Hold On to Your Britches

The most recent Nasdaq dives aren't reason enough to start dumping stocks.
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SAN FRANCISCO -- Is it time to get scared yet? The

Nasdaq Composite Index

suffered its second-biggest point decline

Tuesday, falling just over 200 points, a day after it sustained its fourth-biggest point decline. (Boo!)

Of course, point losses are not as significant as percentage drops and neither decline ranks among the index's Top 10. But that does little to mitigate the pain most tech-focused investors are (no doubt) suffering in the wake of today's 4.1% decline.

A few things to keep in mind:

    The Nasdaq rose nearly 86% in 1999 after climbing almost 40% in 1998. The index was up 24% in 2000 heading into this week while its major blue-chip counterparts were down considerably. The Comp sustained a near 10% decline in January before rebounding with a vengeance in February and the first week of March. Oracle's (ORCL) - Get Report earnings report after the bell will likely stem some of the pain.

These truths may be self evident. But it's important to keep them in mind. Just as it was important, back when the good times were rolling (last week, that is), to keep in mind that stocks (yes, even your tech and biotech favorites) can go down.

"I think investors are guilty of thinking stocks go in one direction, which is up. That is not, indeed, the case," said Marc Klee, portfolio manager at

American Fund Advisers

. "People forget that

momentum stocks are to a large extent subject to the same pressure in both directions."

Klee also notes there's been a "rolling correction" in tech stocks, and household names such as

Microsoft

(MSFT) - Get Report

,

Yahoo!

(YHOO)

and

Amazon.com

(AMZN) - Get Report

are each down at least 20% from their 52-week highs.

Thus, it's folly to think you can blindly buy just any tech stock and profit.

So much for the obvious.

What is (perhaps) less apparent to some investors is that just because a stock such as

Protein Design Labs

(PDLI) - Get Report

(which I'll return to in a minute) is now at 195, when it was at 265 Monday or 327 1/4 a week ago, does

not

mean it's necessarily a bargain.

"You've got to remember that valuation is a combination of price and fundamentals," Klee said (about stocks in general vs. Protein Design Labs in particular). You can't just look at one of the two, he said, and determine whether a stock is attractive.

Which brings us back to Protein Design Labs, a developer of antibodies used to prevent and fight a variety of ailments, including cancer.

In concert with most biotech names, Protein Design Labs shares soared from a base in the mid-30s last October to as high as 327 1/4 on March 7. Conversely (and predictably), the stock shed nearly 25% Tuesday as biotech stocks were roiled by comments from the politicians.

The issue for this (c'mon everybody do your) exercise, is not whether Protein Design was under, over, or fairly valued then vs. now. The issue is what to do if you're long the stock heading into a revolting session like Tuesday's.

"If you liked it at 230, you've got to love it at 190," said Robert Christian, chief investment officer at

Wilmington Trust

, who did and does.

Monday, Christian mentioned Protein Design Labs in passing among names he likes (and is long). Trying to avoid playing Tuesday Afternoon QB, I called him back amid the carnage to get insight into how he was handling the deluge.

"This day-to-day volatility is why it makes sense if you've recently made a decision to buy

any highflier to take your time" and accumulate a position over time, he said. "This gives us an opportunity to average down."

The investment officer was doing just that Tuesday, calling Protein Design Labs a company with a "tremendous opportunity" to benefit from advances in genetics -- where he sees "tremendous strides" being made in the next three-to-five years.

Christian runs about $25 billion in assets, so perhaps it's easier for him to be blase about a single horrid day in one stock than it is for individual investors.

But that gets to a point he's been trying to bring home: Diversification is OK, even a good thing.

"There seems to be this growing feeling that you don't need to do asset allocation -- just own tech stocks," Christian observed. "Owning tech stocks is great but you have to own other things as well and take a long-term view."

He recommends that an equity portfolio for most folks should be broken down as follows: about 70% in large-cap stocks, with about a third of that in technology; 20% in small-caps; and 10% in international equities, via mutual funds.

Even some avowed tech bulls like Klee -- who runs about $3.3 billion in tech funds -- concede that the sector's glory days may be fading.

"My gut feeling is

tech is not going to dominate the way it has," he said. "It will do well and outperform, but not nearly by the order of magnitude as in the last two years. Tech will resume the leadership but will start to be joined by other sectors" with healthcare and financials the most likely candidates for participation.

Which brings us back to the issue of diversification, which I know sounds boring, old-fashioned, even pedantic in the wake of recent gains by the sectors in favor. But if the trend of the

most

recent events continues to take the steam out of the momentum game, such "dull" conventions may find themselves back in favor.

Although I'm not going to hold my breath.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com.