention by focusing on the most exciting part of the allocation. That isn't the large company stocks, which should make up over half of your equity holdings. Nor is it the international investments, which should be about another quarter of your equity holdings. It isn't even the "value"-oriented smaller companies, which should be about half of the remaining equity allocation. No, I will focus on the smaller company growth stocks — which I will now refer to as X-stocks — which should be no more than 10 percent of your overall equities.

You might consider it misleading to name the allocation strategy for the component that is given the smallest weight. But, hey, that's show biz! The XFL focuses on the cheerleaders and they count for way less than 10 percent of the score (although, I hear that NBC is proposing some new rule changes to solve that problem).

The X Strategy

With my new focus, I can now re-formulate the key to a successful overall investment strategy, focusing on X-stocks. The strategy has three components:

1. Buy low.
2. Sell high.
3. Make sure you have no more than one-tenth of your money in X-stocks.

It's simple (even the hosts of the X Show can understand it) and effective. It can prevent most of the investment disasters that people have experienced over the past few years, particularly last year. In fact, for those people who only watch the X Show, X Games, and XFL, the strategy can be further simplified — only follow rule No. 3.

To specifically answer the reader's question at the beginning of this column, yes, you should use a different strategy. Following a consistent path is important, but it needs to be a path that makes sense (remember your mother's admonition, "if Johnny jumped off a bridge, ...). Investing all of your money in growth stocks, particularly small company growth stocks, does not make sense. It is too risky.

Last year, X-stocks lost 22 percent — the trend has continued so far this year as they have lost 7 percent for the first two months of 2001. Meanwhile, small company value stocks gained 23 percent last year (betcha didn't know that) and have returned 3 percent so far this year. The same is true for large company stocks — over the past 12 months, large company growth stocks have lost 26 percent while value stocks have gained 14 percent. And, this isn't just a short-term phenomenon. Even though the late '90s were supposedly a great period for growth stocks, small-cap value indexes have outperformed X-stocks over the past five years.

Xcuse Me, but Why Didn't You Tell Us That Last Year?

I did. I certainly didn't predict the dramatic collapse in growth stocks, but I (and most advisors) have been preaching the benefits of broad diversification through the late '90s — some of you just weren't listening. Indeed, some of you did well with a concentrated growth stock portfolio in 1998 and 1999. However, recognize the risk you are taking. And, don't act shocked when you suffer large losses. That's like driving 90 miles per hour down the highway and being surprised when you get pulled over (not that I have any personal experience with that).

Related Reading A Simple Plan The Value of Asset Allocation The Upside to the Down Market

Hopefully, with my new branding strategy, I'll get some real publicity. To prepare, I'm shaving my head, growing a goatee, and getting my tongue pierced. Maybe Vince McMahon is paying attention. Hey, given the low number of XFL viewers last week, even a middle-aged guy rambling about the benefits of long-term investing philosophies would get better ratings ... especially if he acts like he belongs to gen X. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.