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Lessons learned from NASDAQ's fall (Part 2)

Know when to sell, do your homework, diversify portfolio

Last week we presented you with two lessons to be learned from the dramatic fall of the NASDAQ index since it hit its peak on March 10, 2000. This week: three more lessons.

First, know, or at least think about, when to sell. Given the speed with which the market can obliterate wealth, it's crucial for investors to plan an exit strategy.

Your rule could be as simple as selling if a stock drops, say, 10 percent. But your criteria may depend on your reasons for buying. A value-oriented investor should sell when a stock hits a particular P/E target. A buyer of fast-growing companies should cash out if the case for growth unravels.

On March 10, 2000, Amazon.com's shares stood at $67 — already well below their all-time high of $107. Amazon hadn't turned a profit, and investors were concerned about intensifying competition and ambitious expansion plans. Clearly, the cracks were showing. A sale almost anytime last year would have been wise; the stock recently fetched $15.

Second, do your homework. It's important to research every stock you buy. That's especially true for technology, where the pace of change can quickly turn a champ into a chump.

Few amateurs have the time or acumen to distinguish Cisco's routers from Juniper's, but other issues aren't as difficult.

When investing in new or recently issued stocks, for instance, you should be aware of lockup agreements, which prevent insiders from selling their shares for a specified period following the IPO.

Something else to heed: burn rates, or how fast companies deplete the cash they raise. According to Barron's a year ago, many new companies were rapidly eating their seed corn. Drkoop.com and Pets.com are two notorious examples.

Finally, diversification isn't a four-letter word.

Forgive us for stating the obvious, but the bursting of a bubble in a single sector underscores the benefits of diversification.

Because it's difficult to time the market, diversification is the only way to position yourself for gains and minimize losses before they happen, says Lawrence Creatura, co-manager of Clover Small Cap Value.

"In January 2000, small-company stocks were the cheapest they'd been in decades, and I was begging people to invest in the fund," he says.

A year later small-company stocks had gained 22 percent.

Maybe now is a good time to diversify into some promising (and now cheaper) tech stocks.