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
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
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
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
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.