TCS Daily


America's a Safe Bet

By James K. Glassman - March 19, 2004 12:00 AM

Last week marked an anniversary most investors would rather forget. On March 10, 2000, the Nasdaq composite index hit a high of 5049. The high for the benchmark Standard & Poor's 500-stock index came two weeks later at 1527. Despite strong rallies last year, the Nasdaq is 61 percent off its high; the S&P, 27 percent.

Those were heady days in the spring of 2000. Bill Clinton was president, riding an unprecedented boom -- nine years straight of economic growth. Enron Corp. was a high-tech energy firm that had just won Fortune's "most-admired company" award. Priceline.com was trading at $567 a share (adjusted for splits); it is now $22. Hardly anyone had heard of Osama bin Laden. The twin towers at the south end of Manhattan were standing.

The most important lesson on this miserable anniversary is, don't put all your eggs in one basket. Most investors who got crushed in the avalanche of 2000-02 had bet heavily on high technology. Some were addicts, hooked on pleasure and fear, but many simply forgot the importance of balance in their financial lives.

A sensible portfolio tries to look like the economy. Certainly you need high-tech stocks, but you also need tried-and-true consumer companies, financials, transports, natural resources, real estate. Sometimes -- as in 2003 -- these stocks move in lockstep. But more frequently, some sectors will rise while others fall. Over time, you get a smoother and more productive ride.

Today, my suspicion is that too many Americans hold too few tech stocks, especially the large-caps that were pummeled in the years after the bubble burst. Technology represents 15 to 20 percent of the economy. If you have sworn off tech because of what happened between 2000 and 2002, you're making a big mistake. It's unlikely that the Nasdaq will rise 50 percent this year, the way it did in 2003, but technology is here to stay. In fact, companies that survived the bust are stronger than ever, with much more powerful market positions since their weakling competitors have gone broke.

John Buckingham, editor of the Prudent Speculator, the top-performing stock-picking newsletter over the past 10 years, is currently recommending Advanced Micro Devices Inc. (AMD), which has more than quadrupled since late 1992 but is still down by two-thirds from its high; Apple Computer Inc. (AAPL), whose new retail stores appear to be a major success; and money-losing 3Com Corp. (COMS), which makes voice and data networking products and just entered into an important joint venture in China.

It's important, as well, to own much smaller companies. While the Dow and S&P are still well below their highs, the Wilshire Micro Cap Index recently broke its all-time record. Through the first week in March, it was up 119 percent over 12 months. I am not urging you to load up on micro-caps (that is, companies with a market capitalization -- number of shares times price per share -- of less than about $300 million); I am, however, saying that a portfolio without them doesn't reflect the economy, much less the market.

One way to buy the market is to own a mutual fund like Vanguard Total Stock Market Index (VTSMX), which reflects the movement of the Wilshire 5000, an index that includes every stock listed on the New York and American stock exchanges and the Nasdaq Stock Market (actually, there are about 8,000 such companies). The fund carries no load, charges annual expenses of only 0.2 percent (20 basis points) and requires a minimum investment of $3,000.

The S&P 500, which is considered shorthand for the market, comprises the 500 largest companies -- which do, in fact, account for about four-fifths of the market's overall value in dollars. But while small stocks have outperformed large in recent years, Vanguard's Total Stock Market fund has returned an annual average of 0.6 percent (through Tuesday) while its 500 Index fund (VFINX), the world's most popular mutual fund of any kind, has lost an annual average of 0.9 percent.

Don't expect the Wilshire to beat the S&P all the time, but understand that the two are different.

A second lesson is to keep buying, even when it hurts. If you purchase stocks consistently -- through, for example, monthly or quarterly deductions from your pay or simply through a lump-sum purchase every year -- then when a company or mutual fund falls in price, you end up buying more shares. In the long run, stocks go up; not each and every stock, of course, but it is reasonable to count on the value of a stock portfolio rising by an annual 10 percent over, say, a decade. The broad market has shown a profit in all 64 10-year periods since 1931, and in 39 of those periods, the gains have averaged 10 percent or more annually.

In a falling market, it makes sense to keep buying. I am not saying you should keep purchasing shares -- or "averaging down," as it's called -- in the stock of a company that is having terrible problems. But consistently buying stock in the S&P 500 or the Wilshire 5000 -- that is, in the U.S. economy -- has been a bet that has nearly always paid off handsomely.

James K. Glassman recently wrote for TCS about "The Two Faces of Lou Dobbs."


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