Tempted to Put More in Stocks?

Should you really be raising your risk level today in the stock market?

Many investors, rueful about the returns they left behind in 1999, will no doubt be tempted to jump into the hottest market sectors they see detailed in our special mutual fund pages later in this section.

Others may decide that whatever cash or bond reserves they hold ought to be committed to stocks--any stocks--instead.

Slow down. Take a look at the accompanying chart. What it shows is the Federal Reserve’s estimate of the percentage of American households’ financial assets held in stocks.

That figure was nearly 35% at the end of 1998, a record high as long as the Fed has been keeping stats. (Financial assets include stocks, bonds, bank savings, cash and other such assets, not including real estate.)

The Fed’s estimate is used by economists as an indication of what’s happening generally with Americans’ wealth, not as a specific indication of what the average family is doing. Indeed, many families don’t own stocks at all. Plenty of others have far more than 35% of their savings in stocks.

The point is, as the stock market has risen sharply in recent years, more people have joined the game. And those already in the game have seen their stock holdings rise sharply as a percentage of whatever other savings they have.

So your investment may already be substantial. You may be exactly where you need to be in terms of portfolio mix--or even overweighted in stocks.

Wall Street pessimists like to trot out the usual suspects in warning people away from committing significant new money to stocks today. They say our market could mimic Japan’s, which peaked 10 years ago after a tremendous run and is still down 50% from that high.

They point to the extraordinary price-to-earnings ratios on major stocks and on many minor ones.

They warn that rising interest rates have almost always slammed the stock market in the past, and that the current rate surge will catch up to the equity market sooner rather than later.

Some, like Sylvester Marquardt, director of equity research for the John Hancock Funds, believe an economic slowdown is near. His advice: Rather than try to shoot the lights out now, “invest for stability.”

Perhaps the best reason to be cautious is simply that history is filled with examples demonstrating that investing after a big surge in a particular sector often means getting there too late--at least, if what you’re expecting is another immediate surge.

Still, investors who can take a longer-term view can forcefully argue that although short-term caution may be appropriate, nothing says that the U.S. market, or foreign markets, can’t continue to do very well in the new decade.

Technology stocks? Yes, they may be overpriced right now, but name another industry with better 10-year growth prospects.

Foreign stocks? Many of those markets have badly lagged the U.S. market over the last decade. That may have been quite logical, given the performances of foreign economies. But if capitalism remains strong around the globe, the new decade could be surprisingly rewarding for foreign markets.

U.S. stocks in general? Maybe the most interesting feature of our market is that so many stocks declined in price last year, despite the surge in major indexes.

Was that a warning--or an opportunity?

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America’s Surging Equity Stake

U.S. households at the end of 1998 held an estimated 34.9% of their financial assets (i.e., all investments excluding hard assets such as real estate) in stocks, on average, the highest level on record. That surpassed the previous peak of 34.4% in 1968. Where is the rest of that asset pie? Bank accounts, bonds, U.S. savings bonds and other non-stock accounts.

1998: 34.9%

Source: Federal Reserve Board, Employee Benefit Research Institute, Investment Company Institute