Stocks Got You Down? Here’s What to Do

Investors who piled into technology stocks in recent months have seen spectacular losses as many one-time favorites have lost ground since early March. But is now the time to change strategy? Sell for a tax loss? Here are answers to some frequently asked questions about the Nasdaq roller-coaster ride:

Question: I feel dumb, because I put a huge chunk of money in technology stocks in February and now the investments are under water. What have I done?

Answer: You’re not alone. About $53 billion flowed into stock mutual funds in February, and most of that went to aggressive stock funds that have been specializing in technology shares. Many technology and Internet shares hit new highs in January and February as investors piled in.

So these people got to the tech party just as the music stopped. If you are one of them, especially if you put a majority of your money in one kind of investment, then let this be one lesson you remember: Do not put all your money in one kind of investment, and certainly don’t do it all at once.

Q: Should I sell? I have a lot of money in the technology sector.

A: Before doing anything else, review your strategy.

Did you move more heavily into tech stocks or aggressive growth funds because you believed in the long-term possibilities of these investments? Did you tell yourself then that you were willing to accept the risk of loss for the possibility of gain? And have you reviewed your asset allocation strategy to make sure you are properly diversified in a variety of investments, including value stocks, cash and bonds?

Or was greed your motivator? Many people heard others brag about spectacular gains and wanted in on the action with little thought about whether they could stomach the inevitable volatility that comes from investing in an overheated market sector.

If you subscribe to a buy-and-hold philosophy and tech stocks play a role in your overall asset allocation strategy, then there is little reason to sell now. You risk getting out at the bottom and having to buy back in at a higher price later.

If you were merely chasing others’ gains, though, it could be smart to cut your losses and invest a little time on developing a market strategy that makes sense for you.

Q: Should I be loading up on tech and Internet stocks now that they’re “on sale”?

A: If you had a plan to buy on dips, this may qualify. If you want increased exposure to technology or Internet stocks and you understand that you may endure more losses, then now may be a time to buy. If you’re hoping to make a quick buck, understand that you are playing a high-risk game. No one knows how long it may take for tech stocks to recover--and some may not recover at all.

Q: If I bail out of some Internet stocks I just bought a month ago, can I deduct it all from my taxes?

A: You should never let tax considerations dictate your investment strategy. That said, any short-term capital losses you incur will first have to be offset against any short-term capital gains. (Any investment held less than one year is considered short-term for tax purposes.) Likewise, long-term capital losses are offset against long-term gains. Then the results of those two offsets are offset against each other.

If, after all of that, you still have a capital loss, you can deduct up to $3,000 against your regular income each year. Excess losses are carried forward to the next year.

Also, remember “wash sale” rules. If you sell a stock at a loss and buy “substantially identical” stock back within 30 days of the sale, you do not have a deductible loss. Your basis just carries over as if you never sold it.

Q: This market scares me!

A: You’re right to be a little frightened. Nobody knows what will come next, and fear is a natural response to the unknown.

Savvy investors understand that risk is part of investing--and know how much they can tolerate. If you invest aggressively, you must be able to handle the inevitable ups and downs. If you don’t like risk, it’s smart to be in more conservative investments.

If recent market activity caused churning and burning in both your portfolio and your stomach, it could be that your investments don’t suit your personality. It could be time to add cash, bonds or value stocks to your portfolio to balance some of the higher-flying stocks.

If you have an investment advisor, it might be time to review your strategy with a professional. If you don’t, there are increasingly sophisticated Internet tools to help investors, particularly those saving for retirement, to evaluate their risk tolerance and decide on an asset allocation strategy. Some to try include the 401(k) Advisor at https:/www.quicken.com and Financial Engines’ probability simulator at https://www.financialengines.com. Many discount brokerages, including Charles Schwab, have retirement planners and asset allocation software on their Web sites.