The Millionaire Mania

Financial planner Brent Kessel recently got a voicemail message at his Santa Monica office from a client, a single woman whose investment portfolio is 60% stocks and 40% bonds.

With stock-market indexes soaring the way they have been, the woman asked, shouldn’t she be getting more aggressive in her investment mix?

The client, Kessel added, is in her mid-70s.

Like her, many individual investors now believe they have been too timid with their money during what has been one of history’s greatest bull markets, financial advisors say.

Investors whose holdings were split between stocks and bonds in the ‘90s, for example, now wish they had tweaked the stock portion higher. Those who were already heavily invested in stocks wish they had loaded up in specific sectors such as telecommunications or the Internet, which produced stunning gains last year.

In the last two months, a surge of investment in technology-stock sector mutual funds, and soaring trading volume in individual Nasdaq tech stocks, suggests many people are no longer wishing but are acting.

In the era of the instant millionaire, raising one’s investment risk level seems like a no-brainer to many Americans.

“There’s a bit of a keeping-up-with-the-Joneses mentality,” Kessel said. “[People ask,] ‘Why aren’t I in this party getting the 60% and 70% returns like everybody else?’ ”

That return-envy was worsened by the split nature of the U.S. stock market in 1999.

The Nasdaq composite stock index was up a dazzling 86% for the year, but that mainly reflected the performance of its 50 or so largest members--tech stocks such as Cisco Systems, Intel, Microsoft and Qualcomm.

Only about 51% of the 5,189 Nasdaq stocks logged any gain at all last year. And two-thirds of Nasdaq issues at year-end were down at least 20% from their 1999 peaks.

What was true for the hottest U.S. market was equally true elsewhere. More than half of the Standard & Poor’s 500-index stocks lost ground last year, despite the index’s 19.5% price gain for the year.

Helped by tech-stock holdings, the average U.S. stock mutual fund rose a respectable 27.5% in 1999. But how is that supposed to compete with the 2,600% gain in Qualcomm’s stock price?

Meanwhile, as market interest rates rose with the strong U.S. economy, bond values plunged, making the whole idea of owning bonds as a risk-reducer seem suspect.

A hot-selling recent book with the greed-inducing title “Dow 36,000” argues that with share prices at these levels, stocks actually are less risky than bonds, anyway.

Historically, investors have demanded a “risk premium” from stocks to compensate for their volatility and presumed riskiness relative to Treasury securities, which are considered risk-free in terms of safety of principal and interest.

That is, investors have demanded that stocks deliver annual returns averaging about 7 percentage points above long-term Treasury bond returns since 1926.

But the authors, one of whom is a former Federal Reserve economist, contend that since stocks always have produced higher returns than bonds over any 20-year period, no risk premium is warranted.

Instead, they argue, stock prices should quickly rise to levels at which stocks and bonds are valued equally in terms of the cash they will produce over the long run--meaning the interest return on bonds, and the dividends and retained earnings generated by companies.

That level of stock prices, say the authors, equates to a Dow Jones industrial average of 36,000--more than three times the Dow’s 1999 closing value of 11,497.12. Stocks, they say, soared in the 1990s because investors are increasingly pricing stocks based on lower perceived risk levels.

Veteran stock strategist Byron R. Wien of Morgan Stanley Dean Witter acknowledged recently that the rising impact of technology makes today’s economy, and stock market, different from previous ones. Yet, he warned: “The time to change the risk premium is not when the market is making new highs and you are looking for a reason to stay bullish.”

But stock booms always seem to invite such thinking, say experts in market psychology.

“The environment today is similar to the environment in all other bull markets: As prices go higher, risk seems to diminish,” said Peter Bernstein, author of “Against the Gods: The Story of Risk.”

“You know it’s wrong, but it’s hard to shake off.”

Still, it’s too simple a declaration to say that no one should be raising the risk level of their portfolio today, even with many stocks so highly valued and the current U.S. bull market’s longevity--more than nine years--tempting fate.

The main question to ask, experts say, is: What is your time horizon?

Younger people who have thus far left too much of their savings in short-term accounts may well benefit if they’re galvanized to raise their risk level now.

That may even be true for some older investors, financial advisors say.

Although she has heard a few people express regret about missing the market boom, planner Judi Martindale of San Luis Obispo said that just as big a problem in her conservative community is getting people to accept much risk at all.

“With life expectancies rising, what I see as the main danger is that [clients] will outlive their income,” said said.

She generally starts clients out with a 60% to 40% mix between stocks and bonds, “and I try to move them up [toward more stocks] from there,” she said, noting that she sticks to blue-chip stocks, which happen to have done very well in recent years.

The cream of the technology stocks and many Internet start-ups have done far better, of course, “But if somebody complains about 18% returns, I slap them,” Martindale joked.

The standard optimism about stocks’ long-term performance is rooted in fact, experts note: Since at least 1926, stocks have outperformed bonds and money-market accounts in every decade but the ‘30s. When you own a piece of the stock market, you’re betting on a growing economy--which is the norm.

But it’s also true that the stock market goes down as well as up. Even the most enthusiastic market partisans acknowledge that their belief in stocks’ outperformance applies only to the long haul. Market drops of 30% or more are not only possible, but in most investors’ lifetimes they are to be expected.

If you’re thinking of upping your ante in stocks today, experts say you should ask yourself whether you have the temperament to sit through a long downturn--perhaps years of losses--without selling. And you should also remind yourself that the market, and individual stocks, have mediocre years, not just spectacularly good or bad ones.

Although the long-term stock return data are unassailable, “In any given year, the odds of beating [a money-market account] aren’t a whole lot better than half,” said University of Rochester economist G. William Schwert, a specialist in market returns.

If you’re in the market, you should stay in, financial advisors say, because the chances of correctly timing the market’s ups and downs are tiny, and the greatest gains often come at the beginning of a rebound. Missing rebounds by a few days or weeks can mean missing the bulk of the gains.

And what about those mutual fund investors who now are tempted to shift money directly into some individual hot tech stocks?

The success stories of many tech-stock investors are, of course, compelling.

Karen Donlan recalls the skeptical reactions of fellow members of her investment club in Wells, Maine, a couple of years ago when she first mentioned such stocks as Internet portal Yahoo.

“I was talking about Red Hat a year and a half ago,” she said, referring to the Linux software firm that had one of 1999’s most spectacular initial public offerings.

Her tech savvy comes from her part-time job running an electronic bulletin board for people with disabilities. She has four PCs at home, and her 11-year-old son knows six computer programming languages.

However, club members weren’t comfortable with Yahoo or Netscape Communications initially, and they couldn’t have gotten in on the Red Hat IPO even if they wanted to.

Still, they have little to complain about: The club finished second among 429 investment clubs in a national contest, with average annual returns of about 45% over the last four years, Donlan said.

The more skittish members of Donlan’s club finally overcame their reluctance and let Donlan talk them into buying Cisco Systems and America Online, which have been star performers--up 131% and 96%, respectively, last year.

For a shot at those kinds of returns, many people may tell themselves they’re willing to accept more risk. But, “It’s always easier to feel more tolerant of risk in hindsight,” warns Hersh Shefrin, a finance professor at Santa Clara University and author of “Beyond Greed and Fear,” a new book about the psychology of investing.

Donlan and her fellow investors are happy with their experience so far. But they also are trying to be realistic about their chances of staying on such a roll.

At the moment, Donlan said, the club is seeking to diversify away from technology stocks, “So that when the Nasdaq goes down, we don’t get hurt as badly.”

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Times staff writer Thomas S. Mulligan can be reached at thomas.mulligan@latimes.com.