Portfolio Advice: Diversify to Survive
March 9 -- Obsessive love affairs are destined to end badly.
So it goes with technology stocks — who could blame you for falling inlove? Those triple-digit returns you were getting from tech stocks andtech-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 stilloverweight in technology, and trying to figure out how to get things backin order.
You might feel like you're alone, but financial planners across the countrysay they are seeing this scenario every day. Although the tech crash hasknocked down investors' tech allocation a bit, that may not have doneenough. At the end of January, the National Association of InvestorsCorporation top 100 index of most widely held stocks showed a techweighting of almost 34 percent, compared with the S&P 500's 24 percent weightingin tech at that time.
Letting Go Is Hard To Do
"What we've been seeing is many investors that think they're diversifiedand they own seven or eight large-cap growth funds; or four large-capgrowth funds, one mid-cap growth funds and an S&P 500 fund," says LouStanasolovich, a certified financial planner with Legend FinancialAdvisors in Pittsburgh. "That's when they want to evaluate what theyhave."
The most difficult part of the diversification process is letting go, sayplanners. Before investors sell their beaten-down tech stocks or mutualfunds, they need to come to terms with the fact that what once made themrich, if only on paper, is now worth a fraction of what it once was. That'swhy many investors are often reluctant to sell their tech holdings, becausethey 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 bylittle over a period of time, as the best way to wean yourself off oflosing stocks. That way, investors can not only come to gripspsychologically with selling off their losers, but also decrease the riskof selling a stock or a fund at too low of a price.
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