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Jewish World Review March 16, 2001 / 21 Adar, 5761

MARY DEIBEL

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Consumer Reports


What's an investor to do these days?

http://www.jewishworldreview.com -- "RISK" is a four-letter word investors are learning to live with after years of seeing the stock market go up, up, up.

Having bought the New Economy notion that what matters is a company's promise, not its profits, investors sent the technology-heavy Nasdaq index sky-high only to have it plunge 60 percent in the last year.

The Dow Jones blue-chip average that got updated last year by shedding Old Economy stock is off, too, and the nation's broadest measure of stock value - the Standard & Poor's Index of 500 stocks - has lost more than 20 percent of its value over the last year and is officially in bear territory.

Q - What's an investor to do?

A- For starters, figure whether you were investing or speculating.

People who bought high-flying tech stocks at the peak had plenty of warning things were overblown, but those who rode the tech rocket up shouldn't feel destitute if they're ahead of where they started.

Second, if you don't invest through a 401(k) plan or other tax-sheltered retirement account up to the maximum your employer will match, you should. David Wray of the 401(k)/Profit Sharing Council notes the average employee puts 7 percent of pay in these accounts with the average employer adding 3.3 percent for an instant return of 47 percent before you invest a cent. That's better than the 20 percent-a-year returns of the 1990s.

Q - I loved seeing my worth rise on paper during the '90s, but I hate seeing my stocks lose. What if I don't have the time, interest or skill to manage them?

A- It's time to learn, if only that you're as likely to win the lottery as to beat the market long-term and that double-digit returns aren't the norm and no substitute for strategy to serve your long-term financial goals.

If you don't have the time or inclination to make the market your life's work, remember that most experts over time don't outperform the market, says Burton Malkiel in a landmark book, "A Random Walk Down Wall Street."

That's why some investors stick with the Standard & Poor's index fund or other mutual funds that mirror the market.

Q - What if I don't want an index fund but like individual stocks?

A - Pick stock in companies you know are well-run and have a future, but don't put your proverbial nest egg in one basket.

When Malkiel's book first appeared in 1973, a basket of 20 stocks was sufficient to spread investor risk. But a new Journal of Finance study Malkiel did with John Campbell, Martin Lettau and Yexiano Xu suggests recent volatility of individual stocks requires up to 40 stocks for diversification's sake.

Also, diversification means your holdings should be spread across market sectors: Shareholders of America Online, Cisco and Microsoft loved them on the way up but hate it now if that's all they have in their portfolio.

Tech stocks also are what's hurting the Standard & Poor's index fund. Seven of the 11 S&P sectors actually have gained since the S&P's peak last March with utilities, transportation and health care leading the way. "A lot of Old Economy stocks have done well," says Morgan Stanley Dean Witter strategist Byron Wien.

Q - How long will the bear market last?

A - Nobody knows. Not counting the current downturn, the Standard & Poor's index fell 20 percent or better nine times since 1950, the last time in 1990 when it took five months for the S&P to get its bullishness back.

The Dow took 91 years to break 2,000, only to be hit 10 months later with a 508-point crash on Oct. 19, 1987, that sent the blue-chip average skidding 22.6 percent. Nineteen months later, the Dow recouped those losses and resumed its climb to above 10,000, where it remains today.

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