What to Do When Tech Tanks

Before 2009 ends, we're going to see a lot more days like yesterday, during which some tech stocks took a serious beating:

Source: Yahoo! Finance.

If that's a frightening thought to you as an investor, it should be. Tech stocks have rallied big so far this year. Since January, the Morgan Stanley High-Technology index is up close to 33%, versus a 15% gain for the Nasdaq. Big winners such as Apple (NASDAQ:AAPL), up 59.9% through yesterday, have supplied much-needed tailwinds.

R.I.P, buy and hold
There's reason to believe the good times won't last, if only because there's ample evidence that buy-and-hold investing no longer works. Fool co-founder Tom Gardner said it best recently:

It makes sense that this debate would rage during the most explosive year in the history of stocks, with the S&P 500 racing to 1,400, buckling to 670, and now settled 'twixt the two. In 2008, on 18 separate days, the index moved more than five percentage points.

It's almost enough to give you motion sickness, isn't it?

Going by the volatility measure known as beta, tech stocks tend to pitch and yaw more than their old-fashioned peers. Take Apple. With a beta of 1.52, shares of the Mac maker tend to move 52% more than the market does on any given day. If you believe, as I do, that a further market correction is coming, then Apple is a prime candidate to take a short-team beating. It could even give back most or all of its 2009 gains by December.

When CIOs attack your portfolio
Technical factors aren't the only factor at work here. Researcher Gartner says that 42% of 900 chief information officers (CIOs) surveyed cut their first-quarter budgets. Only 4% of those surveyed said they had increased spending. (In most corporations, CIOs are responsible for reviewing and approving big-ticket tech purchases.)

If there's good news from the Gartner study, it's that CIOs aren't canceling projects outright. "CIOs report shifting more work to in-house resources and delaying capital expenditures more than reducing IT project investments," Gartner vice president Mark McDonald told News.com.

While delays are likely short-term bad news for consultants such as Infosys, they're good news for software suppliers hoping to win business when CIOs upgrade their infrastructures -- as they always do. Prudent Fools -- those who can no longer count on a blind buy-and-hold strategy -- must ask when such upgrades might finally arrive.

Should you sell?
Fortune-telling isn't my expertise. Fortunately, none of us need the soothsayer's touch to win in this crazy market. Instead, we should be thinking and investing like CIOs. We should be structuring our tech portfolios to:

1. Profit from short-term needs.
2. Capitalize on long-term shifts.

Let's address short-term needs first. Workforces are becoming more mobile, and consumers with them, thanks in part to smartphones and on-the-go software such as Apple's iPhone App Store offerings. Palm (NASDAQ:PALM) also offers a potential breakthrough with webOS, which has proven easy to create software for. CIOs are unlikely to cut back on technology that could boost revenue.

Cloud computing is a longer-term play. A recent Goldman Sachs survey found that CIOs ranked cloud computing 33rd on their list of current tech priorities. When they change their view, IBM (NYSE:IBM) and Google (NASDAQ:GOOG) should reap much of the windfall. Both firms are committing capital and talent to their cloud offerings as of this writing.

Tech is likely to tank -- but only because history says that it must. Booms are followed by busts, followed by booms again. What can you do? First, don't panic; prepare. You want your portfolio weighted to profit from where CIOs are spending now, with a sprinkling of where they will be spending later.

Call it "buy to profit," rather than "buy and hold." Isn't that a better maxim anyway?

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