Nas-blachhh 2: The Sequel

By Scott Lummer
Chief Investment Officer, mPower

In This Story Some Perspective What to Do

On Monday March 12, 2001, the NASDAQ declined by 6.3 percent and fell below 2,000 for the first time since 1998. The main reason for the decline was the announcement by the telecommunications company Ericsson that it would suffer a loss this quarter because it was getting fewer orders for telephone equipment, particularly from the United States. This news caused analysts to become even more concerned about decreased technology spending by U.S. companies and compounded the uneasiness created a few days earlier when technology giants Cisco and Intel announced that they were cutting their work forces by 16 percent and 5 percent, respectively.

My computer kept crashing March 12, perhaps in sympathy with NASDAQ, so I couldn't read your e-mails. But, I'm pretty sure they went something like this:

What's happening ... and more importantly, should I be worried?

Some Perspective

Technical Terms Diversification Growth stock NASDAQ Standard & Poor's 500 (S&P 500) Value investing

Although the overall market is down, the major problems investors are experiencing are among the NASDAQ stocks. The Index is down 22 percent since the beginning of the year and 62 percent over the past 12 months. However, the broader market has not done nearly as poorly — for example, the Dow is down only 5 percent for the year and has actually increased by 3 percent over the past 12 months. Value-oriented stocks have actually been producing positive returns throughout 2000 and 2001.

A valid question to consider is, if the situation is not that bad, why are the declines talked about so much in the news? It's because the media is concentrating its attention solely on one index. A few years ago, most people thought the NASDAQ was either a sinus relief drug or the name of the new space station. However, sometime over the past two years, the media — and not investment advisors — determined that the NASDAQ was the index du jour. During the boom years of the late '90s, it was an emblem of investors' success, rising 83 percent alone in 1999. Every reporter loves a good story, and the higher highs and lower lows of the NASDAQ made for more compelling reading. However, most investment advisors, including us at mPower, always rejected the notion that the NASDAQ was the only market segment to watch.

Of course, some professionals did fall into a trap. In late 1999, I spoke at an investment conference on a panel with one other advisor who I will call Bob (because that's his name), who runs three allocation funds. While I preached the benefits of broad balance and diversification (and induced such a massive yawn that it registered on most seismometers), Bob told the audience that I was a dinosaur and that the path to riches was paved with only growth-oriented stocks.

Well, in the past 14 months, Bob's all-equity fund has lost 44 percent, compared with a 16 percent loss by the S&P 500. That means his clients lost a quarter more of their wealth by investing in his undiversified strategy. Worse, his conservative fund has lost 25 percent over the same time period — meaning his investors who wanted a degree of safety actually lost more than investors in the average aggressive all-equity portfolio did. (Given his apparent definition of conservative, Bob must wear plaid leisure suits to funerals.)

I'm not trying to make light of investors' losses or say that there's nothing to worry about. The doldrums in the NASDAQ have impacted most investors, and the typical overall portfolio has lost ground over the past year. My point is that if your investments are diversified, the situation is not nearly as bad as the front-page news in your local paper might make it seem. You need to look at your portfolio — not some index that makes for exciting reading.

What to Do

I ask you to remember three things:

1. Diversify broadly. This statement might have seemed passé a year ago, but I believed and preached it then, and nothing has caused me to change my mind.
2. Focus on news that is relevant to you. If you are adequately diversified, it's likely that only a portion of your portfolio is in NASDAQ stocks. Don't overreact to movements that are not affecting you greatly.

   Related Reading The Value of Asset Allocation Nas-blachhh The Road Less Traveled

3. Be patient. Your goal isn't to have the highest value portfolio on March 12, 2001, or any other date. It is to have enough to enjoy retirement. Following a consistent plan that includes a diversified stock portfolio is the key to a successful retirement.

Call me a dinosaur if you will, but this strategy may help ensure that your own wealth doesn't become extinct. 

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.

