Dow 36,000 Revisited

Back in 1999, investment writer James K. Glassman wrote a good book with a very bad title: the now-infamous Dow 36,000, coauthored with economist Kevin A. Hassett.

In those heady days of the tech boom, with the Dow Jones industrial average racing toward a peak of 11,723 in early 2000, the book became a hot bestseller. But a dozen years and two bear markets later, its title is a punch line for jokes about irrational exuberance.

Now Glassman, whose astute writings on investments appear in Kiplinger's Personal Finance and on Kiplinger.com every month (see all his Opening Shot columns), has written a new investment tome. Given the flawed premises of his last one -- especially that stocks are actually less risky than bonds -- why should anyone pay attention to Glassman now?

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Well, because this time he has written a better book with a title that doesn't titillate. It's called Safety Net: The Strategy for De-Risking Your Investments in Turbulent Times (Crown Business, $23). And it delivers on its understated promise.

A less risky allocation. Dow 36,000 was a prime example of a book that more people heard about than actually read. And it had a title that was probably forced on the authors by the publisher's marketing department.

In my review of it at the time, I noted that the first half of the book presented a controversial thesis that quality U.S. growth stocks were undervalued by a factor of four in 1999. I was skeptical of that thesis, as were many other reviewers, such as John Bogle, the curmudgeonly conservative founder of Vanguard.

But I really liked the second half of the book, in which Glassman dispensed a lot of sensible investing advice. (Bogle apparently did too, praising Dow 36,000 for "sound and simple wisdom about investment principles.")

Yes, Glassman and Hassett were wildly partial toward stocks and rather dismissive of bonds. But Dow 36,000 included an insightful chapter on the subject of asset allocation. The authors wrote, "It often makes sense to keep a cushion of bonds and cash -- for some investors, very little; for others, a lot. You first need to examine your own situation your age, your financial requirements, your willingness to accept risk."

Their suggested asset allocation for a 50-year-old planning to retire in 15 years, with moderate risk tolerance? In 1999, it was 70% stocks and 30% bonds and cash. For someone ten years older, they suggested a 60-40 mix of stocks and bonds. Now, 12 years later, Jim Glassman views the global economy as a much riskier place. Not embarrassed to eat crow, he says of his old buy-and-hold passion for U.S. equities: "I was wrong." And he quotes John Maynard Keynes, a brilliant investor as well as economist: "When the facts change, I change my mind."

Glassman's new default asset allocation? It's a more conservative 50% stocks and 50% bonds and cash for people in their forties, fifties and sixties. "If you're younger," he says, "you can afford to increase the proportion of stocks to 70/30" -- but only if you have a high tolerance for risk.

Lessons learned. Yes, the old gunslinger Glassman has been sobered by the carnage of the Aughts. He still recognizes the superior long-term performance of good equities, but he is now more respectful of the role that bonds (especially Treasury inflation-protected securities and high-quality corporates) play in dampening risk.

Safety Net embraces the new reality that dynamic economies such as Brazil, China and India will grow faster than Western nations in the coming decades, so he suggests that emerging markets constitute 20% of the stocks and mutual funds in your portfolio.

Jim Glassman learned a lot from the Lost Decade that is recently and blessedly past. And we can all benefit from his hard-won wisdom.

Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance magazine and of The Kiplinger Letter and Kiplinger.com.