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What to do about the to-do
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April 4, 2000: 7:48 p.m. ET
How investors should respond to Tuesday's sudden sell-off and rebound
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - The success story of last year became a nightmare for many an investor Tuesday. The Nasdaq composite index swooped so low early the afternoon of April 4 that it turned into negative territory for the whole year.
By the end of trading, the darkness had lifted. Like a bad dream, the turmoil had passed and the index, which has a strong technology component, had regained almost all its lost ground.
The Dow Jones industrial average, for once, followed a similar, though not nearly as dramatic, course. The 30 industrials closed slightly down, a mere stumble after lurching around lunchtime.
We're not in Kansas anymore
Investors might well rub their eyes and struggle to make sense of the specter that swooped by. It scared them and leered at them and haunted some with the hint of reality of a margin call. But the market left much as it had come in.
How best to react? Stay scared, according to John Manley, senior equity strategist with Salomon Smith Barney. If greed was good in the '80s, fear is good right now.
Market watchers like Manley had worried about the lack of reason behind stock prices, particularly for Internet companies. Tech stocks with no earnings and no prospect of earnings were driven wildly higher by momentum rather than realism. Every setback was met with renewed optimism.
 After a freefall that broke through past levels of support early Tuesday afternoon, there is a hefty dose of reality.
"The absence of fear is gone -- we're seeing the lack of the absence of fear," Manley said.
Frank Gretz, market analyst with Shields & Co., welcomed the panic selling. Amid the tumult of early afternoon, he told CNNfn's market coverage that he felt the sell-off helped rebalance stock prices in the long run. Click on the following links to hear Gretz: [308 KB WAV] or [308 KB AIFF].
Manley and Gretz both seemed to paraphrase Rudyard Kipling -- "if you can keep your head when all about you are losing theirs ... you'll be a Man my son."
Greed is so last century -- now fear is good
Investment professionals often cite overconfidence as a key factor in creating a "bubble" in stock prices that could prompt a crash. Manley thinks the shakeup Tuesday will have restored a healthy dose of nerves in investors who had gotten used simply to buying stocks on any pullback. Gravity finally took hold of a market that had only seemed to go up.
The truth is that last year's record performance for Nasdaq, which rose 86 percent in 1999, went too far, according to investment strategists.
 "Technology stocks were just overowned," said Mark Simpson, equity strategist with A.G. Edwards. "A month ago, that was not a healthy market environment, with Internet stocks running wildly to the upside ... and many stocks trading on two-year lows."
"I think what we're seeing is really a normal correction and a very healthy correction in what had been a very overvalued sector, the Internet sector," said Mary Farrell, senior investment strategist with PaineWebber.
She thinks Internet stocks still have a lot of ground to give up. "This is still an overvalued market," she said. "The Internet stocks are vulnerable for possibly another 40 percent."
Market looks healthy, Internet has more to give up
But the market as a whole is healthy, she said, a sentiment echoed by Manley. The economy is still strong, the Federal Reserve may well ease its course, or at least back off "pernicious" tightening, and stocks will be driven by earnings as they start to come in this month.
Farrell thinks the Dow will move up this year but end it somewhere around 12,500. But the only thing she and most investment strategists admit they can say with any certainty is that there's more volatility in the offing.
"I don't think we're going back to the Old Economy, so I would be looking to buy that," she said. But large-cap technology companies like Cisco Systems (CSCO: Research, Estimates), IBM (IBM: Research, Estimates) and Oracle (ORCL: Research, Estimates) joined in the wild ride today, and their downdrifts made for good buying opportunities.
 The bottom line is to buy companies that you feel comfortable with, that have solid prospects and that are therefore highly unlikely to drop 50 percent in a day, as the big losers did Tuesday, she said.
"If you own good quality companies, you don't need to do anything," said Farrell, whose investment-strategy book "Mary Farrell's Beyond the Basics" coincidentally came out today.
Future uncertain, ask again later
Investment strategists tend to look at the market much closer, and pay much more attention to sector swings and rotations, than almost all financial planners advise their clients to do.
But equity strategists and financial planners agreed on one thing over and over today. None of them can predict the future, other than to say more volatility is in the offing. So both groups said that investors who have positioned themselves sensibly with solid companies and a dose of diversity should ride above the intraday waves. Some feel a new breed of investors already do this.
Long term there is still a better argument for owning and buying stocks than not owning and not buying them, according to Manley. He favors the four growth areas in the U.S. economy -- technology, health care, financials and communications.
