Comfort Zone Investing: What to buy, what to sell

I read an article that was explaining some of the credit problems financial institutions have. It went into the mortgage mess, the concerns for coming credit card collections and home equity loans. It was good and helpful to anyone interested in knowing more about potential problems for banks and thrifts. Then I read one of the reader's replies: More big picture stuff, just tell me what to buy tomorrow morning.

This one reader speaks for many others. Every investor would love to know what to buy now. They just want the name of a stock that will go up. And they don' want to have to research it or know anything else about it. Just a name. Give me a name. Ah, if it were that easy.

But it's not. No one can give you the name of a stock that will positively go up in the morning. That's impossible. Even a name of a stock that will go up over time isn't available. Because no one can foretell the future. Furthermore, what might be the right name for the writer may be the absolutely wrong name for the reader. Why? Because both will have different circumstances, different risk profiles, different needs.

So I'm going to help all investors who want to know what to buy and what to sell. As Will Rogers said: Buy the stocks that are going up. If they don't go up, don't buy them. But seriously folks, here's what you might consider buying and/or selling for investing, not trading.

If you're conservative and want to preserve your capital as the paramount reason for investing and you have no tolerance for risk: sell or don't buy the financial stocks. Sell the technology stocks. Buy defensive stocks such as consumables (KO, PEP, PG, CL) and drug makers (MRK, PFE, LLY, ABT). Of course, you don't just go out and buy those. You need to research each one to determine if you're comfortable in owning it. If you want income, check the dividend and make sure it's not taking up too much of the earnings to pay so you've got a fairly safe bet that you'll keep getting the quarterly payment.

If you're more risk oriented and don't mind losing some of your capital with the chance that you could make a lot more, then reverse the above. Buy a little of many different financials. Sell the defensive stocks. You'll have more volatility in your portfolio and need to have a strong stomach to ride the crashes and rockets that these investments entail. But you'll make a lot of money if you can hang on and see how all of this credit mess resolves. Some of the financials you buy will not make it. Some will be merged. Some will finally pull out victorious and reward investors with very high returns. Which ones? No one knows. But if you have enough of them, you'll find out.

One more thing: when an investors such as the writer who just wanted to know what to buy acts on stock recommendations without research, they never have anyone to tell them when to sell. Be smarter than that. Look for good ideas. Research each one before you buy.

Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

Six keys to successful investing

By Dianne H. Webster

A successful investor maximizes gains and minimizes losses. Sounds simple, but how does one do it? Here are some basic practices to keep in mind in good markets and bad.

• Compounding. Compounding pays earnings on your reinvested earnings. It's the "snowball effect." The longer you keep your money working for you, with dividends and capital gains reinvested, the better. And more, if your investments are growing in a tax-deferred retirement account, you are paying no taxes on those earnings. Let time work in your favor, and worry less about figuring out when to jump in and out of the market.
• Stay invested for the long-term. The capital markets can be volatile, so remember to invest only what you can put aside for the long-term. Be prepared to ride out the inevitable downward cycles. Remember also that during any given period, the value of some assets will go down while others go up. Past performance does not predict future results, but keeping a variety of asset classes minimizes overall risk.
• Spread the wealth. Asset allocation means dispersing your money over several categories of assets, including stocks, bonds, cash, real estate, insurance and even collectibles. Even within each asset category, there are numerous sub-categories such as growth stocks, value stocks, international investments and government securities. It's smart to divide up your investment dollars between assets that respond differently to market forces.
• Maintain liquidity. In general, keep money in cash when you expect to need it in the short term (one to three years), such as to pay a tuition bill or to purchase a new car. "Cash" means a savings account, CD or money market. Your rate of return may be relatively low, but it is worth knowing that your money is quickly available without concern over market conditions.
• Dollar cost averaging. This is a method of accumulating shares by purchasing a fixed dollar amount at regularly scheduled intervals over a long period of time. When the price is high, your fixed dollar amount buys fewer shares, but when prices are low the same amount buys more shares. Remember that dollar cost averaging does not guarantee a profit or protect you against a loss, so you should consider your ability to keep investing when the market is down.
• Review your plan. Your long-term success will depend on regularly reviewing it. Consider changes in the economy, the market and your personal situation. Over time, your asset allocation will change and the portfolio will need to be rebalanced to stay on track with your plan. Rebalancing restores your portfolio to the original planned allocation. You might consider rebalancing every year or whenever you notice a major shift in the overall mix.

