The New Safe Portfolio: Why Stocks, Bonds, and Cash Aren't Enough Anymore

The old ways of shuffling investments around simply don't work the way they used to.

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Call it the Holy Trinity of Investing: Stocks, bonds, and cash. For decades, it's been drilled into investor's heads that a diversified portfolio was simply a matter of finding the right balance of those three assets. Not anymore. If there's a lesson to be learned in this financial crisis, it's that the old ways of shuffling investments around simply don't work the way they used to. As markets become both more global and more sophisticated, concentrating wealth in the limited world of old Wall Street is simply becoming a riskier proposition.

Now, more advisors, educators, and analysts are recommending everyday investors expand their investments to a more varied mix in order to protect their portfolios. With the help of Leland Hevner, author of The Perfect Portfolio: A Revolutionary Approach to Personal Investing, we offer a primer on some of the assets every investor should understand in order to keep your money growing, plus tips on how new investment vehicles are making diversification easier than ever.

Gold


Fear, inflation, and a weaker dollar. The first one here right now, and you can bet the other two will return in the future. To be ready, consider a small allocation of some version of the shiny yellow metal. Soaring prices during this downturn suggest it's still the ultimate defensive trade. How to invest: Hevner suggests looking at the Fidelity Select Gold fund (symbol FSAGX) for a mix of exposure to bullion and mining stocks. Other popular options include ETFs like the iShares Gold Trust (IAU) or SPDR Gold Trust (GLD).

Energy


Despite advances in alternative energy, the world economy still runs on oil, and while the fluctuations in crude prices may be a bit unnerving, the low correlation between energy and many other asset classes make it a must-have for your portfolio. How to invest: There are dozens of funds and ETFs with energy exposure. Hevner likes Fidelity Select Energy (FSENX) and the Dow Jones Energy ETF (IYE).

Agricultural Commodities


There's been a bit of a boom and bust feel to the agricultural commodity sector over the last year. Prices for grains like corn shot up on hefty demand for ethanol, and the fertilizer industry jumped as global food production struggled to meet demand. Then, the global bust (in food prices, ethanol, and the rest) brought shares back to earth. But agriculture has a growing chorus of proponents, including the likes of legendary investor Jim Rogers. Growing populations and changing diets also favor the sector for the long term. "The growth in demand is almost certain," Hevner says. How to invest: Until relatively recently these commodities were largely limited to futures traders. Now, ETFs offer much more friendly options for the everyday investor. Pure commodities are tracked by Powershares DB Agricultural Fund (DBA), while the Market Vectors Global Agribusiness ETF (MOO) is a way to play the likes of ag giant Archer-Daniels-Midland, Monsanto, or fertilizer makers.

Real Estate


The term "safe as houses" may seem so last century, but real estate—specifically Real Estate Investment Trusts—are still worth a spot in your portfolio. Say what you will about real estate investing in this environment, but REITs remain the easiest way for everyday investors to gain exposure to an asset that can cut your portfolio's overall volatility. While the rule doesn't apply in this downturn, real estate tends not to move in tandem with stocks, and has almost no correlation with short-term bonds. How to invest: The Vanguard REIT ETF (VNQ) holds a broad range of REIT assets.

Emerging market stocks


Again, it's tempting to count out emerging markets after their brutal declines during this downturn. U.S. investors may shudder when they look at losses on the S&P 500, but a quick glance at China, India, and many other markets show that lots of foreign markets fared worse. While it's true that bets on specific countries or regions can be highly volatile, especially in a fast-growing but less stable emerging market, the returns can be sizable if monitored carefully.