After five years of solid gains in the stock market and an even longer bull run in home prices, many investors got a rude awakening when their net worth took a serious hit during the past six months. If substantial losses have your emotions on edge, you might want to look for ways to smooth out the ups and downs in your portfolio's value.

Let's face it, the most obvious way to make your investments less volatile is to cut your allocation of equities. But that would mean missing out on what could be a historic opportunity for stocks. And let's face it -- while the stock market hasn't been a great place for your investment dollars lately, over the long haul, it has been the place for the great long-term returns you need to retire comfortably.

Have your cake and eat it, too
So if you're committed to owning stocks through thick and thin, is there any way to smooth out the ride along the way? The brand-new issue of our Rule Your Retirement newsletter -- available today at 4 p.m. ET -- hits that question head-on, as lead advisor Robert Brokamp speaks with top-ranked investment advisor Louis Stanasolovich of Legend Financial Advisors to get tips on building a more stable portfolio.

The key to maximizing returns while keeping risk low is to own well-diversified investments. In the past, a portfolio that focused on domestic large-cap stocks and bonds, with small allocations to international and small-cap stocks, provided enough diversification. That's no longer true. The effects of the latest downturn in stocks have been felt around the world.

What you need to own
The problem, according to Stanasolovich, is that you need to have assets in your portfolio that aren't correlated with one another. That way, when one group of investments loses value, other investments will hold steady or rise to offset those losses. In his interview, he names several different types of assets -- including real estate, bonds, international stocks, and more exotic investments like hedge structures and managed futures -- that stock investors can use to reduce volatility in their portfolios.

You can get exposure to some of those asset types on the stock exchanges. For instance, companies like Vale (NYSE: RIO) and Monsanto (NYSE: MON) tend to move in sync with metals and grains, respectively. Similarly, share prices of real-estate investment trusts are based largely on the value of their underlying real estate portfolios. Hundreds of foreign stocks trade as American depositary receipts in U.S. markets.

For some strategies, however, funds make more sense. One fund Stanasolovich uses as an example is the Caldwell & Orkin Market Opportunity Fund (FUND: COAGX), a long-short fund that buys some stocks and sells others short. Although its performance during the bull market in stocks was terrible, as it lost money each year from 2003 to 2005, the fund has done very well when stocks have faltered. Last year, for instance, the Caldwell fund returned more than 33%, buoyed by bets against financial firms Bear Stearns (NYSE: BSC) and Lehman Brothers (NYSE: LEH), while counting shares of Transocean (NYSE: RIG) and Corning (NYSE: GLW) among its top long holdings.

Finding calmer waters
To create a low-volatility portfolio, you have to change your usual way of thinking about investing. Many people look for stocks that will rise as much as possible, and they're willing to risk gut-wrenching drops in the hope of achieving larger rewards. In contrast, you can always expect to have some of your investments fall in value in a diversified portfolio.

Yet while you probably won't see your net worth go up tenfold in a few years with a low-volatility portfolio, you also won't have to stomach as many big losses from your investments. If that helps you sleep better at night, then it's well worth the effort.

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