DIVERSIFIED PORTFOLIO PROTECTS INVESTOR FROM SUDDEN SLUMPS (FINANCIAL FOCUS)

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

Technology has been the word for some investors over the past couple of years. But when tech stocks short-circuited in the spring of 2000, investors whose portfolios weren't well-diversified learned a hard lesson.

Some investors mistakenly believed the technology sector had unlimited growth potential. But when it fell, it fell hard. The Nasdaq Composite Index, home to many technology stocks, dropped 13 percent in the second quarter of the year -- its largest drop in a decade. Then, in July, the Nasdaq fell another 10 percent.

Market experts attribute this rapid decline to several factors. For one thing, many technology stocks had become tremendously expensive -- too expensive for investors' liking. Also, investors began to get nervous over the lack of earnings exhibited by many of the dot-com companies.

The reasons behind the market meltdown are actually less important than the fact that some people had large percentages of their portfolios tied up with technology stocks. As a result, they got burned.

Were these people foolish to pit their investment dollars in technology stocks? Not necessarily. Several areas of technology offer attractive prospects for growth. However, too many people put too much money in technology, leaving themselves over-exposed to just one sector -- and that's an invitation to trouble. It's never a good idea to put a large majority of your investment dollars into one particular market segment, no matter how strong it may look at a given time. As the events of this past spring showed, it takes very little time for a soaring market to plunge.

Sometimes, you can become over-concentrated in one area without even being aware of it. For example, rapid or sustained growth in the total value of a particular group of stocks can contribute to "unbalancing" a portfolio.

That's why it's important to periodically review your holdings and, if necessary, "rebalance" your portfolio. If you're too heavily weighted in an area, think about ways you can diversify. By spreading your dollars across many different industries and types of investments, you'll reduce the risk of having most of your assets exposed to a sudden downturn in one area. And by having your money invested in a variety of areas, you'll have chances to take advantage of upswings.

Furthermore, you can diversify in more ways than one. First, of course, you can invest in different industries. Then you can invest in different types of companies within each industry. Some industries may offer you more investment possibilities than others, but all industries will give you some choices. And striving for maximum diversification is generally a good idea.

There's not much "sizzle" in diversification; it's a basic, common-sense approach to investing. But when the winds of change cool off the "hot" sectors, you'll probably be glad to have a well-diversified portfolio.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.