Nas-blachhh

By Scott Lummer
Chief Investment Officer, mPower

Editor's note: Scott Lummer is putting the finishing touches on his Alan Greenspan costume for Halloween and couldn't write a column this week. Given the NASDAQ's recent tribulations, he thought now would be a good time to revisit the column he wrote earlier this year, after the Index had suffered a ghastly drop.

From March 10 until last Friday, the NASDAQ declined by an aggregate 33 percent. Although the Dow has risen by 3 percent, and the S&P 500 has fallen 2 percent since that time, our eyes (and those of the press) tend to follow movement, and the NASDAQ has been the mover.

So the focus has been on the amount of value lost among NASDAQ stocks. Now let's spend some time focusing on two issues — what is happening with the NASDAQ and how it impacts a well-constructed portfolio.

The NASDAQ

It is not surprising what is happening with the NASDAQ in terms of a general trend. At the beginning of the year I said that we would likely experience heightened volatility and lower returns for the NASDAQ, although the degree of this volatility could not be anticipated. The index is primarily comprised of smaller companies and larger businesses in the computer, Internet, telecom, and biotechnology sectors. Some of the larger companies in these industries are Cisco Systems, Microsoft, MCI Worldcom, Dell, Amazon.com, and Amgen, Inc.

These companies tend to be riskier — many of them are currently generating operating losses — but the expectation is that high revenue growth will make them profitable. For companies that are currently generating earnings, analysts still tend to focus on their long-term future instead of present fundamentals. The long-term prospects for profits of high-growth companies are based on a myriad of factors, including long-term economic outlook, demographic changes, expectations of technological advances, competitive landscape, and individual company operations.

Trying to assess the value of these firms is much more difficult then valuing, say, a utility. A company with relatively low growth prospects will have its value based on recent- and near-term earnings, because the long-term expectations will not be widely different than the short-term. And, short-term earnings are much easier to predict than the long-term earnings of an Amazon or an Amgen.

Since the valuation of high-technology companies is difficult and imprecise, it is reasonable to expect that changes in any of the valuation assumptions will have a dramatic impact on a stock's price. So, given the events of the past few weeks, during which we have seen a reduction in revenue forecasts, an increase in inflation, a likely related increase in interest rates, and a possible major operational shake-up of the largest software developer forced by the government, estimated valuations will swing widely. And, although the impact of these changes will be felt by businesses with a lower reliance on technology, their reactions will be muted.

A Reality Check

But let's step back from the turmoil over the past five weeks and consider some basic questions.

I have read more analyses of the economy than I care to admit. No analyst I have seen is predicting that these high-tech industries will not be viable and successful. The current level of interest rates, or short-term profits, does not overly affect the very long-term prospects for most of the businesses. Long term, the economy's use of the Internet, computers, telecommunications, and advances in medical treatments will expand. The only question is what this rate of growth will be.

Many of you have a portion of your investments in high-tech stocks. A month ago, the average market participant thought that, in general, companies in these businesses were worth 50 percent more than they are today.

Now I sympathize with your pain. But the question you need to ask is, if you were motivated to purchase or hold onto these stocks a month ago, why should you sell today?

There really isn't a good reason.

Your Portfolio

If you have been following the investment suggestions outlined weekly in this column, you probably are holding a well-diversified portfolio that is not in too bad of a shape.

At mPower, we thoroughly analyze the stocks in the funds that we recommend, to make sure that there is not an abundance of exposure in any one sector, particularly high-risk sectors such as high technology. We follow this investment philosophy to help control the risk of our clients' portfolios. We follow this investment philosophy in all economies, so that when high-tech stocks do very well, as they did in January and February of this year, the returns resulting from our recommendations lag the high-growth indexes. But, the pay off is in very volatile markets, when our results should be steadier. That's our job as an investment advisor.

However, please keep this in mind: diversification is not a sure thing. Even a well-diversified equity portfolio will lose money in about 15 percent of one-year periods. Remember, the goal of retirement investing isn't to eliminate the risk of losing money over the short term, the goal is to get you to the best place possible over your retirement horizon, taking into account your attitude about risk.

Now some of you may have not followed the diversification suggestion. If that's the case, what should you do now? Well it's not too late. If you have all of your money in the NASDAQ, accept your losses and climb aboard the diversification train.

The NASDAQ may recover entirely this week — I don't think it will, but I suspect that it might produce some good returns (it had a nice start on Monday). But, it also may continue to fall, and there is no doubt it will fluctuate wildly. Now, more than ever, is the time to achieve some balance in your portfolio.