Dianne Webster is a registered investment adviser with Integrated Financial Strategies LLC of Amesbury.

The Morgan Stanley Capital International Europe, Australia, Asia, and Far East (EAFE) Index

The Morgan Stanley Capital International Europe, Australia, Asia, and Far East (EAFE) Index, considered one of the more prominent, tracks more than 1,000 foreign stocks in 20 countries. This is the big daddy for international investors and money managers. It tells you how the international stock market is faring, and if you own stock or a mutual fund that invests globally, how you’re doing in comparison.

Analyst encourages long-term investing

By Don Worthington
Aijit Dayal said he would return to his native India when he fell prey to American consumerism.

As he left his New York City office one day in the summer of 1984, he wanted to make a long-distance call to India and bill it to a different number. The operator told him the phone company no longer offered that service.

“I was angry,” Dayal said. “‘What do you mean I can’t do this? It’s my birthright.’”

He realized it was time to move back to India or forever stay in America.

He returned to a country that lacked a consumer economy. Buying a car or getting telephone service was a three-year process.

“It was a time warp,” he said.

Twenty-four years later, India is one of the world’s emerging economies, one ripe with investment opportunities. Cell phones are selling at a rate of 8million per month.

Dayal spoke at Tuesday’s Stock Market Symposium sponsored by The Center for Entrepreneurship at Methodist University.

He holds a master’s degree in business administration from the University of North Carolina at Chapel Hill. He has analyzed the Indian equity market since his return — he is possibly India’s first equity analyst. He is the founder of Quantum Advisors, an Indian firm that deals with institutional investors.

He talked about risk and benefits in investing, as well as investing for the long term.

“The wisest thing to do is buy something and hold onto it — just like a marriage. Stocks are very, very similar,” he said.

Dayal said investing is not as simple as putting a formula in a spreadsheet and dragging the mouse to the right. It requires the right mix of assets and the “right time horizon” — investor-speak for patience.

He cited the rise and fall of technology firms in the United States. People rushed to invest in those firms rather than investing in emerging firms overseas.

Had investors put a portion of their money into India’s emerging economy, they would have seen a 15 percent return on their investment.

He cautioned people against investing in “frontier” markets, areas of the world that lack a financial network such as North Africa, Mongolia and Vietnam. The risk is tremendous in those countries, he said.

Emerging markets that have successfully proven themselves include India, Mexico, Brazil and China, he said.

Dayal said people’s fears that the outsourcing of jobs to India hurts the American economy are overstated. The growth in the Indian economy will come from its own consumer focus.

The American economy, Dayal added, “has the ability to re-engineer itself” when resolving crises.

The secret, Dayal said, to surviving the bubbles and the burst is “keeping your head” and investing for the long term.

Business editor Don Worthington can be reached at worthingtond@fayobserver.com or 486-3511.

3 Investing Mistakes You're Making Now

Every investor makes mistakes. The keys to being a great investor, however, are 1) realizing when you're doing something wrong, and 2) fixing it.

The best time to look at how you're doing with your investing is when the markets are weak. During bull markets, your portfolio will often do well no matter what you do. But that doesn't mean you're the world's best investor -- and when the inevitable downturn comes, it can reveal all sorts of problems with your investments.

So with that in mind, here are a few mistakes you may be making right now.

1. More is not better. Many investors put together their stock portfolios the same way they'd build a coin collection. Whenever they see a company that interests them, they buy a little and set it aside, hoping that eventually it'll turn into a gold mine.

These investors are particularly susceptible to hot sectors. They'll often buy overvalued stocks at exactly the worst time. For instance, Internet companies like Yahoo! (Nasdaq: YHOO) and Amazon.com (Nasdaq: AMZN) have done very well in recent years. But if you bought them in 1999 at the height of the boom, you might still be underwater on those stocks despite their strong returns lately.

