Y (O-Y-O-Y) 2 K

By Scott Lummer
Chief Investment Officer, mPower

The question of the week is a timely one -- and is certainly one that will be asked a lot in the coming weeks.

We are retiring in 10 to 15 years. Should we move all money in our 401(k) into a fixed income fund or money market fund before the end of the year and until the Y2K scare is over?

First of all, what I want to know is who the publicity agent is for this Y2K -- and how can I get him or her to work for me? This alleged impending crisis has made every business publication read like a supermarket tabloid ("Will your local utility stop functioning? -- Inquiring minds want to know!"). But in my opinion, the potential for disaster is overstated, to say the least.

To answer your question, first let's scope out the severity of the problem, and then determine how it should alter your investing strategy.

Now, I admit that you might consider me a bit biased. I have not taken any survivalist courses, purchased automatic weapons, or spent three years stocking up on essential items such as food, clothing, and Pauly Shore videos. So I am not obsessing about the threat.

On the other hand, I am not completely ignoring the problem. I will have a little extra cash on hand (some in the form of currency -- the rest in traveler's checks) and I will make sure my family's cars are completely gassed up. Also, I'm not planning any New Year's Eve flights over Belarus.

However, although we may experience some inconveniences while watching -- or not watching -- the Bowl games, and the difficulties might be more severe in some less developed countries, this will not translate into a global economic meltdown. Large multinational companies have been focusing on the problem for several years, in part because their customers have been demanding that they do so. Most smaller businesses both here in the U.S. and abroad have also been paying critical attention to avoiding any difficulties.

Will some mom-and-pop establishments encounter some glitches? Sure -- but the vast majority of problems will be that they won't be able to access their accounting software until they pay some computer specialist $200 an hour to solve the problem (a rate usually reserved for my plumber). I doubt whether we will see the total collapse of your local dry cleaner, let alone the world economy.

While I'm sure many of you agree that the potential severity of Y2K has been overstated by the press, some of you might not be so sure ("isn't this the guy who told the major league umpires 'don't worry -- baseball could never replace you'?"). Suppose the potential exists that something more severe could happen. What would be the impact of such a problem on market values? Five percent? ... 10%? ... 20%? Even if it were as high as 20%, I still wouldn't suggest you make any changes.

First of all, there is no certainty that stock values will fall, which means that they also could rise.

The main reason I don't suggest that you pull all of your money out of stocks is because it starts you down the slippery slope of market timing. You may feel that this time there is a good reason to get out of stocks -- but then, you can always convince yourself there is a good enough reason.

Remember the "reason" last September? It was the "upcoming worldwide recession." Asia and Eastern Europe were going to endure economic collapse. Corporate earnings were going to shrink. Production would crawl to a halt. Many of the pundits were shrieking that U.S. stocks would decline sharply, and suggested that investors pull out of equities.

What happened? The only things that recessed were the portfolio values of investors who followed the pundits' advice. The economic problems reversed themselves, and as a result the recession that was to occur never happened. The stock market rose by 29% during the last four months of last year -- an opportunity lost by those investors who timed out of the market. By trying to avoid a potential loss, market timers reduced their wealth by more than one-fourth.

So, with the exception of those of you who are retiring on New Year's Day, I suggest you don't change your portfolio as a result of the Y2K situation. You should make sure your portfolio is diversified, and that you have less than 10% of it in each of the two sectors most likely to be affected by the potential threat -- emerging market stocks and high technology companies. But frankly, I recommend broad diversification and minimal exposure to risky sectors regardless of the impending threat.

I admit I may be wrong about the impact of Y2K. If that's the case, feel free to e-mail me on January 2. Of course, it might take me a while to respond -- my computer will be shut down by the bug. 

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.

Y (O-Y-O-Y) 2 K

By Scott Lummer
Chief Investment Officer, mPower

The question of the week is a timely one -- and is certainly one that will be asked a lot in the coming weeks.

We are retiring in 10 to 15 years. Should we move all money in our 401(k) into a fixed income fund or money market fund before the end of the year and until the Y2K scare is over?

First of all, what I want to know is who the publicity agent is for this Y2K -- and how can I get him or her to work for me? This alleged impending crisis has made every business publication read like a supermarket tabloid ("Will your local utility stop functioning? -- Inquiring minds want to know!"). But in my opinion, the potential for disaster is overstated, to say the least.

To answer your question, first let's scope out the severity of the problem, and then determine how it should alter your investing strategy.

Now, I admit that you might consider me a bit biased. I have not taken any survivalist courses, purchased automatic weapons, or spent three years stocking up on essential items such as food, clothing, and Pauly Shore videos. So I am not obsessing about the threat.

On the other hand, I am not completely ignoring the problem. I will have a little extra cash on hand (some in the form of currency -- the rest in traveler's checks) and I will make sure my family's cars are completely gassed up. Also, I'm not planning any New Year's Eve flights over Belarus.

However, although we may experience some inconveniences while watching -- or not watching -- the Bowl games, and the difficulties might be more severe in some less developed countries, this will not translate into a global economic meltdown. Large multinational companies have been focusing on the problem for several years, in part because their customers have been demanding that they do so. Most smaller businesses both here in the U.S. and abroad have also been paying critical attention to avoiding any difficulties.

Will some mom-and-pop establishments encounter some glitches? Sure -- but the vast majority of problems will be that they won't be able to access their accounting software until they pay some computer specialist $200 an hour to solve the problem (a rate usually reserved for my plumber). I doubt whether we will see the total collapse of your local dry cleaner, let alone the world economy.

While I'm sure many of you agree that the potential severity of Y2K has been overstated by the press, some of you might not be so sure ("isn't this the guy who told the major league umpires 'don't worry -- baseball could never replace you'?"). Suppose the potential exists that something more severe could happen. What would be the impact of such a problem on market values? Five percent? ... 10%? ... 20%? Even if it were as high as 20%, I still wouldn't suggest you make any changes.

First of all, there is no certainty that stock values will fall, which means that they also could rise.

The main reason I don't suggest that you pull all of your money out of stocks is because it starts you down the slippery slope of market timing. You may feel that this time there is a good reason to get out of stocks -- but then, you can always convince yourself there is a good enough reason.

Remember the "reason" last September? It was the "upcoming worldwide recession." Asia and Eastern Europe were going to endure economic collapse. Corporate earnings were going to shrink. Production would crawl to a halt. Many of the pundits were shrieking that U.S. stocks would decline sharply, and suggested that investors pull out of equities.

What happened? The only things that recessed were the portfolio values of investors who followed the pundits' advice. The economic problems reversed themselves, and as a result the recession that was to occur never happened. The stock market rose by 29% during the last four months of last year -- an opportunity lost by those investors who timed out of the market. By trying to avoid a potential loss, market timers reduced their wealth by more than one-fourth.

So, with the exception of those of you who are retiring on New Year's Day, I suggest you don't change your portfolio as a result of the Y2K situation. You should make sure your portfolio is diversified, and that you have less than 10% of it in each of the two sectors most likely to be affected by the potential threat -- emerging market stocks and high technology companies. But frankly, I recommend broad diversification and minimal exposure to risky sectors regardless of the impending threat.

I admit I may be wrong about the impact of Y2K. If that's the case, feel free to e-mail me on January 2. Of course, it might take me a while to respond -- my computer will be shut down by the bug. 

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.