It's coming. Can't you feel the ground shaking?

OK, I can't either, at least not yet. But I know it's coming. It may be hard to see through all the doom and gloom in the business pages right now, but the next great bull market is out there, somewhere in our future. I don't know how far away it is, but it's getting closer every day -- and if it's anything like past bull markets, its arrival will be a surprise.

Are you ready for it?

Using the market's cycles to our advantage
I realize that it might seem strange to be talking about upcoming bull markets when the daily news reports on our current market seem so glum. But that's just the thing -- markets are cyclical. It's easy for me to predict a future bull market because history teaches us that it's inevitable.

History also teaches me something about what it'll look like. Past bull markets have started with sharp spikes upward, with small caps leading the way. Of course, bear markets see the occasional spike in the major indices too -- witness the bounce we saw during the third week of July -- which can make it hard to tell whether the train is really leaving the station or just revving its engines.

That's all the more reason to stay fully invested. If you're short of great stock investing ideas, or the bulk of your money is in a 401(k) with no direct stock investing option, it's completely fine to park your money in an index fund or an ETF. Just don't leave it in cash -- there's rarely a good reason for an investor who is more than 10 years from retirement to be holding anything but stocks in long-term accounts. If you're holding a cash position, I suggest you start dollar-cost averaging into stocks or an index fund now.

But don't just pick any index fund -- think in terms of asset allocation.

Covering all the bases
As the experts at the Fool's Rule Your Retirement newsletter often remind us, asset allocation is the key to sustained investing success over time and through different market conditions. And dividing assets among four basic categories of stocks has historically yielded higher returns than any of those categories alone. It's that cyclical effect again -- sometimes small-caps can pick you up when large-caps are down, and vice versa.

Here are the four bases you should have covered in your retirement stock portfolio. For each, I've shown some sample stocks -- all rated 5 stars by our CAPS community -- from each asset class and some index funds and ETFs you could consider instead:

Asset Class

Sample Stocks

An Index Fund and an ETF

Small-cap stocks

optionsXpress (NASDAQ:OXPS), AmSurg (NASDAQ:AMSG)

Vanguard Small Cap Index Fund, iShares Russell 2000 Index ETF

Large-cap stocks


Fidelity Spartan 500 Index Fund, iShares S&P 500 ETF

International stocks

France Telecom (NYSE:FTE), Aluminum Corporation of China (NYSE:ACH)

T. Rowe Price International Equity Index Fund, iShares MSCI EAFE Index ETF

REITs and real estate stocks

Ventas (NYSE:VTR)

Vanguard REIT Index Fund, Dow Jones Wilshire REIT Index ETF

Remember, it's not just a matter of picking the strongest-looking asset class at any given time -- it's the way they work in combination over time that yields superior returns. Optimizing that combination is part of the art of portfolio management. It can be a complex subject, but if you'd like an easy-to-use guide to combining those asset classes into an optimized market-trouncing whole, check out the model portfolios in the July 2008 issue of Rule Your Retirement. (It's a paid service, but you can get full access free for 30 days, so click with confidence.)

Once you get your free access to the members-only area, follow the links to the July 2008 issue. There you'll find full instructions for pulling it all together -- and under the Resources tab, you'll see in-depth lists of recommended mutual funds for each asset class. These lists include funds available in most 401(k) plans, so you can put the plan into action no matter your situation. But whatever you decide to do, get rolling soon -- the bulls could be here any day!

To read more on asset allocation and preparing for the bull's return:

Fool contributor John Rosevear has no position in any of the stocks mentioned. France Telecom is a Motley Fool Income Investor selection. 3M is a Motley Fool Inside Value pick. optionsXpress Holdings is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.The Fool's disclosure policy has its red blankie all ready for the next running of the bulls.