The Greatest Show on Earth

By Scott Lummer
Chief Investment Officer, mPower

I always wanted to be a circus performer. In fact, I've watched with envy as my two children swung on a trapeze. Unfortunately, I have a physical condition that prevents me from engaging in such activity — it's called cowardice.

This week I will perform the death-defying feat of answering three e-mails simultaneously. Please hold your applause until the end, as concentration is vital.

The first question:

I'm heavily invested in two NASDAQ funds but also have some money in two large-cap funds. I can live with the volatility (of the NASDAQ funds), and the risk excites me because of the possibility of excellent returns. My horizon is 10 to 15 years. Am I kidding myself? I'm willing to stay this course and get more conservative at the end of the race.

Technical Terms Dow Jones Industrial Average (DJIA) NASDAQ Risk

And number two:

I hold some shares of a banking stock that is listed on the NASDAQ. Yet, the behavior of this stock is somewhat opposite to NASDAQ's. Why?

And finally, the third:

With all the wild fluctuations in the stock market now, what arguments could I use to convince my employees that they should buy into our 401(k) program and sign up now? Would you recommend increasing my contribution or should I hold tight for now and wait for a better market?

The "Best" Market

One should always wait to invest in the best market possible. The problem is, no one really knows when that best market will be. Many investors were convinced that it had arrived early this year, when the Dow Jones Industrial Average and NASDAQ were at record highs coming off an impressive five-year run of strong returns. In a matter of weeks, they were proven wrong. In early 1994, I spoke at a conference of brokers, and one gentleman criticized me for suggesting investors put money in stocks during such a bad market — the Dow was at 3,500 then.

Because we really don't know when a better market will be, I always advise to never put off until tomorrow what you can do today (my wife always laughs when I say that). Develop a plan for your investing future — read A Simple Plan for a straightforward approach — and start implementing that plan now.

How Much Should You Invest?

If you can increase your contribution to your 401(k), you should. You can use retirement calculators, including mPower's 401(k)alculator, to estimate how much you need to invest to reach your goal. But, all retirement calculators make simplifying assumptions that may or may not come true. The only true certainty is that the more you invest, the more you will have in retirement and the higher the likelihood that you will reach your goal.

No Guts, No NASDAQ

Now, as far as where you should invest, the asker of the first question has the right philosophy but perhaps the wrong tactics. If you have a long time horizon, as most of you do, you should be willing to accept risk. But, accepting risk in your portfolio does not guarantee superior returns. For example, shares of a single stock (with average risk) will be about three times as volatile as a portfolio of stocks with similar risk. Yet, the anticipated return of the single stock and the portfolio will be the same.

Yes, the NASDAQ definitely has more risk than the average portfolio of stocks from the S&P 500. The reason is that the NASDAQ has disproportionately more small-company stocks and high-tech stocks, which are more volatile than most other securities. The NASDAQ has other types of stocks, such as the banking stock mentioned above, but just because a stock is listed on the NASDAQ doesn't mean it will act like other NASDAQ stocks.

Related Reading A Simple Plan What Every Investor Should Know about High-tech Nas-blachhh

And that's good. The fact that there are financial stocks, energy stocks, and health care stocks in the NASDAQ holds down the volatility. If it contained only tech stocks, the NASDAQ would be even more risky than it is already.

However, even with these diversifying stocks, the NASDAQ is still volatile. And that is why it is too risky to put a majority of your 401(k) money in the NASDAQ. It's reasonable to hold up to 25 percent of your money in smaller-capitalization stocks, like the ones that dominate the NASDAQ, but a much larger portion than that adds too much risk relative to the potential extra return you might earn.

So, there it is — I hope you liked the show. In a future column, I hope to juggle 11 asset classes while standing on one foot. 

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 Greatest Show on Earth

By Scott Lummer
Chief Investment Officer, mPower

I always wanted to be a circus performer. In fact, I've watched with envy as my two children swung on a trapeze. Unfortunately, I have a physical condition that prevents me from engaging in such activity — it's called cowardice.

This week I will perform the death-defying feat of answering three e-mails simultaneously. Please hold your applause until the end, as concentration is vital.

The first question:

I'm heavily invested in two NASDAQ funds but also have some money in two large-cap funds. I can live with the volatility (of the NASDAQ funds), and the risk excites me because of the possibility of excellent returns. My horizon is 10 to 15 years. Am I kidding myself? I'm willing to stay this course and get more conservative at the end of the race.

Technical Terms Dow Jones Industrial Average (DJIA) NASDAQ Risk

And number two:

I hold some shares of a banking stock that is listed on the NASDAQ. Yet, the behavior of this stock is somewhat opposite to NASDAQ's. Why?

And finally, the third:

With all the wild fluctuations in the stock market now, what arguments could I use to convince my employees that they should buy into our 401(k) program and sign up now? Would you recommend increasing my contribution or should I hold tight for now and wait for a better market?

The "Best" Market

One should always wait to invest in the best market possible. The problem is, no one really knows when that best market will be. Many investors were convinced that it had arrived early this year, when the Dow Jones Industrial Average and NASDAQ were at record highs coming off an impressive five-year run of strong returns. In a matter of weeks, they were proven wrong. In early 1994, I spoke at a conference of brokers, and one gentleman criticized me for suggesting investors put money in stocks during such a bad market — the Dow was at 3,500 then.

Because we really don't know when a better market will be, I always advise to never put off until tomorrow what you can do today (my wife always laughs when I say that). Develop a plan for your investing future — read A Simple Plan for a straightforward approach — and start implementing that plan now.

How Much Should You Invest?

If you can increase your contribution to your 401(k), you should. You can use retirement calculators, including mPower's 401(k)alculator, to estimate how much you need to invest to reach your goal. But, all retirement calculators make simplifying assumptions that may or may not come true. The only true certainty is that the more you invest, the more you will have in retirement and the higher the likelihood that you will reach your goal.

No Guts, No NASDAQ

Now, as far as where you should invest, the asker of the first question has the right philosophy but perhaps the wrong tactics. If you have a long time horizon, as most of you do, you should be willing to accept risk. But, accepting risk in your portfolio does not guarantee superior returns. For example, shares of a single stock (with average risk) will be about three times as volatile as a portfolio of stocks with similar risk. Yet, the anticipated return of the single stock and the portfolio will be the same.

Yes, the NASDAQ definitely has more risk than the average portfolio of stocks from the S&P 500. The reason is that the NASDAQ has disproportionately more small-company stocks and high-tech stocks, which are more volatile than most other securities. The NASDAQ has other types of stocks, such as the banking stock mentioned above, but just because a stock is listed on the NASDAQ doesn't mean it will act like other NASDAQ stocks.

Related Reading A Simple Plan What Every Investor Should Know about High-tech Nas-blachhh

And that's good. The fact that there are financial stocks, energy stocks, and health care stocks in the NASDAQ holds down the volatility. If it contained only tech stocks, the NASDAQ would be even more risky than it is already.

However, even with these diversifying stocks, the NASDAQ is still volatile. And that is why it is too risky to put a majority of your 401(k) money in the NASDAQ. It's reasonable to hold up to 25 percent of your money in smaller-capitalization stocks, like the ones that dominate the NASDAQ, but a much larger portion than that adds too much risk relative to the potential extra return you might earn.

So, there it is — I hope you liked the show. In a future column, I hope to juggle 11 asset classes while standing on one foot. 

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.