The Year of Living Dangerously: Coping with the Nasdaq
Aug 7, 2000

When the Nasdaq fell resoundingly earlier this year, it was with a suddenness that chilled the blood. In March, the technology-laden index stood triumphantly atop the 5000-mark; but then, in a matter of weeks, it lost more than one-third of its value. At its worst point, in May, the Nasdaq had fallen below the 3200-level and anguished investors could see no end to the rout.

As the tech stocks tumbled around her, Sylvia looked at her portfolio and winced. Her technology holdings lay in tatters -- the staggering gains of the past few months had all but evaporated, leaving her with a ragtag collection of profitless dot-coms.

But all was not lost. Other components of her portfolio had held up reasonably well in contrast to the carnage in the tech sector. Not long ago, there were those who argued that the advent of the New Economy had doomed old financial strategies. A well-diversified portfolio, in this view, was inferior to one that specialized in a particular sector (technology, of course), and those who continued to do things the old-fashioned way ran the risk of missing out on some spectacular (and seemingly assured) gains.

But Sylvia, dubious about the claims of the New Economy purveyors, had continued to invest in a diversified portfolio. True, she had picked up a few technology stocks, but the bulk of her holdings encompassed broad segments of the financial universe, from small-cap U.S. stocks to mutual funds that invested in Asia. Even the much-maligned value stocks found a place in her portfolio. All of which, Sylvia noted with relief, served to cushion her losses during the dot-com debacle.

The March-May rout of the Nasdaq had revealed the perils of investing solely in one sector. Those lured by the siren song of the dot-coms paid dearly. Tales of fabulous fortunes made, which used to fill the glowing pages of magazines, now were replaced by stories of paradise lost. Silicon Valley denizens, who once eyed their company's stock options as the key to untold wealth, lavish lifestyles and retirement at 30, have reportedly become less sanguine about such prospects.

In June, the Nasdaq made a comeback of sorts, rising rather sharply to end the month near the 4000-mark. Since then, its recovery has stalled, with the index becoming markedly volatile and unable to post any sustained advance.

As investors seek to build their portfolios anew, will technology's beacon shine less brightly? Or, will investors, once again enthralled by the New Economy, load up on tech stocks?

Variety, William Cowper had said, is the very spice of life. An adage, thought Sylvia, that might very well apply to portfolios.