Nas-blachhh 2: The Sequel

By Scott Lummer
Chief Investment Officer, mPower

In This Story Some Perspective What to Do

On Monday March 12, 2001, the NASDAQ declined by 6.3 percent and fell below 2,000 for the first time since 1998. The main reason for the decline was the announcement by the telecommunications company Ericsson that it would suffer a loss this quarter because it was getting fewer orders for telephone equipment, particularly from the United States. This news caused analysts to become even more concerned about decreased technology spending by U.S. companies and compounded the uneasiness created a few days earlier when technology giants Cisco and Intel announced that they were cutting their work forces by 16 percent and 5 percent, respectively.

My computer kept crashing March 12, perhaps in sympathy with NASDAQ, so I couldn't read your e-mails. But, I'm pretty sure they went something like this:

What's happening ... and more importantly, should I be worried?

Some Perspective

Technical Terms Diversification Growth stock NASDAQ Standard & Poor's 500 (S&P 500) Value investing

Although the overall market is down, the major problems investors are experiencing are among the NASDAQ stocks. The Index is down 22 percent since the beginning of the year and 62 percent over the past 12 months. However, the broader market has not done nearly as poorly — for example, the Dow is down only 5 percent for the year and has actually increased by 3 percent over the past 12 months. Value-oriented stocks have actually been producing positive returns throughout 2000 and 2001.

A valid question to consider is, if the situation is not that bad, why are the declines talked about so much in the news? It's because the media is concentrating its attention solely on one index. A few years ago, most people thought the NASDAQ was either a sinus relief drug or the name of the new space station. However, sometime over the past two years, the media — and not investment advisors — determined that the NASDAQ was the index du jour. During the boom years of the late '90s, it was an emblem of investors' success, rising 83 percent alone in 1999. Every reporter loves a good story, and the higher highs and lower lows of the NASDAQ made for more compelling reading. However, most investment advisors, including us at mPower, always rejected the notion that the NASDAQ was the only market segment to watch.

Of course, some professionals did fall into a trap. In late 1999, I spoke at an investment conference on a panel with one other advisor who I will call Bob (because that's his name), who runs three allocation funds. While I preached the benefits of broad balance and diversification (and induced such a massive yawn that it registered on most seismometers), Bob told the audience that I was a dinosaur and that the path to riches was paved with only growth-oriented stocks.

Well, in the past 14 months, Bob's all-equity fund has lost 44 percent, compared with a 16 percent loss by the S&P 500. That means his clients lost a quarter more of their wealth by investing in his undiversified strategy. Worse, his conservative fund has lost 25 percent over the same time period — meaning his investors who wanted a degree of safety actually lost more than investors in the average aggressive all-equity portfolio did. (Given his apparent definition of conservative, Bob must wear plaid leisure suits to funerals.)

I'm not trying to make light of investors' losses or say that there's nothing to worry about. The doldrums in the NASDAQ have impacted most investors, and the typical overall portfolio has lost ground over the past year. My point is that if your investments are diversified, the situation is not nearly as bad as the front-page news in your local paper might make it seem. You need to look at your portfolio — not some index that makes for exciting reading.

What to Do

I ask you to remember three things:

1. Diversify broadly. This statement might have seemed passé a year ago, but I believed and preached it then, and nothing has caused me to change my mind.
2. Focus on news that is relevant to you. If you are adequately diversified, it's likely that only a portion of your portfolio is in NASDAQ stocks. Don't overreact to movements that are not affecting you greatly.

   Related Reading The Value of Asset Allocation Nas-blachhh The Road Less Traveled

3. Be patient. Your goal isn't to have the highest value portfolio on March 12, 2001, or any other date. It is to have enough to enjoy retirement. Following a consistent plan that includes a diversified stock portfolio is the key to a successful retirement.

Call me a dinosaur if you will, but this strategy may help ensure that your own wealth doesn't become extinct. 

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.