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Making Your Money Last

Your Investing Mix Will Change

When it comes to diversification, think globally.

Vanguard group economist John Ameriks sums up investors' recent rough ride this way: "We got schooled over the past ten years, but the principles have held up." The principles are: buy and hold, diversify, and rebalance. Following them may sound simple but, as the past decade underscored, it's often tough to do.

Buy and hold does not mean that if you assembled a portfolio in 2000 you can sit on it until you retire. Standard & Poor's 500-stock index may have been the mainstay of the 1990s, but if that's all you held over the past ten years, your portfolio hasn't grown a bit. The world has changed, and your investment portfolio should reflect that new reality.

Diversification now means owning some stocks and bonds from emerging markets as well as developed markets, plus some commodities and maybe a bit of a merger-arbitrage fund, among other untraditional investments (see 5 Strategies to Lower Risk).

Rebalancing -- selling a portion of your better performers to return your portfolio to its original proportions of assets -- should not be something you do only when you feel like it. Had you rebalanced at the end of every year since 2000, a portfolio that was evenly divided between stocks of big and small U.S. companies would have returned an annualized 3.6%, compared with just 2.7% if you hadn't. Add U.S. bonds to the mix in equal portions with the stocks, rebalance annually, and your portfolio would have returned an annualized 5% -- with less volatility.

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Managing a portfolio with many asset types isn't easy. Jeffrey Maggioncalda, CEO of Financial Engines, a retirement advisory firm, says we often make poor choices with our savings. For example, younger workers often have too much in money-market funds, and many older workers put too much in their employer's stock.

And those are just the technical problems. Fear and greed cause self-inflicted wounds. Cases in point: During the tech-stock and housing bubbles, investors rushed in at the top and sold after the bubbles popped.

That's why target-date funds have become so popular with retirement savers. The funds rebalance for you and move to a less volatile mix of investments as the target date approaches. They're well diversified, holding categories, such as emerging-markets stocks and commodities, that you might not invest in on your own.

So the basic rules of investing haven't changed, but you now have more tools with which to put those principles to work. Don't be afraid to use them.

For free advice, call 888-919-2345 between 9 a.m. and 6 p.m. EST January 21 or January 25, or go online at kiplinger.com/links/jumpstart. Jump-start your retirement-savings plan when you contact financial planners from the National Association of Personal Financial Advisors (value: $150 to $300).