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Internet Stocks Can Present High
Risks for Small Investors

By Joyce M. Rosenberg   Associated Press
Internet stocks, which helped drive the Nasdaq composite index up more than 85 percent last year, seemed like a sure bet. But some stocks turned out to be a bad gamble, as The Associated Press found by adding an online issue to a sample small investor's portfolio.

EToys was one of the hottest stocks of 1999, surging higher as Internet retailing grew more popular and more promising. The AP, which has tracked the small investor's portfolio since October 1997, decided to include eToys as part of a reallocation of the portfolio's assets that took place as of Sept. 30.

EToys was valued at $66.56 a share at the third quarter's end. On Oct. 26, when it closed at $77.81, the online toy retailer was looking like a great investment. But the stock began to bounce around a few days later as doubts about eToys' fourth-quarter earnings grew, and then it plunged in December as the company admitted it was having trouble getting Christmas shipments out on time.

It closed Dec. 31 at $26.25, for a drop of more than 60 percent.

Was it a bad decision to go for eToys? Maybe, if you're looking for a quick return. And maybe not, if you're in for the long term. Two years ago, the portfolio's Morgan Stanley Dean Witter Pacific Growth Fund looked like a dog as Asian economies fell into recession. In the just-ended quarter, the fund continued its recovery, surging 22.1 percent.

EToys' rise and fall shows how tricky Internet investing can be. While stocks like eToys, Amazon.com, Yahoo! and eBay have won notoriety for their huge gains, these stocks can also take a big tumble, and in a small portfolio they can do a lot of damage.

Overall, the portfolio, which includes four mutual funds and four individual stocks, rose 5.6 percent in the fourth quarter. That was well behind the Dow Jones industrial average, which rose 11.2 percent for the quarter, and the Standard & Poor's 500, which rose 7 percent. The Nasdaq composite index, which outperformed all major market measures, was up 49 percent.

For the year, the portfolio rose 14.3 percent, compared to the Dow's 25.2 percent, the S&P; 500's 19.5 percent and the Nasdaq's 85.6 percent.

The portfolio's top gainer in the fourth quarter was Wal-Mart, which rose 45.4 percent, followed by the Pacific Growth fund and Coca-Cola, rebounding after three dismal quarters with a 20.7 percent gain.

Another new addition to the portfolio, the Legg Mason Value Trust, rose a robust 18.9 percent, while the Vanguard Index Trust 500 Portfolio fund, which includes S&P; 500 stocks, was up 14.2 percent.

The assets in the portfolio were allocated to keep it diversified. When the portfolio was first put together, it had about $25,000 spread evenly among six holdings. Since then, the tremendous surge in Wal-Mart and another holding, IBM, meant more than half the portfolio's value rested in those two stocks, making the portfolio more vulnerable to swings in their prices.

Under the reallocation, the $39,279.71 in the fund as of Sept. 30 was split evenly among its eight holdings, which also include the T. Rowe Price U.S. Treasury Long-Term Fund.

Without the reallocation and addition of eToys and the Legg Mason fund, the portfolio would have risen 13.7 percent in the fourth quarter. While the changes reduced the portfolio's gain, it is now more diverse and in a position to move higher.

The laggards in the portfolio this past quarter included IBM, hurt by worries about Y2K and unable to continue its big winning streak. It fell 10.7 percent.

The T. Rowe Price fund, included as a hedge against stock market volatility, lost 4.6 percent as interest rates rose.

The portfolio was valued at $25,299.85 at its inception and was worth $41,477.69 at year's end.

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