Advertisement
YOU ARE HERE: LAT HomeCollectionsFixme

QUARTERLY INVESTMENT OUTLOOK AND FUND REVIEW

Time for a New Hand?

With the Stock Market Leaving the '90s Behind, Investors Need to Rethink Strategy

October 09, 2000|JOSH FRIEDMAN and TOM PETRUNO | TIMES STAFF WRITERS

When Duke Energy shares are whipping Cisco Systems and the three main U.S. stock indexes are in the red for the year, you know you're in a brand-new market game.

A new game often means learning to play by different rules. And that may be the key challenge for many investors in a market where neither the bulls nor the bears seem to have a convincing hand.

Consider: If you had known at the start of this year that the Dow Jones industrial average would be down 6.3% through the third quarter and the Nasdaq composite index would be down nearly 10%, you might have figured it would be a good year to stay out of stocks altogether.

Yet the average domestic equity mutual fund was up 6.3% through the third quarter, according to fund tracker Morningstar Inc. And returns in many market sectors--including mid-size stocks, health care, natural resources and utilities--have been more than generous.

If this is a bear market, plenty of investors must be happy to be a part of it.

For others, however, 2000 has marked the end of a spectacular winning streak that began in 1995. The blue-chip Standard & Poor's 500 index is down this year after five straight years of 20%-plus total returns.

And a big reason for the S&P's slump is the slide in giant technology stocks that had ruled the market in the late '90s. Those shares plummeted again last week on growing worries about their sales and earnings prospects, reducing the average technology stock mutual fund's year-to-date return from a positive 3.0% at the end of the third quarter to a negative 5.7% by Friday, according to Morningstar.

Aggressive technology investors who early this year mocked the idea of keeping some of their money in something as pedestrian as a municipal bond mutual fund may be reconsidering now: The average California long-term muni bond fund has produced a return of 8.1% so far this year, which beats most stock funds.

The general idea of portfolio diversification isn't novel, of course. But it may be so for people who coasted along in recent years without focusing on how their investment mix was being changed by the market's moves.

Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School, said that, although the '80s and '90s explosion in mutual funds has, by definition, brought about more diversification for investors, "The trend in the last five years has been toward more concentration--perhaps too much--thanks to the big ride in technology and a reluctance to realize taxable gains."

Abiding by basic diversification rules can raise the odds that you'll always have some element of your portfolio making money, and lower the odds of a catastrophic loss of capital.

Yet many small investors understandably find it boring to think in terms of classic diversification strategies--30% in this stock sector, 20% in that sector, 10% in this one, etc.

For some, there is still a feeling that diversification dilutes returns too much in exchange for supposed stability.

"I look at diversification with a bit of a jaundiced eye," said Mel Brocklehurst, a 70-year-old retiree in the High Desert community of Pinon Hills. "Technology has created a new paradigm, so it's hard to argue with those stocks" despite their volatility, he said.

One survey last year found that only 44% of 401(k) retirement-plan investors had any kind of asset allocation program.

The 'D' Word

Burned by the failure of some textbook diversification rules in the 1990s--such as the argument for owning foreign stocks--even some professionals have junked the old formulas.

"A lot of other financial planners are throwing out asset-allocation altogether," said planner LauraTarbox of Tarbox Equity in Newport Beach.

Still, planners say some investors have become more receptive to the idea of diversification this year, as forgotten market sectors have suddenly zoomed while recent stars have tumbled.

"In the past few years people were saying, 'Just give me that tech.' But the blood on the streets following Nasdaq's March peak has made the most compelling case for diversification we've seen in quite awhile," said Victoria Collins, a planner with Keller Group Investment Management in Irvine.

"Investors have been hurt, and pain always causes a little better listening," she said.

The good news, at least so far, is that some money that has come out of tech stocks and blue chips has looked for a home in non-tech stocks and smaller stocks--rather than fleeing the market entirely. That has helped produce this mixed stock market.

"It's a broadening market, and more than likely these trends will continue, so it's time to throttle back, to add a little more non-tech" to one's portfolio, said Marshall Acuff, equity strategist at brokerage Salomon Smith Barney.

"Once the Internet bubble burst, people started thinking about the prices they are paying [for stocks]," he said. Still, "I wouldn't rush out and buy steel stocks," Acuff said. "I'd still look for growth stocks, but growth at a reasonable price."

Advertisement
Los Angeles Times Articles
|
|
|