Portfolio Advice: Diversify to Survive

Obsessive love affairs are destined to end badly.

So it goes with technology stocks — who could blame you for falling in love? Those triple-digit returns you were getting from tech stocks and tech-filled mutual funds were so hard to resist. You blew off other sectors — which seemed boring in comparison. And when the tech bubble deflated, you just couldn't let go.

Now look at you: Stuck with a sagging portfolio that's still overweight in technology, and trying to figure out how to get things back in order.

You might feel like you're alone, but financial planners across the country say they are seeing this scenario every day. Although the tech crash has knocked down investors' tech allocation a bit, that may not have done enough. At the end of January, the National Association of Investors Corporation top 100 index of most widely held stocks showed a tech weighting of almost 34 percent, compared with the S&P 500's 24 percent weighting in tech at that time.

Letting Go Is Hard To Do

"What we've been seeing is many investors that think they're diversified and they own seven or eight large-cap growth funds; or four large-cap growth funds, one mid-cap growth funds and an S&P 500 fund," says Lou Stanasolovich, a certified financial planner with Legend Financial Advisors in Pittsburgh. "That's when they want to evaluate what they have."

The most difficult part of the diversification process is letting go, say planners. Before investors sell their beaten-down tech stocks or mutual funds, they need to come to terms with the fact that what once made them rich, if only on paper, is now worth a fraction of what it once was. That's why many investors are often reluctant to sell their tech holdings, because they cling to fond memories of the past.

For that reason, many planners say investors should not go on the rebound. Most recommend dollar cost averaging, or selling your investments little by little over a period of time, as the best way to wean yourself off of losing stocks. That way, investors can not only come to grips psychologically with selling off their losers, but also decrease the risk of selling a stock or a fund at too low of a price.

"I would avoid doing anything dramatic or selling it all right away, just for the purpose of dollar cost averaging," says Matthew Reading, a certified financial planner with Austin Asset Management in Austin, Texas. "No matter what, you don't know what's going to happen to a stock. That's true on the upside as well as the downside."

Reading also suggests that investors place a limit order to sell at a certain price that is good till cancel. That means you place an order to sell a stock only when it reaches, say, $25 or higher. That way, you decrease the risk of selling a stock at a really low price. The downside is, if the stock never reaches that $25, your sell order won't get fulfilled. If that happens, you may need to place another order to sell the stock at a lower price.

Move Quickly to Diversify

But not everyone agrees you should divest gradually. Some, like Roger Gibson, president of Gibson Capital Management in Pittsburgh, argue that the longer your portfolio is undiversifed, the worse it's going to be for you in the long run.

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