It's important to have a diversified portfolio. But that doesn't mean you have to hold onto every stock you ever buy. If you're holding more than 15 stocks, you need to ask yourself three things:

* Do you believe every stock you own will outperform the average stock?
* Do you have the time to follow each company on an ongoing basis?
* Do you really like all your stocks equally well?

If the answer to any of these questions is no, then you'll likely get better results with a smaller stock portfolio.

2. You're watching your stocks too much.
When the market's sliding, it's hard to keep your eyes off the ticker feed. That leaves you vulnerable to the whims of your emotions -- in both directions. When your stocks fall, you're more likely to panic and sell at bargain-basement prices, locking in a huge loss. On the other hand, even if you've got stocks that do hold up, it can be tempting to try to lock in profits -- and potentially miss the bigger gains that come with long-term investments.

Whether you've got blue-chip holdings such as ExxonMobil (NYSE: XOM) and Wal-Mart (NYSE: WMT), or a small-cap speculative stock like Vail Resorts (NYSE: MTN), day-to-day price changes in your stocks aren't important. In fact, they're likely to distract you from what's really essential: choosing companies that will perform well over the long haul. So if you trade too much -- or even think about trading frequently -- then you owe it to yourself to take a break from your instant price quotes and take the big-picture approach.

3. Don't stop believing.
Market uncertainty can give even the most experienced investors pause. Taking a break from adding money to the market can seem like the smartest move you can make -- especially when you look at the short-term losses you would've had if you'd kept buying shares.

In the long run, however, interrupting your regular investment plan is the worst thing you can do. While it's hard to realize this when you're in the middle of a downturn, money you invest right now will have a much better long-term return than the investments you make when markets are trading at highs. Consider this: Back in 2002 hardly anyone wanted to hold oil services stocks like Schlumberger (NYSE: SLB) and Dawson Geophysical (Nasdaq: DWSN). Yet those who kept buying have been richly rewarded.

So don't stop buying stocks when the markets aren't doing well. In fact, think about upping the amount you buy to take advantage of cheap stocks.

Don't be too disappointed when you make mistakes with your investments -- it's all part of the lifelong on-the-job education you get as an investor. If you don't learn from those mistakes, though, then you'll be doomed to keep repeating them.

The Morgan Stanley Capital International Emerging Markets Index

The Morgan Stanley Capital International Emerging Markets Index looks at smaller companies that are operating in up-and-coming and also sometimes highly volatile developing markets around the world.

The Perks and Drawbacks Of Being an Investment Banker

By AJA CARMICHAEL
April 18, 2008 10:18 a.m.

The job: Investment banker

The pay: Varies by educational background and experience. A new associate hired in the first half of 2006, with an M.B.A., is expected to make around $185,000, according to Alan Johnson, managing director of Johnson Associates Inc., a pay consultancy in New York. Recent hires for analyst posts are making between $65,000 and $70,000. And an associate can rake in an annual bonus of between $70,000 and $190,000, while analysts' bonuses can range from $30,000 to $35,000, banks and recruiters say.

The hours: Long. A minimum of 70 hours a week, young bankers say.

Benefits: Standard health-care, dental, vision and prescription-drug benefits and a 401(k) plan are common. Many firms don't offer pension plans, Mr. Johnson says.

Other incentives: Can include access to the company gym and discounts on museum, sports and theater tickets. Employees working late hours may also receive car and meal services.

Career path: Most banking firms hire analysts from their company's summer internship programs. Advancement to an associate investment-banker post takes about three years.

Best part of the job: A lot of responsibility early on in a career. "Within any project I am able to be hands on," says Gregory Hersh, 23, an analyst specializing in mergers and acquisitions at Merrill Lynch & Co. in New York. "I get to see the drivers in the industry very early on."

Worst part of the job: The schedule. "I might have to work weekends, holidays and postpone trips," says Mr. Hersh, who has adjusted to the time-consuming job. "There are a lot of great challenges working for an investment bank and you have to make a lot of sacrifices with personal time."

Hiring: For further details visit www.sia.com or www.ml.com/careers.

