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Commentary: Today's Hot Trend Is Tomorrow's Loser


BusinessWeek Investor

Commentary: Today's Hot Trend Is Tomorrow's Loser

Robert Markman thinks slicing up your portfolio among superthin stock classes is for the birds. Since February 1995, the president of Minneapolis-based Markman Capital has won a wide following by concentrating his clients' money on what he calls "the red, white, and blue chips"--stocks of big U.S. companies, plus an extra dash of technology.

His three funds of funds--portfolios of high-minimum mutual funds for the aggressive, moderate, or conservative investor--have posted returns 1.9 to 6.7 percentage points higher than their peers. "Where is it written that you have to have a piece of everything happening around the globe to prosper?" he says. The world belongs to large-cap U.S. stocks, Markman insists, because big American companies are so nimble and techno-savvy that they'll leave small and foreign competitors in the dust for years to come.HAZARDS AHEAD? Markman's big-growth-stock gospel--laid out in his new book, Hazardous to Your Wealth (Elton-Wolf Publishing, $17.95)--has been unbeatable since 1995. But it could be hazardous to follow into the future. Markman is joining a long line of gurus who preached that a current hot investment would forever rule the market--a prediction that has always been undone by the market's tendency to dethrone winners.

The New Economy thesis is the whip Markman uses to lash out against the academic takeover of the investment game. Since the 1970s, scholars have been designing ways to reach the "efficient frontier," the diversified mix of assets with complementary returns and offsetting risks. Their ideas have been popularized by writers, financial planners, and even Web sites like Nobelist William Sharpe's financialengines.com.

Markman insists that dicing your stock portfolio is a flawed strategy on several levels. First, two of the allocators' favorite assets--small and foreign stocks--don't outperform or offset large caps, he says. And Markman dismisses the idea that the future can be discerned by studying the past. "The theory depends on relationships between assets that aren't projectable to the future," he says.

But any long view will show that every asset class has its time in the sun (table). Since 1926, the 16.02% annual return on U.S. small-cap stocks has outpaced big stocks' 13.2%, according to Ibbotson Associates. And since 1970--as far back as good data are available--foreign shares as defined by Morgan Stanley's EAFE index have posted a 15.16% annual return.

History never repeats itself exactly. But "if you don't know which asset will outperform, it behooves you to have some of each," says John Rekenthaler, director of research at Morningstar, the mutual-fund data firm. And while a falling large-cap market tends to sink all types of shares, diversification will still reduce your risks, because large, small, and foreign stocks don't move in lockstep, says Ibbotson's Clay Singleton.

True, many money managers and investors have been "oversold by science," in Rekenthaler's words. But that science is based on common sense at least as old as Aesop: Don't put all your eggs in one basket. Even Markman divides his clients' assets into stocks, bonds, and cash. But anyone who follows his lead and bets solely on big-cap and technology stocks is ignoring history--and begging for trouble.By Mike McNameeReturn to top

TABLE

To Diversify or Not?

Concentrating on large-cap stocks, as Robert Markman advocates, means missing

out on opportunities. Here are the number of years from 1980 to 1999 when each

asset class was the best and worst performer:

YEARS

YEARS ON THE

ON TOP BOTTOM

LARGE-CAP STOCKS 5 1

SMALL-CAP STOCKS 7 4

LONG-TERM TREASURIES 2 5

LONG-TERM CORP. BONDS 2 0

MEDIUM-TERM TREASURIES 1 1

TREASURY BILLS 3 9

DATA: IBBOTSON ASSOCIATES

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