Which is likely to be more accurate, John Crudele's viewpoint or Jonathan Chevreau's, whose article is included here for the sake of balance...?

Thursday, January 06, 2000

Tough decisions after Y2Kraziness

Jonathan Chevreau
Financial Post

Investors who experienced "cybergeddon interruptus" last week now have some hard decisions to make.

If nothing else, the apparently smooth century roll-over reinforced several basic lessons investors should have committed to memory by now.

First and foremost among these are that it's impossible to time the market. Second, and closely related, is the old platitude that the real risk of the stock market is being out of it just as it begins to soar.

Certainly the possibility of a real technological catastrophe occurring on a precisely known date was for some -- myself included -- an almost irresistible temptation to indulge in market timing. Having succumbed to it, we encounter lesson three. There are two problems with market timing: when to leave the market and when to get back in.

The simple answer, posted on a few of the popular Web-based discussion forums, is to return to your original strategic asset allocation. If your asset mix prior to succumbing to millennial madness was, for example, 60% stocks, 30% bonds and 10% cash and you had underweighted equities, then it's clear that some bonds and cash should be deployed to buy stocks, getting your mix back up to your prior allocation.

The problem, of course, is that juxtaposed with the Y2K insanity of the last few months has been a different sort of madness -- the outlandish valuations accorded to (mostly) U.S. technology stocks and particularly the out-of-this world valuations on the "rocket chips" trading on what Equion Group's Stephen Gadsden terms the "NASA-daq" exchange.

Yet another classic investing dilemma arises for the investor contemplating re-entering the market early this year: Do you invest in one fell swoop or gradually through a dollar cost averaging approach? Historically, most investment advisors have suggested reinvesting completely at once --waiting for the next catastrophic event down the road is just another form of market timing.

It's arguable the original feared event of the mother of all computer glitches isn't quite over, of course. Some may argue we aren't out of the woods yet, but I don't agree. For all intents and purposes, the problem has been licked, as Peter de Jager declared last March in his "Doomsday Avoided" essay. And yet, other Y2K pundits continue to backpedal, declaring we now have to wait till the end of January or the Feb. 29 leap year date.

Well, fool me once, shame on you. Fool me twice, shame on me. We heard this song and dance applied to the Aug. 22 global positioning date and then the Sept. 9, 1999, milestone. I don't buy it any more.

The whole scare about Y2K was about multiple computer problems happening around the world simultaneously. Sure, there will be thousands of minor glitches over the next year. But we'll hear about very few of them and they will happen at different points in time -- not the feared single moment of simultaneous failures.

There will be some effects showing up in earnings statements in the first two quarters. A more ironic impact may be that the U.S. federal reserve pumped in almost $200-billion (US) in liquidity to forestall problems.

Now that the iceberg has been melted, the U.S. Federal Reserve may sop up some of that liquidity and start seriously addressing the credit-fuelled gambling occurring among U.S. blue- chip, technology and Internet issues.

Rather than jump holus bolus into an overvalued Nasdaq exchange or technology fund, a better approach might be to buy select large-cap value funds that are diversified geographically.

Our old friend, the Rip Van Winkle two-fund portfolio, is one possible approach: A low-MER balanced fund for the Canadian content lets the managers worry about asset mix, while a value-based global equity fund for foreign content lets another manager worry about relative valuations among different countries.

Despite the trend to low-MER index funds, I suspect the investors who fared best the past year were those with traditional load mutual funds sold by financial advisors. If those advisors counselled you to hold the course during the "Y2Kraziness," they more than earned their fees.

Therein lies another lesson: the more risk you shoulder, the greater the reward. Personally, I viewed the combined overvaluation of the Nasdaq and the onrushing century change as an unacceptable level of combined risk.

Those who remained invested were well-rewarded. Fund managers hung in to the bitter end in part to provide window dressing to their portfolios; individuals may have been reluctant to trigger capital gains and pay taxes.

This week's sell-off on major indices might have been profit-taking by investors who had chosen to defer capital gains taxes by another year. But in the view of financial planners who were formerly Y2K bears, like Mr. Gadsden, it's an opportunity to get back into the market at decent prices.

Next: Reinvesting in value funds

[ENDS]

-- John Whitley (jwhitley@inforamp.net), January 07, 2000