Write to Aja Carmichael at aja.carmichael@wsj.com

The Russell 2000

The Russell 2000 is the most widely used benchmark for the smaller company market. (Other small company performance indexes include the S&P Small Cap 600, the Wilshire Small Company Growth Index, and the Wilshire Small Company Value Index.)

S&P Mid Cap 400

The S&P Mid Cap 400 index measures the performance of 400 medium-sized companies. If you’re interested in investing in mid-size companies, or mutual funds that do — and there are a number of success stories in the mid-sized range — this is a good benchmark to use to gauge your own success.

Are You a Stock Trader or a Stock Investor?

By David Goodboy | TradingMarkets.com
Trading and investing. Both sides of the same coin, right?

I wish it were that easy! Most people who own stocks ask themselves at some point, "Am I a trader, an investor, or both? And what's the difference?" I want to delve into some of the finer points of these two broad terms and allow you to choose which one fits you best.

Investing: putting your money in someone else's pocket and waiting

Let's start out by defining the terms. Investing refers to buying a stock with the hope of future gains, usually several years later. The word has its roots in the Latin "vestis," and directly relates to the idea of placing money in someone's pocket in anticipation of getting a return for the loan. The idea of having your capital or wealth working for you without any additional effort on your part comes from this classic meaning.

Investing is normally a passive activity after the initial purchase of the stock or fund.

Trading: putting your money in a bunch of pockets, and maybe a few roulette machines too

Trading, on the other hand, is an active pursuit - sometimes very active.

Trading is the buying and selling of stocks or other financial assets with the hope of making gains in a relatively short period of time. In many financial markets, you can not only buy assets that you believe will go up in value, but you can also sell assets you believe will go down in value - without even owning the assets first!

This is called short selling. And while there are a large number of traders who do not sell short, knowing and understanding short selling is important for all traders.

Short selling is the strategy of making money on the decline of an asset like a stock. By borrowing the asset from their broker, short sellers sell the asset on the open market. After the asset declines in price, the short seller buys it back and returns it to his broker, keeping the difference as profit.

Trading requires liquid markets, meaning markets with a lot of buying and selling. Trading also requires volatility, which means movement of prices up and down. The stock market is one of the most popular places for traders to trade because the stock market has a lot of liquidity and because there are a large number of stocks with the necessary volatility to make trading worthwhile.

Investing and trading are not mutually exclusive. Many traders are investors in the same markets they trade. And many traders invest their gains in less liquid markets such as real estate. You can be an investor who trades around his or her long term investment positions. You can also be a trader who invests his or her profits, developing a net worth distinct from trading.

Investing is often viewed as safer than trading. For example, many people choose to trade smaller amounts of money as a hobby, and invest larger amounts long term in a retirement fund. Investing is safer if you invest in the right stocks at the right time. But investors tend to lose money by remaining in stocks or other assets as their price declines, not selling the assets, as a trader would once those assets had started to lose money.

Invest and trade for a healthy portfolio

You should employ a combination of trading and investing in your personal portfolio. Invest your primary funds in solid, historically well - performing investments, be they stocks or funds. Consider allowing someone to manage your investment money.

At the same time, keep a portion of your capital to trade. This will allow you to take advantage of shorter term moves in the market as they develop.

Investing is a passive, normally long term endeavor. Trading is generally short term, and requires both a liquid market with lots of buying and selling, as well as assets with a higher than average volatility. For those who own stocks, both investing and trading have important roles to play.

Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.

Book Review: 'The 7 Commandments of Stock Investing'

(David Merkel)
For those that read my book reviews, let me simply say that unless I say that I skimmed a book, I read every book that I review, and I don’t use the publisher's notes to aid me, as many other reviewers do. I just give you my opinion straight, even if I didn’t like it, realizing that there will be no commissions at my Amazon Store from that review. And that is fine with me. I review new and old books. I just want to point my readers to what I think is good, and away from the bad stuff.

Anyway, onto today's book review. I am genuinely not sure what to conclude on Gene Marcial's 7 Commandments of Stock Investing. There was much that I liked, and much I did not. I know that Mr. Marcial wrote a column for Business Week for many years, but that was not something I followed closely. This is my first real introduction to his thought.

