A few weeks ago, I suggested here that those who had racked up big wins in tech stocks should lighten up on their precious juggernauts to preserve what they had made. Lighten up, not sell out. Remove some risk, not quit the game. The e-mail response was vitriolic. How could I be so dumb? What would I recommend next, mining stocks? No. But how about a tutorial in market risk? In case you don't remember: the NASDAQ got creamed last week, providing our course materials.
Here's the essence of it, gang: stocks that soar can also plummet. Sure, in the long run, high risk usually means high reward, and the techs could climb anew. But the long run can be long indeed, and if you hold only a few stocks, there are no guarantees. You could be wiped out. Even if you own a basket of tech stocks, your nest egg could drop 50% or more in the time it takes to order that new BMW. Spreading investments across asset classes reduces such risk and looks dumb only to the tech cultists.
The flip side of high risk--assuming too little of it--is equally dangerous. That's been clear enough over the past few years to anyone who is mainly in bonds or old-economy value stocks like Philip Morris and Good-year Tire. Quite simply, they were left in the tech dust. Ask Julian Robertson, the famed Tiger Management boss who held fast to his value style until time ran out. Last week Robertson, whose assets had dwindled, to about $6 billion from $21 billion in 1998, gave up and quit. The question is, Is it too late to jump on the tech train?
Too late for Robertson but not for you. Tech stocks are roughly 30% of the total market, and that's a good ration for your portfolio. The critical consideration, though, is that by beefing up now you are layering on risk just when safer value stocks may be coming back into favor. But don't let that stop you, at least not if your goal is long-term savings with an all-weather portfolio that you need to check and rebalance only once a year.
I recently sat in on a troubled saver's discussions with Schwab investment specialist Terence McNamara in New York City. The client, whom I'll call Mr. Value, has had nearly all his assets in conservative stock funds for three years. In a recent 12-month run, he actually lost money. Tough stuff in a roaring bull market.
Well, Mr. Value decided it was time to get in the game. First, McNamara tested his risk tolerance with a series of questions. Mr. Value's answers revealed him to be, no shock, intimidated by the market and concerned most about not losing money. Yet Mr. Value was insisting on an all-stock portfolio with broad exposure to tech--a challenging contradiction that every investor should explore within. Do your stocks suit your risk tolerance?
In the end, Mr. Value (in his 40s) rightly signed on for more risk, though less than he wanted at first. His worthy goal: equal parts value and growth; a roughly equal mix of small, large and international stocks totaling 80% of his portfolio; 15% in bonds and 5% in cash. To keep costs down and take on risk slowly, he's going to exchange funds in tax-deferred accounts immediately, getting partway to his goal. He will finish the job during the next 12 months as he invests new money. The best part: with a plan in place, he's already sleeping at night.