The Experts
| Lummer's Logic |
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| Nas-blachhh 2: The Sequel
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By Scott Lummer
Chief Investment Officer, mPower |
March 13, 2001
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
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:
- Diversify broadly. This statement might have
seemed passý a year ago, but I believed and preached it then, and nothing has caused me
to change my mind.
- 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.
- 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.
 Lummer's Logic Archives
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
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