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

By Scott Lummer
Chief Investment Officer, mPower

Editor's note: Scott Lummer is putting the finishing touches on his Alan Greenspan costume for Halloween and couldn't write a column this week. Given the NASDAQ's recent tribulations, he thought now would be a good time to revisit the column he wrote earlier this year, after the Index had suffered a ghastly drop.

From March 10 until last Friday, the NASDAQ declined by an aggregate 33 percent. Although the Dow has risen by 3 percent, and the S&P 500 has fallen 2 percent since that time, our eyes (and those of the press) tend to follow movement, and the NASDAQ has been the mover.

So the focus has been on the amount of value lost among NASDAQ stocks. Now let's spend some time focusing on two issues — what is happening with the NASDAQ and how it impacts a well-constructed portfolio.

The NASDAQ

It is not surprising what is happening with the NASDAQ in terms of a general trend. At the beginning of the year I said that we would likely experience heightened volatility and lower returns for the NASDAQ, although the degree of this volatility could not be anticipated. The index is primarily comprised of smaller companies and larger businesses in the computer, Internet, telecom, and biotechnology sectors. Some of the larger companies in these industries are Cisco Systems, Microsoft, MCI Worldcom, Dell, Amazon.com, and Amgen, Inc.

These companies tend to be riskier — many of them are currently generating operating losses — but the expectation is that high revenue growth will make them profitable. For companies that are currently generating earnings, analysts still tend to focus on their long-term future instead of present fundamentals. The long-term prospects for profits of high-growth companies are based on a myriad of factors, including long-term economic outlook, demographic changes, expectations of technological advances, competitive landscape, and individual company operations.

Trying to assess the value of these firms is much more difficult then valuing, say, a utility. A company with relatively low growth prospects will have its value based on recent- and near-term earnings, because the long-term expectations will not be widely different than the short-term. And, short-term earnings are much easier to predict than the long-term earnings of an Amazon or an Amgen.

Since the valuation of high-technology companies is difficult and imprecise, it is reasonable to expect that changes in any of the valuation assumptions will have a dramatic impact on a stock's price. So, given the events of the past few weeks, during which we have seen a reduction in revenue forecasts, an increase in inflation, a likely related increase in interest rates, and a possible major operational shake-up of the largest software developer forced by the government, estimated valuations will swing widely. And, although the impact of these changes will be felt by businesses with a lower reliance on technology, their reactions will be muted.

A Reality Check

But let's step back from the turmoil over the past five weeks and consider some basic questions.

I have read more analyses of the economy than I care to admit. No analyst I have seen is predicting that these high-tech industries will not be viable and successful. The current level of interest rates, or short-term profits, does not overly affect the very long-term prospects for most of the businesses. Long term, the economy's use of the Internet, computers, telecommunications, and advances in medical treatments will expand. The only question is what this rate of growth will be.

Many of you have a portion of your investments in high-tech stocks. A month ago, the average market participant thought that, in general, companies in these businesses were worth 50 percent more than they are today.

Now I sympathize with your pain. But the question you need to ask is, if you were motivated to purchase or hold onto these stocks a month ago, why should you sell today?

There really isn't a good reason.

Your Portfolio

If you have been following the investment suggestions outlined weekly in this column, you probably are holding a well-diversified portfolio that is not in too bad of a shape.

At mPower, we thoroughly analyze the stocks in the funds that we recommend, to make sure that there is not an abundance of exposure in any one sector, particularly high-risk sectors such as high technology. We follow this investment philosophy to help control the risk of our clients' portfolios. We follow this investment philosophy in all economies, so that when high-tech stocks do very well, as they did in January and February of this year, the returns resulting from our recommendations lag the high-growth indexes. But, the pay off is in very volatile markets, when our results should be steadier. That's our job as an investment advisor.

However, please keep this in mind: diversification is not a sure thing. Even a well-diversified equity portfolio will lose money in about 15 percent of one-year periods. Remember, the goal of retirement investing isn't to eliminate the risk of losing money over the short term, the goal is to get you to the best place possible over your retirement horizon, taking into account your attitude about risk.

Now some of you may have not followed the diversification suggestion. If that's the case, what should you do now? Well it's not too late. If you have all of your money in the NASDAQ, accept your losses and climb aboard the diversification train.

The NASDAQ may recover entirely this week — I don't think it will, but I suspect that it might produce some good returns (it had a nice start on Monday). But, it also may continue to fall, and there is no doubt it will fluctuate wildly. Now, more than ever, is the time to achieve some balance in your portfolio.

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.