Asset Allocation

October 10, 1998

Closing averages: Dow 7899, S&P500  984, NASDAQ 1492
Last week:        Dow 7784, S&P500 1002, NASDAQ 1614

The averages diverged this week, with the Dow up 115 (+1.5%) but other market
indices down:  S&P500 down 18 (-1.8%) and the NASDAQ off a whopping 122 (-8.2%).
Of course, the Dow is only 30 stocks and can act kind of odd at times.  This
divergence will end soon, with the Dow dropping nearly as much as NASDAQ.
The bear market continues and I expect another down week next week.

The market peaked at Dow 9337 on July 17, 1998.  Currently at 7899, it is 15.4%
off the peak.  When the market's down, analysts like to talk about asset allocation.
(Why should I be any different?)  Asset allocation is the idea that rather than
trying to call turns in the market, you should just worry about allocating your
investments in the correct percentages amongst the various possible investments.  The
idea is that a young person should hold high percentage of common stocks and a old
person should not.  Sometimes a formula is used:  keep your age as a percentage in
bonds, or perhaps your age minus 10.  So a 35 year old would have 25% to 35% in
bonds and the rest in stocks.

The beauty of this approach is that is forces you to buy low and sell high.  If the market
goes way up, your percentage of stocks will get too high and you'll have to sell some to
keep the right percentages.  Conversely, you'll have to sell bonds and buy stocks if the
stock market tanks.

Other assets can be allocated, too, such as real estate and money market funds.  You can
design your own percentages and categories.  Start out by figuring out how you have
your assets allocated now.  Does it make sense?  Maybe you have some adjusting to do.

Richard Gillmann (richard@nwfolk.com)
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