Investing Is Not A Sport

The stock market has been good to America. In recent years, it has generated enormous wealth for individuals, financing for investment, jobs for people, and tax revenue for governments. Families now depend on it for retirement, the education of their children, and, increasingly, even consumption. Millions day-trade Internet stocks, and millions more actively manage their mutual funds and 40l(k)s. Soon, people may be handling Social Security investment accounts. The stock market is insinuating itself into the everyday lives of ordinary Americans as never before.

In this holiday season, as people relax with their families and plan financial strategies for 1999, it might be wise to step back and question whether we are, in fact, beginning to embrace a cult of the market. Are we as a nation becoming obsessed with the market's daily ups and downs? Is the drive to beat the market again and again motivated by sound investment criteria or a gambler's passion for instant gratification? Are we, in short, treating investment as sport, entertaining ourselves with the minutiae of the game, while neglecting the basics and ignoring the goals?

No matter what analysts, economists, or pundits tell you, the world is fundamentally unpredictable, and it is foolish to pretend that it isn't. Virtually no one foresaw the strength of either this year's economy or stock market. No one anticipated the amazing fall and remarkable recovery of the market, the Net nuttiness, the split between large caps and everything else. The Nikkei was supposed to rally. It didn't. Russia couldn't default. It did. Inflation was supposed to jump. It disappeared. Spreads were supposed to narrow. They widened. As for politics, forget it.

No wonder mutual-fund managers, by and large, underperformed the broad Standard & Poor's 500-stock index. In 1998 about 90% of diversified equity funds have failed to beat the S&P 500-stock index. Last year, funds still managed to earn a hefty 24.7% total return (including reinvestment of dividends and capital gains) compared with 33.7% for the S&P index. But in 1998, the average domestic equity fund has generated a paltry 7% return--the worst since 1994, when the average fund actually lost money. Even worse, if you lump in international and specialty funds, the all-equity average comes in at just 5.04%, less than what investors could have earned in the typical municipal bond fund--or even a money-market fund. Not a great performance.

A few years ago, only a small percentage of the American population--the rich--would have been affected by this. No longer. A quarter of households earning $10,000 to $25,000 now own equities, either directly or through defined-contribution pension plans such as 401(k)s. Two-thirds of all households earning $50,000 to $99,000 hold equities. And some 84% of households earning over $100,000 own stocks. Capital gains are an increasing component of wealth, savings, and spending in America.

There's the rub. The stock market now is a much more powerful force in the economic life of the U.S. Yet many continue to "play" it with abandon. Encouraged by boosterish analysts, stimulated by stock-jock TV commentators who "call" the market as if it were football, and tempted by promises that fund managers can rarely keep, many investors churn and burn. The smart ones stick with the basics: Diversify and invest for the long term. They do their homework, make their decisions--and go play ball with the kids.