Let me take his seven principles, and go in order:

Buy Panic – Hey, I can go for that. The difficulty for average investors, and even many seasoned investors is that they buy too soon in a panic. One also has to focus on companies that are high credit quality in order to avoid big losses. That got some attention in the book, but not enough for me.

Concentrate, Diversify Not — Ugh, I like having 35 companies in my portfolio, because I concentrate industries. To the extent that you concentrate, you must have superior knowledge of the companies that you own. Without that knowledge, the average investor should diversify more, and investors with no special knowledge should buy index funds.

Buy the Losers – Again, I can go for this, but it takes a special person to separate out the companies that will crater from the companies that have a sustainable business model and will bounce. Buying quality companies is a must here, or else you can lose a lot.

Forget Timing — I agree. I keep roughly the same equity exposure all the time, and my rebalancing discipline helps protect me as well.

Follow the Insider – That’s a good principle, but I’m not sure that it should rank so highly in a set of stock picking rules. Insiders do do better than the market as a whole, but using insider purchase and sale data takes discretion to interpret.

Don’t Fear the Unknown – By this he means have some foreign equity exposure and biotechnology investments. One of my rules is, “If you can’t understand it, you won’t know how to buy and sell it.” Getting comfortable with any area of the market that is volatile takes study and effort. This is not trivial. As for biotech in particular, that takes a lot of incremental skill that I don’t have. After reading what Mr. Marcial wrote, I would not feel confident investing there.

Always Invest for the Long Term: Seven Stocks for the Next Seven Years — He employs a multi-year holding period, like I do, and then points out seven stocks that he thinks will do well. I’m not going to spoil that part of the book by mentioning any of the seven, but none of them interests me. (Well, maybe one or two at the right level.) All of them are large caps, and are quality companies.

Quibbles

Under his first principle, he recommends buying the stock of the company that you work for when it gets hammered down (page 8). Unless you are an industry expert here, be careful: You are compounding your risks, because your wage income derives from the health of the firm. Don’t put your savings there too, unless you are dead certain. (Full confession: I put one-third of my net worth on the line on my employer, The St. Paul, in March of 2000, selling in August of 2000. Great trade, but no one else in the firm knew that I did it.)

On page 62, calling Primerica the predecessor firm to Citigroup (C) is a bit of a stretch. Yes, I know how the case could be made, but there were links in the chain where the smaller company was acquired by a larger one, and the smaller company came to dominate the management of the combined firm.

Under his third principle, he favored General Motors (GM) and Ford (F). I can’t support buying such credit quality impaired investments under the rubric of “Buy the Losers.” These are two companies that will have a hard time surviving in their present forms. Motorola (MOT) would be another example. A pity there is such a lag between writing and publication.

Summary

The book is intelligently written, and is short enough for an average person to read in 4 hours (188 pages). He gives plenty of examples to illustrate his points. I wasn’t usually enthused by the companies that he chose: I prefer to go further off the beaten path, and buy them cheaper.

His basic principles are good principles to follow, but they need to be tempered by a focus on risk control. It’s one thing to serve up investment ideas as a writer; you can throw out a lot of promising ideas, and do it well. What is tough is owning the companies, and trading through their troubles. That’s a dirtier business; one where average investors will be more prone to fear and greed, and may not do so well, just because they can’t stomach the risks.

He also does not make clear how the seven principles work together. Need you follow all seven on every investment? I think that’s what he is saying.

Away from that, you can’t use his principles on low quality stocks; that would be a recipe for regular large losses. Buying panic, buying weakness, and concentrating, require a high quality approach to investing.

With that, I recommend the book to those that have enough maturity to know that they will have to bring their own risk control models to the game. His methods presuppose a degree of ability in interpreting the fundamentals of companies, so I do not recommend this book to beginners; it would be a dangerous way to start out in investing. Better to start with Ben Graham.