If you insist on looking for value stocks, you can find value in those sectors, too, he said.
And remember, DON'T PANIC
Financial planners said they had been hearing from clients Tuesday but cautioned them not to get too caught up in what turned out to be another intraday swing that led back to where it started.
"If you're driving down the road and you read every billboard sign, you'll never make it to your destination," said Phillip Cook, a certified financial planner in Torrance, Calif. "Don't panic because of the activity of one day. And that's about as sage as I can get."
If investors call in a panic, he finds out what share of their money they have in technology and what their time frame is. Having 5 percent or 10 percent of your portfolio in technology shouldn't be a cause for concern, he and others say.
Investment advisers like to use the "nocturnal slumber" rule of thumb. If you can't sleep at night, you have too much exposure to risk and should rebalance, or even rethink your whole approach. That point should have been rammed home today.
"Nervous money doesn't win," Cook said. If an investor is unable to withstand the shock of a day like Tuesday, "I tell them to get out and stay out," he said.
Time to rebalance, or a buying opportunity
If you have very heavy technology exposure due to gains in the past year, it is time to back off, he continued. Take gains and balance them with losses the make the most of your tax situation, Cook said. Who knows how long it will take technology to come back? Though Nasdaq closed just 75 points below its open Tuesday, another downswing could be in the offing, market watchers say.
Cook is also advising clients to overweight international stocks, thinking that Asia has overcome its setbacks and the introduction of the Euro promises good growth in Europe.
Wholesale technology selling isn't a good idea, either. Many investors have started to think "long term" means six months, joked Scott Kahan, president of Financial Asset Management in New York. But he reminds his clients that they have likely done very well with their technology holdings.
Do not make the mistake of comparing your investments with their best performance, he said. "People tend to look at the highest price, and that becomes the new benchmark," he said. "But if they buy a stock at $10, it goes up to $20 and comes back to $15, they've still got a profit of $5."
Remember that volatility comes part and parcel with investing in technology. "People should look at this market as a great learning experience," Kahan said. "The best learning experience of how much risk you want to take is going through a down market."
Ramming home the value of diversification
If you do not have technology exposure or are looking to build a more substantial position, he and others look for setbacks like Tuesday as a buying opportunity. But be very specific about what you are buying, Kahan cautioned.
"Don't just buy all the same things that everybody has been buying, all the dot.com stocks," he said. "If you have been buying what everyone else has been chasing, it's time to rebalance."
Check mutual fund managers' track records, looking for past performance and their turnover ratio, which will give you an idea of how actively they invest and how volatile their positions may be. For individual stocks, now is the time to break down the financials and look at past stock performance. Does the stock's movement fit with your risk profile?
When Nasdaq corrected in mid-March, some financial planners also saw that as a buying opportunity. Others said they were watching for further downturns. Investors seem to have gotten used to buying on downdrifts, a strategy many investment advisers said they were employing Tuesday.
Nick D'Ambrosio backed off buying too much technology in mid-March. Tuesday he saw his opportunity.
"My thought was, as soon as it [the Nasdaq composite] got below 4,000, it's a good opportunity," he said. The Cubes (QQQ: Research, Estimates), the Nasdaq-100 tracking stock, are the easiest way to play Nasdaq and the broad technology market, he said, and he was looking to buy around midday.
But like Cook, he prizes diversification and was telling his clients that Tuesday's decline in Nasdaq showed the value of a broad portfolio.
Anytime a client has more than a 10 percent exposure to one sector, "I get nervous," he said. "If I've got 60 percent or 70 percent [of a portfolio] in stocks, I spread it between the S&P 500, Nasdaq and the Dow."
A bad day for some always makes for buying opportunities for others. Hence panic selling, and sudden buying. Only by spreading yourself broadly and not hitting the sell button too quickly can you protect yourself, both investment advisers and equity strategists said Tuesday.
"When a market gets too one-sided, you get something like today," Simpson at A.G. Edwards said. "This was history today." 
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Special Report: Eyes on the Market
Nasdaq back from an abyss - Apr. 04 , 2000
Margin calls flood in, hurt late market trading - Apr. 04 , 2000
The new small investor - April 4, 2000
You got your wish, Alan - April 4, 2000
How low can techs go? - Apr. 04 , 2000
Dow vs. Nasdaq, what now? - Mar. 16 , 2000
Getting in on the tech craze - Mar. 07 , 2000
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