On March 16, Cisco Systems shares (Nasdaq: CSCO) closed below $21 a share, after dipping to a 52-week low of $20 earlier in the day. In the past 12 months, the Internet equipment maker’s shares have fallen 44 percent.

The bad news is that Cisco can drop another 20 points. The good news is that it probably won’t. It all depends on President Bush, Alan Greenspan, consumer confidence and everything else bantered about by the experts on CNBC.

One year ago, Cisco, along with the rest of the Nasdaq Composite Index, was flying high. Twelve months later, technology stocks continue a painful, downward slide. Day after day investors check in to declining portfolio balances, witnessing a bear market in search of realistic valuations that have yet to be discovered.

Are you trying to figure out how low Cisco can go, or have you put into place a portfolio that will allow you to reach your long-term financial goals regardless of Monday morning’s new round of disappointing earnings?

If the past two years have taught investors anything, it is that trying to stay one step ahead of this stock market is a losing proposition. Yet despite the obvious realization that diversification does in fact work, a surprising number of individual investors continue to latch on to the hype of Wall Street, ignoring the simple tenets of modern portfolio theory upon which Coffeehouse Investors build portfolios.

Are you faced with a similar dilemma? Do you want to move past Wall Street’s daily obsession with the irrelevant, and toward a more logical and sane approach to building long-term wealth? Where should you begin?

Everyone knows that the first rule of a prudent investment plan is diversification — don’t put all your eggs in one basket. The second Coffeehouse principle — that of capturing the entire return of each basket — is a little more obscure.

What does this mean, and why is it more important now than ever before in light of this challenging investment climate? Let’s take a closer look, including a few of the major benefits of embracing the second Coffeehouse principle.

Instead of trying to select individual stocks and mutual funds for your portfolio, a far simpler approach is to first identify the various asset classes, or baskets, upon which your portfolio will be built.

Once this task has been completed, you have the choice of either following Wall Street’s lead and trying to select the top securities in each asset class, or opting for the Coffeehouse philosophy instead, and owning all the securities in each basket through a portfolio of unmanaged index funds.

Which approach is best for you? It’s hardly worth mentioning Wall Street’s dismal track record in making a decision, but here are three arguments that might sway your choice:

Indexing allows you to stick to a long-term game plan with total confidence — in up markets as well as down markets. Unfortunately, without a plan, including a written investment policy statement (IPS), many investors default to Wall Street’s “go with what feels good at the time.’’ The past few years have shown the futility of this approach, as investor money poured out of value stocks and into high-tech stocks in search of higher returns. Now these same investors are trying to figure out how low Cisco will go before Alan Greenspan saves the day — or is it time to sell everything in pursuit of the next hot sector, which right now happens to be, you guessed it — value stocks?

Indexing allows you to maximize your stock market returns within a diversified portfolio. Consider this: Regardless of how you divide the stock market into various asset classes, each basket is usually driven by a small number of top-performing stocks.

For instance, in the 1980s, the best performing stocks were Circuit City Stores, Limited Inc., Hasbro, Home Depot, and Wal-Mart. How many of these stocks made the top-five list in the 1990s? None. The top stocks of the last decade consisted of names like Dell Computer, America Online, EMC Corp., and yes, everyone’s beloved Cisco.

Are these companies going to be leading the pack over the next 10 years?
Don’t bet on it.

How can you make sure you own the next decade’s top stocks? Wall Street wants you to sign up for its high-priced research and find out. Coffeehouse Investors have a much simpler approach. We already own the top stocks, whichever they might be, because we own ‘em all!

Most importantly, indexing allows you to build emotional and financial wealth while getting on with your life. A few investors enjoy the challenge of gambling on Cisco’s ultimate low. Many more investors are too busy with the challenges of just making it through the day, embracing their families, their careers, and dreams along the way, having recognized that investment portfolios are simply a tool to be used to accentuate a larger purpose in this world.

The Coffeehouse philosophy continues to reward investors who recognize its simple wisdom. It will do the same for you.

(Editor’s Note: Bill Schultheis is the publisher of The Coffeehouse Investor, a financial and investment newsletter. He may be reached at (206) 286-0376 or WjS6@aol.com.).