Monitoring the Nasdaq Capital Gains

We are at a wonderful period in time in many ways. We are enjoying the year-end holiday season with our family and friends, the Dow index has crested the 10,000 mark, and the capture of Saddam Hussein is now behind us. After 3 years of negative market performance returns displayed each time we opened our statements, we get to see a net change in value that is a positive number instead of negative.

As investors, we do have many good reasons to celebrate, and should. But we should not forget what happened last time the party got out of hand and especially what happened with the high-speculative behavior exhibited with Nasdaq stocks. It would be time well spent to take

a moment and reflect on that period of seemingly endless growth, and the decisions and investments choices that we made. If given the ability to go back in time, what would you do different regarding your investments if given a second chance?

Technology shares have led the market recovery in 2003, with the tech-heavy Nasdaq Composite Index now up 43% year-to-date, compared with 19% for the Dow Jones Industrial Average. The Nasdaq index staged a remarkable 74% rise from its low in October of 2002. So much money has come into these stocks recently, it's hard to believe. After 3 years of such poor performance, you would think that investors would have sworn off the sector. But while the sting of the dot-com collapse has by no means subsided, the strength these stocks have enjoyed so far this year begs the question of how much higher can they go?

The Nasdaq 100 indexes now trades at 97 times expected 2003 earnings. That is three times as rich as the more diversified S&P 500. Expectations are high going into 2004 and people could be easily disappointed. Often a tiny piece of negative news can spark a massive sell off with this group, such as disappointing earnings or anemic holiday retail sales. Whatever resolutions were made during the past three years seems to have been forgotten with the first whiff of exuberance in 2003.

Tech companies that supply equipment or services for the semiconductor industry are poised to do well if demand for personal computers and communications products continues. Hopes are big for consumer electronics, involving everything from plasma screens to DVDs to smart phones. Web stocks also remain a popular play despite a tremendous run-up. The demand for broadband should continue and will fuel a number of other industries.

Investors and analysts seem to believe the next couple of quarters will offer up more upside growth and potentially share momentum with the overall market. However, investors should no longer count on the mostly unchecked upward spiral they've enjoyed from last spring until now.

The second half of 2004 is when momentum could start to ebb. The Bush administration stimulated the economy with tax-rebate checks this past summer. Consumers will get an additional fiscal stimulus in the first quarter when they receive tax rebates for the first half of 2003. But by about the second half of the year, the effect of those incentives will start to diminish. The economy has benefited from the consumer rally and now we need to see more in the way of corporate spending. The consumers has had so much help this year with low interest rates and tax rebates, it's hard to see that getting much better next year.

Getting back to the question of what you would do different this time if your stock accounts were flush with gains? While each of our investment goals is different, there most likely are actions we could all consider. One might be raising more cash by selling shares, ensuring that no one stock sector accounted for a disproportionate share of your savings. Buying alternately maturing bonds, purchasing real estate or cutting back contributions to funds that were huge winners. Maybe even taking those profits and using them to pay down debt. If you have sizable gains that could be used to lower your monthly installments considerably, what's the harm in taking some of those profits off the table? The tax code favors long-term investing, but paying the taxes is better than losing the money, and you'll have to pay the taxes some day. The markets have risen and there are opportunities and adjustments to be made. Consult with your financial advisor before making any changes to see if you should be handling your new gains any differently then you did in the past.

We are at a wonderful period in time in many ways. We are enjoying the year-end holiday season with our family and friends, the Dow index has crested the 10,000 mark, and the capture of Saddam Hussein is now behind us. After 3 years of negative market performance returns displayed each time we opened our statements, we get to see a net change in value that is a positive number instead of negative.

As investors, we do have many good reasons to celebrate, and should. But we should not forget what happened last time the party got out of hand and especially what happened with the high-speculative behavior exhibited with Nasdaq stocks. It would be time well spent to take

a moment and reflect on that period of seemingly endless growth, and the decisions and investments choices that we made. If given the ability to go back in time, what would you do different regarding your investments if given a second chance?

Technology shares have led the market recovery in 2003, with the tech-heavy Nasdaq Composite Index now up 43% year-to-date, compared with 19% for the Dow Jones Industrial Average. The Nasdaq index staged a remarkable 74% rise from its low in October of 2002. So much money has come into these stocks recently, it's hard to believe. After 3 years of such poor performance, you would think that investors would have sworn off the sector. But while the sting of the dot-com collapse has by no means subsided, the strength these stocks have enjoyed so far this year begs the question of how much higher can they go?

The Nasdaq 100 indexes now trades at 97 times expected 2003 earnings. That is three times as rich as the more diversified S&P 500. Expectations are high going into 2004 and people could be easily disappointed. Often a tiny piece of negative news can spark a massive sell off with this group, such as disappointing earnings or anemic holiday retail sales. Whatever resolutions were made during the past three years seems to have been forgotten with the first whiff of exuberance in 2003.

Tech companies that supply equipment or services for the semiconductor industry are poised to do well if demand for personal computers and communications products continues. Hopes are big for consumer electronics, involving everything from plasma screens to DVDs to smart phones. Web stocks also remain a popular play despite a tremendous run-up. The demand for broadband should continue and will fuel a number of other industries.

Investors and analysts seem to believe the next couple of quarters will offer up more upside growth and potentially share momentum with the overall market. However, investors should no longer count on the mostly unchecked upward spiral they've enjoyed from last spring until now.

The second half of 2004 is when momentum could start to ebb. The Bush administration stimulated the economy with tax-rebate checks this past summer. Consumers will get an additional fiscal stimulus in the first quarter when they receive tax rebates for the first half of 2003. But by about the second half of the year, the effect of those incentives will start to diminish. The economy has benefited from the consumer rally and now we need to see more in the way of corporate spending. The consumers has had so much help this year with low interest rates and tax rebates, it's hard to see that getting much better next year.

Getting back to the question of what you would do different this time if your stock accounts were flush with gains? While each of our investment goals is different, there most likely are actions we could all consider. One might be raising more cash by selling shares, ensuring that no one stock sector accounted for a disproportionate share of your savings. Buying alternately maturing bonds, purchasing real estate or cutting back contributions to funds that were huge winners. Maybe even taking those profits and using them to pay down debt. If you have sizable gains that could be used to lower your monthly installments considerably, what's the harm in taking some of those profits off the table? The tax code favors long-term investing, but paying the taxes is better than losing the money, and you'll have to pay the taxes some day. The markets have risen and there are opportunities and adjustments to be made. Consult with your financial advisor before making any changes to see if you should be handling your new gains any differently then you did in the past.