The Wilshire 5000

Want a good look at how the overall U.S. stock market is doing? The Wilshire 5000 tracks a huge universe of stocks — in fact, it lists almost every publicly listed stock, including those listed on the New York Stock Exchange, the American Stock Exchange, and the Nasdaq Composite. That’s a pretty definitive look at the large-, medium-, and small-company stock markets.

This is not a must-read index, especially on a daily basis, but it is an index investors want to at least know about and have the option of viewing once in a while. It’s the largest index going. It gives an investor a broad sense of how the U.S. stock market overall is faring and in which direction stocks are headed. More mutual funds have also started investing in stocks listed in the Wilshire 5000, which gives investors total U.S. stock exposure.

Is global investing dead?

http://sify.com
For years, U.S. investors have been told to "go global" in search of stronger growth and higher returns. And Americans obliged by pouring billions of dollars into international stocks, mutual funds and exchange-traded funds.

But now the case for overseas investing appears to be unraveling.

Since global markets topped out late in 2007, the much-maligned U.S., the very source of the subprime mortgage meltdown that has racked credit markets worldwide, has dramatically outperformed some of last year's hottest markets.

The blue chip Dow Jones Industrial Average and the large-cap Standard & Poor's 500 both have lost much less than their major European and Asian counterparts of late, suggesting that the five- or six-year run in which foreign bourses routinely thrashed the S&P and the Dow has ended.

"The international [outperformance] was a great story, but it's over," says Alec Young, S&P's international equity strategist, who notes that U.S. stocks now represent 41.3% of world stock market capitalization, up from 40% at the end of the year.

International markets are down 20% across the board in local currencies, Young says, so the weak dollar doesn't even factor in. And over the past few months, S&P has been steadily reducing its recommended exposure to international stocks.

Despite big falls from their October all-time highs, the Dow and the S&P are among the world's best-performing major markets--Brazil, Mexico and Canada--all of which happen to be in the Western Hemisphere. In fact, despite all the moaning and groaning on Wall Street and in the financial media, those big U.S. indexes have still not crossed the 20% decline that technically signals a bear market. And yet some of last year's biggest winners--Germany, India and especially China--are deep in bear market territory. Despite a strong currency and a fairly robust economy, the German DAX index is down 21% from its high, in the same range as that of its querulous neighbor, France.

And in Asia, whose century we supposedly inhabit, it's been a bloodbath. From India, which was just about to dethrone Silicon Valley as the world's low-cost high-tech capital, to China, the world's next economic superpower, to Japan, whose "lost decade" U.S. policymakers are now allegedly powerless to avert, investors have lost not only their shirts but also their shoes, their socks, their belts and their pants.

These markets have racked up declines ranging from 28% in Mumbai to a sickening 38% in Shanghai, through March 19. Meanwhile, those of us who've been backward enough to stay in the "been there, done that" U.S. stock markets have taken relatively modest hits, with returns comparable to those of last year's global superstar, Brazil.

And that comes amid a financial crisis even former Federal Reserve chairman Alan Greenspan dubs "the most wrenching since the end of the Second World War." Housing prices have plummeted, consumer spending and employment have tumbled, oil prices topped $100 a barrel until March 19 and gasoline approaches $4 a gallon.

Either the equity markets are in complete denial, and U.S. markets will soon face a major crash, or maybe, just maybe, great U.S. companies that are not home builders or financials or purveyors of overpriced consumer junk are quietly selling excellent products and services around the world and are still making good money.

Despite everything, the U.S. economy is a giant with a lot of advantages that may be helping its markets now.

Meanwhile, the bloom is off the rose in China. Hong Kong's Hang Seng index fell 3.5% overnight, and the Shanghai Composite Index has fallen below 4,000 after topping out over 6,000 last October, when we recommended selling Chinese stocks. Inflation is rising, threatening to puncture China's growth bubble amid food and fuel shortages and an energy squeeze.

And as the Beijing Olympics approaches, a rebellion has broken out in Tibet and in neighboring provinces as Tibetans look for some autonomy and religious freedom. China's answer: Crush the dissenters and blame the Dalai Lama for everything.

These events may help crack the finely wrought veneer the government has crafted in its effort to make China shine in the eyes of the world. Ultimately it may remind investors that this is very much a dictatorship whose economy is still firmly controlled by the Communist Party.

