While it's tempting to chase performance, buying highfliers after they've already jumped will usually prove hazardous to your investing health.
For many months, the best-performing ETFs have invested in developing markets and natural resources. These markets may seem appealing, but they've had pretty good runs already, and it's not clear how long this performance will continue.
To avoid getting hit in a downturn, it's best to diversify your portfolio across a broad spectrum of investments. There are many different ways to structure your portfolio, and while the following four steps aren't the only way to go, they're a simple approach to get you started.
Step 1: Shop at home
Building a diversified portfolio should start with U.S. equities as a base. Exposure to the world's largest market is important, and an investment in the U.S. should be the most significant holding in your portfolio. The SPDR S&P 500 ETF
Step 2: Add some bonds
A domestic fixed-income fund adds safety and income to your portfolio. The iShares Lehman 1-3 Year Treasury Bond ETF
Step 3: Go global
It's hard to imagine the world retreating from our ever-more-integrated and growing global economy. Although the U.S. is a huge part of that picture, it's increasingly important to look beyond our own borders when investing.
Broadly diversified equity funds that invest across a wide spectrum of countries can serve you well. The WisdomTree DEFA Fund
Step 4: Specialize
Once you've placed most of your assets in a handful of broad-based domestic and global holdings, you might want to complete your portfolio with a few select and specialized funds. Such narrowly focused funds are risky, but also potentially offer high returns. You might add an emerging-market fund like the Vanguard Emerging Markets ETF
Best of all ...
The four-step process above won't cost you an arm and a leg. None of the funds mentioned has an expense ratio greater than 1%. That means you'll keep more of your money working for you.
With hundreds of ETFs to choose from, it's easy to diversify. Just make sure you cover the basics first, with investments in stocks and bonds, before placing your bets on more exotic assets such as precious metals. The optimal portfolio will be different for every investor -- but these ideas should help you create the portfolio that's right for you.