MORE AMERICANS than ever invest in stocks or stock- owning mutual funds. So the fate of the market is becoming more central to our lives.
At the end of 1998 (the latest data from the Federal Reserve), 50 percent of us were eagerly following the market, compared with 37 percent in 1992. For the first time, stocks account for more than half of our financial assets.
We've also acquired a heightened interest in buying individual stocks, as opposed to owning them through mutual funds. Stocks are our new social currency -- the first thing you talk about, after the weather.
But are individual investors really getting smart about stocks, thanks to all the practice we've had? I dunno.
We talk the talk, like a bunch of mini-Peter Lynches. But that doesn't mean we walk the walk. Maybe we've just been buying lucky (or unlucky) lottery tickets.
Most investors are still not financially literate, says planner Harold Evensky of Coral Gables, Fla. Typically, they know nothing about the companies they own: not the business plan, market share, rate of growth, operating earnings or competitive position.
It's hard to argue with someone who hit Qualcomm right (up 238 percent in '99). But, Evensky asks, "Are you sophisticated, just because you can find E*Trade?"
For a while, investors were pouring their money into index mutual funds, making it seem that they'd grasped a classic, successful investment strategy.
Index funds copy the performance of a particular market -- say the total market (measured by the Wilshire 5,000 index) or the market for leading stocks (Standard & Poor's 500-stock index).
Long-term data show that funds run by stock-picking managers find it hard to beat the indexes, especially the S&P. So it ought to be a no-brainer to buy and hold low-cost index funds.
But it's not turning out that way.
Investors fell in love with S&P funds late in the 1990s, only after that index started beating 80 percent or more of the managed funds. So investors were buying performance rather than exercising a strategy.
Late in the spring, S&P funds fell to the middle of the pack -- and sure enough, by November, new money was flowing to hotter sectors, according to Lipper, a firm that tracks mutual-fund performance.
Investors today also seem less interested in asset allocation, another hot mid-'90s strategy.
Allocators spread their money over several markets: big stocks, small stocks, international stocks and bonds. Everyone used to want a pie chart, showing what percentage of their money to devote to each group.
Then came the Net stock and tech stock boom. Out went the pie charts, in came the mouse.
Now, many investors incline toward concentrated portfolios. Since we "know" the winners in the New Economy, we might as well put more money there.
S&P index funds, by the way, are 30 percent invested in tech, thanks to stocks such as Cisco Systems, Qualcomm, Microsoft and AOL. That's a solid allocation. But few people know what their diversified funds own.
Mutual-fund investors have been restive, because they haven't done as well as the superstocks they read about. But only a handful of stocks accounted for the records being set.
Three things about owning individual stocks:
Do you really know how well you've done? Too many investors remember their winners, blank out their losers, never average them together, and hence have no idea whether they've beaten the market.
To find out the truth, try tracking your performance through software such as Quicken or Microsoft Money.
Have you any idea how much risk you've taken on? By ratcheting ever more toward tech, you may be buying into a bubble. In recent market sessions, a lot of bubbles have been pricked.
A diversified portfolio will never do as well as the flashiest stocks. But it won't do as badly as the worst ones, either. The purpose of diversification is to spread your risk.
Planner Norm Grant of Eden Prairie, Minn., takes a classic position: core money in mutual funds, play money in individual stocks.
Whatever stocks win, you're probably not buying them now. But the diversified mutual funds are.