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The financial world is partying like it’s 1999.


TEN YEARS AGO, on assignment for American Way, I interviewed Charles Schwab, executive chairman of the Charles Schwab Corporation and an outspoken advocate of individual investors empowering themselves. At that time, Wall Street was on a tear. The Dow Jones Industrial Average had just roared past 10,000, while the NASDAQ had also passed 2,500. Technology was booming, and the stock market resembled a one-way elevator that only went up.

Back then, in 1999, when everyone seemed remarkably exuberant, during our interview, Schwab warned me of a tech bubble and strongly advised diversified investing. Anyone who heeded his words avoided getting crunched when companies of the world like Microsoft and Intel and Pets.com hit the wall and dropped precipitously, or died outright.

More recently, the market has been on a whole other kind of tear. After falling more than 50 percent, it’s managed to bounce back part of the way in astonishingly short order. Once again, the Dow has crossed 10,000. During today’s go-round, though, investors are more relieved than ecstatic. Some Wall Street pundits have characterized the current rush as a bear market in disguise and predict a steep decline in the near future. Others express cautious optimism.

Given the timing and uncertainty, this seemed like the right moment to reconnect with Schwab and get his opinions on the future state of investing for 2010.

When we spoke the last time, you said that you viewed the Dow’s being at 10,000 as nothing more than a number. How are you feeling about it now? It’s getting to be old hat. We’ve gone through it at least five times, on the way up and on the way down, so it’s not that unique of a feeling. In five years’ time, the Dow crossing 10,000 in 2009 will be completely irrelevant. What it means right now, though, is that the economics of the companies involved in the Dow are expected to go up.

Some investors look at the current situation and feel that, financially speaking, we’ve gone nowhere in 10 years. This has been a subreturn decade. There are people who view it as a lost decade in terms of the stock market. People are very disappointed with what has happened in the market, but that doesn’t mean that they should throw in the towel and forget about investing. That would be a horrible outcome.

Economically speaking, where do you see us right now? And what do you see for the future? In March of 2009, we had the ending of an incredible crisis. You won’t witness another crisis like that in your lifetime. The response to that crisis was a Dow that went to 6,500 from 14,000 a couple of years before. That is a reflection of a panic, one of the biggest in the last 100 years. The relief rally we have enjoyed [that has taken the Dow back up to 10,000] is almost the emotional relief that the panic is behind us. We have a lot of work to do, but we have climbed out of the worst part of the panic. Companies that have come out of this thing are wonderfully positioned for the big-time growth we will see in the future. I think the next 10 years will be better than the last 10.

Considering the important role that technology plays in our economy, where do you see the NASDAQ going over the coming year? Technology is a powerful force and an engine of growth in our economy -- just look at the Internet as an example. Over the long term, we’ll continue to see developments in existing areas of technology as well as new technologies that we can’t even imagine today. How that equates to specific stocks and a specific index, no one can say. That is all the more reason to stay focused on diversification and asset allocation.

How would you contrast where the NASDAQ is now with where it was 10 years ago? Ten years ago, we were at the peak of enthusiasm for anything related to that new thing called the Internet. We all know what comes after a peak, and we certainly experienced that precipitous drop when the Internet bubble burst. But that’s a natural part of the cycle and did not mean total destruction. There are a lot of companies that were young upstarts then that are successful, mature businesses today.

Ten years ago, you were very hot on index funds. Are you still? I am. There are a lot of investments you can make in which the outcome is unpredictable. Index funds, [a mutual fund that tracks an index such as the S&P 500 or the Dow Jones,] on the other hand, are extremely predictable. They will match a segment of the market, for better or worse, and they’re inexpensive. The new thing that has been devised is exchange-traded funds, ETFs. They are as diversified as index funds, but they are also very liquid.

Can you tell me about them? ETFs are funds traded minute by minute. With traditional mutual funds, you can buy or sell only at one time per day. With ETFs, you can jump in and out during the course of the day. You have more flexibility and can dollar-cost average -- [that is, buy smaller steady amounts of an investment spread out over time rather than one large amount. Dollar-cost averaging can help small investors to buy in a disciplined way and can also give you a better average price over time.]

A decade ago, you were prescient about the Internet bubble. Did you foresee the housing bubble and its attendant carnage? I wasn’t out there shorting all the various stocks, but I positioned my company and myself to avoid leverage. People got crushed by being overleveraged and not understanding it. But that comes as the result of a larger problem: financial illiteracy. People are hung out there, on their own, with little understanding of the markets and are expected to start investing. This country is in dire need of financial literacy and assistance.

How can investors protect themselves from the next bubble? Understand asset allocation and diversification. Be invested in five or seven industries. That way, if one goes down the tubes, you have others that are holding up. And within those industries, make sure you are invested in a variety of companies. You don’t want any one company to take you down. For example, I owned Enron, [which failed spectacularly in 2001,] and it was in the Schwab 1,000. But it represented five-tenths of one percent of the fund, so big deal [when it declared bankruptcy]. You need to mitigate risk.

What advice do you have for people who failed to do that quickly enough and subsequently watched their portfolios get sliced in half? Let’s say you stepped into the waters in August of 2007 and bought an index fund that is now down 35 percent. I would [advise you to] sell it and buy another fund that is its equivalent. That way, you take your tax write-off this year, and the government shares in your loss. Then, invest that money into a similar fund, increase your saving, and grow your way out. Remind yourself that markets go up as well as down, and maintain a consistent plan where you add a little bit to your portfolio throughout the year. That way, you get the benefit of dollar-cost averaging.

But to enjoy the recovery, you need to remain in the market. That’s right. If your emotions took over and you sold [without getting back into the market for its current run up,] then a portion of your investment is wiped out. People who hang on will see the bounce back, realize that two years is not the determinant of any investment, and gain an understanding of risk.

Before things started to turn around, back when the economy was at its most fragile and banks had stopped lending money to one another, I heard Wall Street commentators talking about us being at the edge of a financial abyss. Were you ever concerned that we would fall in? It was terribly stressing, even for me, but I never thought we would fall into the abyss. I knew [the downturn] would come to an end. I couldn’t predict an exact bottom, but I knew it would happen when I least expected. I knew we would eventually come out of it.