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
For some strategies, however, funds make more sense. One fund Stanasolovich uses as an example is the Caldwell & Orkin Market Opportunity Fund
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.
More on preparing for a comfortable retirement:
See more of Robert Brokamp's interview with Louis Stanasolovich and the investments they recommend in the new Rule Your Retirement. Also this month, we take a critical look at the "Sell in May" theory, discuss some classic conflicts families face in retirement, and much more. You can read every word absolutely free with a 30-day trial. Let Rule Your Retirement help you stop being scared of your investments today.
Fool contributor Dan Caplinger sleeps pretty well at night, at least when his 3-year-old daughter isn't cranky. He doesn't own shares of the companies discussed in this article. The Fool's disclosure policy makes a lumpy pillow.