Dow Generation believes stocks just have to go up

Staying Ahead

April 12, 1999|By Jane Bryant Quinn

IT DOESN'T pay to have memories in stock markets like this. They only upset you. You're apt to be thrown off your stride by the words of an older world -- dusty stuff like "earnings" and "dividends" (ask your grandfather what they mean).

This is not your grandfather's stock market. I don't know if anyone has studied money-manager performance by age but, in any era, I'd bet on the unremembering young.

Today, they're buying with the same confidence that an older generation felt for Xerox and IBM.

The Dow Generation takes it on faith that God created stocks in order to make them rich. That's their advantage. They're right for their time. Older investors can only half-adapt.

What went before

All of us live, in part, in the world in which we first came of age. The Depression Generation thought stocks were for madmen, even when they bought a few.

The Inflation Generation still keeps some gold Krugerrands around the house.

We're always testing the new world against what went before, as if the old world slipped out for lunch and will be right back.

For the young, nothing went before. The Dow Generation knows, as scripture, that stock markets exist to deliver 20 percent returns. Sure, there are dips. But after a dip, stocks apologize and rush back up -- covering your losses and adding a bonus, besides.

They also "know" that the Nasdaq stocks are smarter buys than the Dow stocks are ever likely to be -- one reason they're more intrigued by stocks than mutual funds.

`Bad breath'

At the moment, the recent, super gains are a tad deceptive.

"This market has bad breadth," cautions Irwin Kellner, economics professor at Hofstra University in Hempstead, N.Y.

Never before has there been such a performance gap between the 30 stocks of the Dow industrials index and everything else on the New York Stock Exchange.

The Nasdaq leaders are also way ahead of their troops. This sag in the secondary stocks helps explain the poor performance of so many mutual funds.

Has this shaken the Dow Generation's bullheaded faith? It has not, and will not. In every generation's worldview, something's risky and something's safe. To the DowGen, stocks are safe.

How tied are we to the Dow? Let me count the ways:

Social Security. Reformers, especially the affluent young, want private accounts, to invest in stocks. They assume that stocks will always yield a higher lifetime income than Social Security could.

Estimated figures for Social Security reform suggest that high-income people would indeed do better in stocks, even if the market went flat for many years. That's because high-income people get less for their payroll taxes than middle- or lower-earners do.

But the average beneficiary (including dependents, such as a spouse at home) would do better with Social Security, especially if the market delivered more modest returns.

401(k) plans. More than two-thirds of plan balances are invested in stocks today, according to the Employee Benefit Research Institute (EBRI). The younger you are, the higher your equity stake.

What if markets wimp out for a decade or more?

You should be OK as long as you're holding diversified stock-owning mutual funds that you won't touch for 20 years, says Dallas Salisbury, EBRI's president.

But what's true of the market as a whole isn't true of any single stock.

Workers in their 50s currently keep an average of 20 percent of their plan in their own company's stock.

What if your company stumbled?

The mighty IBM took more than nine years to recover after the '87 market crash. Repeat after me: Your company's stock isn't safe just because you work there.

Stock options. If 401(k)s can make your rich, why not leverage your luck? Of 350 large companies, more than a third are giving stock options to most or all of their workers, reports the consulting firm William M. Mercer. That's double the number in 1993.

New high-technology companies provide options in lieu of traditional pension plans.

In a bold step last week, CBS announced that it was ending traditional pensions for new hires and substituting a stock-option plan for all of its employees.

Profit assumed

Naturally, it's assumed that everyone at CBS will profit. Senior Vice President Martin Franks boasts that, over the past two years, CBS stock has doubled.

Right-o, but from 1990 to 1995, it dropped 67 percent. What if those were your last five years to exercise? Bye-bye pension substitute, at least for that particular period of time.

Only the Dow Generation believes that, over any decade, the stock of the company they work for must go up.

Washington Post Writers Group

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