CHET CURRIER

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Put the bull out to pasture. Send the bear back to the woods.

Bull and bear markets the traditional terms investors use to classify broad rising and falling trends in security prices don’t happen the way they used to any more. Today stock-price trends most often occur in fragmented patterns within the market, as individual stocks and groups of stocks go their own very different ways.

You still get dramatic gains and losses, such as the Nasdaq Composite Index’s 37 percent drop between March 10 and May 23 this year. But note that the Standard & Poor’s 500 Index lost only 1.3 percent over that same stretch.

Or look back to the fourth quarter of 1999, when the Nasdaq composite gained 48 percent while the S & P; 500 posted a much smaller 15 percent return.

“I’m not sure everyone agrees what ‘the market’ is any more,” said Michael Sapir, chief executive of ProFund Advisors LLC in Maryland, which manages $2.6 billion in 27 mutual funds. “It’s a lot more complicated than it used to be.”

This doesn’t have to present a big problem for long-term investors. It only reinforces the already persuasive argument for patient, diversified investing. Still, it’s a sign worth every investor’s attention of basic changes in how the investment game is played.

On either the way up or the way down, stocks are less and less prone to following parallel courses. One reason for this:

Most fund managers and other professionals, following a continuous “fully invested” philosophy, now move money from one area of the market to another, rather than into and out of stocks altogether.

Some of the most telling evidence, says Harindra de Silva, president of the $1.3 billion fund management firm of Analytic Investors Inc. in Los Angeles, lies in recent data on “dispersion” of stock returns, which he says has gone “off the charts.”

Dispersion is the variability of returns among individual stocks within the same time span. It differs from volatility, which measures the degree to which stock prices fluctuate over time.

“The highest volatility month in modern market history was October 1987 (when stock prices crashed),” de Silva said. “But dispersion that month was not unusual. Almost all stocks had big moves, but they all moved together.”

The statistic he uses to track dispersion (technically, the standard deviation of individual stock returns around the market average) set a modern monthly high of 12 percent in September 1998, compared to what had been the usual range of 5 percent to 8 percent. It reached 16 percent in December 1999, and 17 percent in February of this year.

These have served as exclamation points in a long-term trend that has seen annual dispersion rates rise from about 20 percent in the 1940s to about 30 percent in the 1990s, with a surge to almost 90 percent last year, de Silva says.

Dispersion increases in periods of great change, he says. Right now, the obvious agent of change is the emergence of the Internet.

The more dispersion you have from stock to stock, it follows that the more investment returns will vary from one mutual fund to the next. “This increases a manager’s chance of beating the market without necessarily a commensurate increase in skill,” says Katie Koehler, Analytic Investors’ director of client relations. “Investors need to be careful not to mistake luck for skill.”

Here’s the tricky part: While some funds with concentrated portfolios of 20 to 30 stocks may rack up dazzling results in this environment, to protect yourself against heightened risks resulting from rising dispersion you need more diversification, not less.

Chet Currier is a columnist for Bloomberg News.

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