How Should I Invest in the Internet?

This sector's volatility might warrant some diversification instead.
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Should I invest in Internet funds or Internet stocks? I have about $150,000 in 13 stocks, including Adaptec (ADPT) - Get Report, Compaq (CPQ) , Cabletron Systems (CS) - Get Report, ICOS (ICOS) and Oracle (ORCL) - Get Report, and I have another $50,000 to invest. I am 60 and retired, and my wife is still working. -- Ferrell Ely

Ferrell,

On Tuesday, the

Nasdaq Composite

plummeted 94.13, or 3.9%, for its third-worst point drop ever. Internet stocks made an even hastier retreat as the

TheStreet.com Internet Sector

index fell 48.59, or 9.6%, largely due to a 26.1% decline in

Lycos

(LCOS)

.

Internet stocks staged an early recovery Wednesday. But Tuesday's performance is an essential reminder of their volatility, especially as you are considering putting $50,000 in the group.

The first question you should ask yourself is: "Can I afford to take this kind of risk?"

If this is money that you can afford to lose, you might consider putting some of it in the Internet sector. (You may have a hefty pension that you didn't mention or a considerable amount of additional money invested in other instruments.)

"I don't have a problem investing in aggressive-growth stocks. That's if you are home free from the standpoint of financial independence," says David Foster, a financial planner with

Foster & Motley

in Cincinnati.

"What would happen or how would you feel if you lost a substantial portion of your money overnight, and it didn't regain its value for years?" asks Ben Tobias of

Tobias Financial Advisors

in Plantation, Fla.

If you are going to need this money for living expenses within the next five years or so, "No. 1,

you shouldn't be adding money to a tech portfolio," says Foster. Instead, you may consider moving into steadier kinds of equities or other, less aggressive instruments.

The decision also depends on the state of your entire investment portfolio. A good number of your stocks are technology-related. Some of the professionals suggested that you may want to step away from your existing investments and assess your complete portfolio. If you need this money in the short term, do you have the necessary downside protection? You may need to diversify outside of tech or growth stocks in general.

"There is no diversification in picking stocks that would move together," says Robert Levitt, a financial adviser with

Levitt Novakoff & Co.

in Boca Raton, Fla. It's like someone buying suntan lotion, swimsuits, rafts and other things that you take to the beach, without any thought that it might rain, Levitt says.

For that diversification, Levitt prefers buying mutual funds to individual stocks. "I don't buy individual stocks. It is very difficult to pick the winners. By buying a fund, I am never only owning the top performers." He starts with a core holding like the

(VTSMX) - Get Report

Vanguard Total Stock Market index fund, which aims to match the

Wilshire 5000

index.

You asked about Internet sector funds, but some of the financial planners I spoke to prefer investing with a recognized manager who runs a diversified fund. Daniel Roe with

Budros & Ruhlin

in Columbus, Ohio, suggests playing the Internet by going to a seasoned manager who knows technology. That way the pressure is off you to pick the next great names and on the manager, whom you can always fire.

Send your questions to

fundforum@thestreet.com, and please include your full name.

TSC Fund Forum aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.