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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
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:
- Buy low.
- Sell high.
- 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).
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.
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