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Cash Flow

How to Beat a Bust

By Albert B. Crenshaw
Sunday, March 13, 2005; Page F01

It's the middle of March. Do you know where your stocks are?

Chances are that they are a lot lower than they were five years ago.

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Hard as it may be to remember, after two reasonably good years in 2003 and '04, all three major stock benchmarks remain substantially below where they were in March 2000. In fact, the Nasdaq composite index, after closing at 2041.60 on Friday, still has nearly 500 points to go to get back to half its all-time high of 5048.62, which it hit on March 10, 2000.

The Standard & Poor's 500-stock index has recovered to about 80 percent of its high, which was 1527.46 on March 24, 2000. And the Dow Jones industrial average, at 10,774.36 on Friday, has clambered back to within hailing difference of its high, 11,722.98, reached on Jan. 14, 2000.

At a time when investing is being held out as the solution to everything from Social Security to private pensions to college expenses, the past five years present a sobering perspective. Anyone who put money into the Nasdaq from late 1998 to early 2000 very likely has yet to see a positive return on that investment. That's a long time to spend in the hole.

And it will take many more months of strong performance to complete the recovery. One of the nasty facts of arithmetic is that when, say, the Nasdaq does get back to half of where it was before, it will still take a 100 percent gain to get back to the 2000 high. You may not realize you need a 100 percent gain to recover a 50 percent loss, but that's the way percentages work.

But the numbers, grim as they are, also provide a useful lesson in why professional money managers urge such things as diversification and rebalancing -- advice that seemed so old-fashioned and unexciting in the dot-com days. Looking back on the past five years, it becomes clear that investors who followed the pros' advice could have avoided a lot of the pain that resulted from the market's nearly three-year dive.

So, on the fifth anniversary of what proved to be the end of a stock market era, it may be profitable to review some strategies and why, looking back, they would have helped.

Diversification -- This has several levels.

First, as they might say at Enron Corp., don't put all your eggs in one basket. It's a common mistake of workers with 401(k) plans to put all, or at least a large chunk, of their money into their employer's stock. It's tempting to say, well, I know a lot about this company and I believe in its prospects, especially when it is doing well. But it's a good idea to shift some of your money out, and generally to shift more as time passes. If the company crashes, you'll likely lose your job and your health insurance; don't expose your retirement savings to the same fate.

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