At the start of this year, it was easy to find experts talking about the failures of diversification, and how investors should plow full-steam ahead into technology stocks.
Six months later, there has been a lot of backpedaling.
Somewhere in the middle of that posturing, average investors are trying to figure out what to do next with a portfolio of mutual funds that is most likely a bit too heavy on technology.
There's an easy reason why, empirically speaking, most investors have funds loaded with tech stocks: Investors tend to buy funds with good track records, and just about any fund with a good history over the last few years has been tech-heavy, with 25 percent to 75 percent of its portfolio in this one hot sector.
As a result, investors may be less diversified and more tech-reliant than they realize. It's a problem worth examining.
For example, say an investor purchased technology, biotech or Internet funds to be aggressive with 20 percent of his money, then spread the remaining dollars among top-performing diversified stock funds that turn out to be 25 percent tech.
He ends up with 40 percent of his assets in tech stocks (the 20 percent in the sector funds, plus one-fourth of the remaining assets). If the diversified funds are 50 percent tech - and that's not uncommon these days - the investor has nearly two-thirds of his assets in technology.
That was fine when everything in technology looked rosy, but now that Microsoft is down 40 percent from its highs, and the Nasdaq index appears directionally challenged, it may make the portfolio too volatile for comfort.
"Any fund with a good track record over the last few years will have a lot of tech stocks," says Morningstar analyst Scott Cooley, "so reducing tech exposure means picking something where the history probably doesn't look as good."
That's a tough sell.
No matter how much you might like to lose some weight in the tech sector, it's difficult to convince yourself to buy something with a history that is worse than what you own now.
One obvious place to look for funds not awash with tech stocks would be value funds - downtrodden in the late 1990s because they look for undervalued stocks but dramatically on the upswing during the current quarter.
You also could invest in sector funds that focus on out-of-favor portions of the market.
"It is always a challenge to invest - a forward-looking exercise - when the only thing you can depend on is past history," says Edward S. Rosenbaum, director of research at Lipper Inc. "Things that are down and out of favor may be that way for a reason and may not bounce right back. But sectors don't stay on top forever, which is the reason to diversify."
In fact, there's a fund industry axiom that the sectors with the most new funds going through the Securities and Exchange Commission registration process are the sectors most likely headed for a fall. That's because fund firms tend to enter markets only after the sector turns positive; the economic cycle typically is past its zenith when the bulk of new funds open.
The two sectors that have the most new funds in registration today? Internet and biotech.
For investors, these warning signs mean that it's time to do some soul-searching and some fund research.
For starters, examine your current holdings to determine how much of your money is dedicated to the technology sector. Most funds will publish new lists of their holdings for semi-annual reports, to be issued after the end of this month; in the interim, Web sites such as Morningstar.com and some financial newsletters offer portfolio X-rays that give an estimate of where a fund invests its money. You also can call the fund company and ask if it will give you current weightings (many will, some won't).
Next, determine how much of your money you really want dedicated to tech stocks.
"Develop a plan or rule and stick to it, such as a maximum of 50 percent of your portfolio in technology," says Thurman L. Smith, publisher of the Equity Fund Outlook. "Once you cross that line, scale back and participate in other segments of the market, even if it means buying something that is less popular with less of a track record."
Last, decide if you can live with your current allocation and plan an escape route.
Given the long technology run-up, you may want to invest new assets in other sectors rather than selling past winners and realizing taxable gains. You may also choose to ride it out, letting your fund managers move you in or out of the technology sector as they see fit.
Says Rosenbaum: "People are uncomfortable finding out how much tech they have, but they are uncomfortable switching. The right thing to do, in those cases, is whichever solution makes them comfortable."
Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at firstname.lastname@example.org or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.