Last week's column was all about the first transaction we've made since I began to hone the Rule Maker criteria. I announced our intent to sell Yahoo! (Nasdaq: YHOO), not really paying attention to the fact that the company was reporting its quarterly earnings the same afternoon. Ah, the tyranny of an editorial schedule. Because the Rule Maker column runs on Wednesday, even though I had concluded long before that Yahoo! was a company I wanted no part of, our portfolio management restrictions mandate that I preannounce any transactions.

Before I could sell, Yahoo! was down 20% based on its poor earnings report. Grrrr. I hate losing money, especially when I had identified the risks involved in advance. But whaddaya gonna do?

Strangely enough, I got very few negative comments about my decision to sell. We got the odd "buy Yahoo!" Rule-Maker-as-contrary-indicator snipe, which is okay. I would point out, though, that we did revise the Rule Maker criteria for a reason. That reason had everything to do with breaking the impression that Rule Maker is mechanical in nature, and everything to do with ensuring that the decisions we make are based upon a firm evaluation of companies' potential, the risks to them, and to a determination of value. In short, to make better decisions than we have in the past.

Whether Yahoo!'s situation turns out well is not really of interest to me at this point. The things that I saw: overdependence on a single cyclical revenue stream, hideous dilution due to options, and an unsure path to future growth. All that led me to believe that the risk profile of Yahoo! is not acceptable for the Rule Maker portfolio.

The more interesting question came up, though, based on my statement that I was going to look for an index fund to hold the proceeds from the sale of Yahoo! Incidentally, I intend to put all of our cash in some form of equity holding place until I find a better place for it. So, some of the questions tossed my way were:

-- Why would you put cash into the market in the current environment?

-- Wouldn't the use of an index fund distort the evaluation of the portfolio?

-- Isn't buying an index fund a short-term solution if you do not intend to keep your money there?

-- Why wouldn't you use something like Spyders (Amex: SPY) instead?

Let's take care of the easy question first, then the last one. Spyders are a kind of index fund called Exchange Traded Funds, or ETFs. The most well-known are Spyders, Diamonds (Amex: DIA) and Qubes (Amex: QQQ). However, there are dozens more. Each tracks a different section of the publicly traded markets, be it a small- to medium-cap index with the Vanguard Extended Market VIPER (Amex: VXF), or a sector like the S&P Global Energy Sector Index Fund (Amex: IXC), or a country like the MSCI Switzerland Index Fund (Amex: EWL). All of these are index funds that can be bought and sold just like stocks.

As for the other three questions, rather than answer them one by one, I will discuss the rationale for my proposal for buying an ETF with money that may be (but not necessarily) deployed elsewhere in the not-too-distant future.

One of the overarching principles of the Rule Maker Portfolio is that one should be fully invested at all times. This is not money that we need in the short term, so we're not going to sweat the short term. With the sale of Yahoo!, along with a bit of cash that has been jangling around since before I took over the port, we've got a few thousand dollars lazing about, doing nothing. So we're going to invest it.

But where? Frankly, I see more opportunities to sell than I do to buy at present. There are a couple of reasons for this: a) there are a boatload of companies that are still plenty buoyantly priced, and b) I've spent more time focusing on the companies we own and less on what new opportunities exist. Still, I am more confident in the overall trajectory of the U.S. economy than I am in my ability (or anyone's for that matter) to project when it is actually going to get better. Time in the market, not timing the market.

But, in the meantime, we've got to recognize that, in fact, the Rule Maker Portfolio is just that: a portfolio. In the absence of any great investing ideas, I'm sitting on a fairly small, non-diverse group of companies. So I have to ask myself: If I were to offer up a portfolio to a new investor, would it look like the one we have now?  The answer is no. I think, for the vast majority of people, holding a portfolio that is centered on just a few issues -- and precious few industries -- is a mistake. As such, it may not be the best example in the world to keep a portfolio that is so concentrated. And despite the fact that we have made umpteen exhortations that one should not blindly copy our ports, there is little doubt in our mind that some people do. We know this because people continually refer to our portfolios as "recommendations," which they are not.

So how do we strike a balance? Easy. We buy a vehicle that provides some diversity without jacking up our trading costs (which for the Rule Maker, at least, are zero). I'm willing to keep a portion of our money in this particular index fund for a long time, just as I will be willing, if I am perfectly happy with every other company in the portfolio, to use it as a funding source for new purchases. The ETF I am leaning toward is the Vanguard Extended Market VIPER, which tracks the non-S&P 500 portion of the U.S. stock market -- the thousands of companies that range from mid caps to small caps. I think this will balance against our stated bias toward large to mega caps among our individual equities.

In the next few weeks, I will analyze several more companies that are currently in our portfolio. I'll make an invitation that I have made previously:

If there's a company that you believe has the makings of a Rule Maker, and you would like to write a 100- or 200-word summary about it, please do so. You can post it on the Rule Maker Companies discussion board, or send it to me at BillM@Fool.com. I may invite some of you to expand your summary into a full-blown column. I'm more than happy to give someone a platform for an exceptional idea!

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann owns no companies mentioned in this column. The Motley Fool is investors writing for investors.