So, what lessons can we learn? First, nothing lasts forever in investing--not tech stocks in the 1990s, housing in the early part of this decade or commodities now. International stocks, especially emerging markets, had a great run, but now, as Young says, may be their time to revert to the mean and lag ours for a while.

Second, despite its many naysayers, the U.S. isn't dead. Over the last couple of years, I've observed a certain schadenfreude--a joy in other people's trouble--in the downright glee with which some commentators have viewed the recent fall of the U.S. dollar and underperformance of U.S. stocks. But now investors may realize that the U.S. economy is much more resilient than others in times of crisis like this.

Third, every boom and bubble has its own rationale, but you should always put it in perspective. Nine out of $10 from U.S. fund investors went into international equities in 2006, and pundits such as Fidelity's Bruce Johnstone until recently advised investors to put as much as two-thirds of their equity into overseas stocks. I'd say 20% (no more than 5% in emerging markets) looks about right now.

Yet even that's a lot more international exposure than Americans had a decade ago. The truth is, the world is a smaller place and many economies and markets are becoming big new players on the world stage. Emerging markets especially will have much bigger ups and downs, but in the long run they should show bigger growth.

The Nasdaq Composite Index

In some senses, the Nasdaq Composite Index is sometimes seen as a competitor to the S&P, but the Nasdaq Composite is actually very different. For starters, Nasdaq measures the stock performance of 5,500 companies, nearly half of them in the telecommunications and high-tech arena, and all of them found in the Nasdaq market. The index includes companies such as Apple, Intel, MCI Communications, Cisco, Oracle, Sun Microsystems, and Netscape. As a result, the Nasdaq index is a good deal more volatile than, for example, the Dow Jones Industrial Average and, perhaps, the stock market at large. It’s also home to some of the bigger success stories of the 1990s — many of which are technology firms. The higher the potential for return an investment has, the more the risk it carries. Just like the Dow Industrial Average and the S&P 500, the Nasdaq Composite gives the average performance of the stocks in the index both as numbers and percentages. If Nasdaq goes up, your newspaper might report that “Nasdaq was up 1 point or 3% today.”
Although it will be increasingly important for investors to watch the Nasdaq Composite in the days ahead and the performance of some of its key stocks, it’s equally important to look at Nasdaq in relation to the S&P 500 — and even the Dow — to get an overall sense of how the stock market is doing. For example, if you are a short-term trader (day trader) then the Nasdaq is where you want to be. The Nasdaq stocks can offer great potential for profit and, unfortunately, for loss, as well.

The Dow Jones Industrial Average

The Dow Jones Industrial Average tracks the performance of 30 companies that are among the largest companies and some of the most venerable stocks the U.S. stock market has to offer. If you own one of these stocks, such as Exxon or IBM, you’ll want to know how your stock is faring compared to the average.

The results of the Dow are reported daily in newspapers across the country and on new sites and financial Web sites. The results, which tell readers the average performance of the stocks in the index, are reported as both numbers and percentages. If the Dow goes up, your newspaper might report that “the Dow was up 4 points or 10% today.” When the index goes up, investors are actively buying stocks and the stocks covered by the index are going up in value. The Dow Jones is known all over the world. Still, it only tracks 30 stocks, and none of them can be considered high tech, so for 1999 and beyond, critics agree that the Dow is hardly the measure of the U.S. stock market’s total success, the way it once was. It has slipped a bit behind the times. It does, however, serve as a daily report on how well the U.S. economy is doing. And it’s important to look at it relative to its index peers, the S&P and Nasdaq, to get a sense about whether certain slices of the stock market are faring better or worse than others.

The Dow Jones Industrial Average is price-weighted — giving companies with a higher stock price more weight regardless of their size. Because of price-weighting, one company’s stock can pull the index up or down significantly, even if that direction doesn’t reflect the performance of the majority of the index’s stocks. That price-weighting doesn’t mean you can ignore the Dow Jones Industrial Average, which follows the performance of giants such as AT&T, and General Electric, but you should understand how the average is determined.