Best of Everything 2010: Best Investments

This portfolio covers the vast majority of global stock and bond markets and returned an annualized 3% for the past decade.

Best Simple Portfolio

You'll beat most investors with just three funds.

This portfolio covers the vast majority of global stock and bond markets and returned an annualized 3% for the past decade. Not super, but don't forget that includes two bear markets. Lift the stock stake to increase potential returns or boost the bond stake to cut risk.

33% Vanguard Total Stock Market (symbol (VTSMX (opens in new tab))

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33% Vanguard Total International Stock Index (VGTSX (opens in new tab))

34% Vanguard Total Bond Market (VBMFX (opens in new tab))

Way to Buy Gold

Own the shiny stuff in a low-cost fund.

Unless you think we'll be using gold coins as currency, invest in iShares Gold Trust ETF (IAU (opens in new tab)), which holds gold bullion. Ease of trading, high liquidity and low commissions make this a better choice than coins. It recently became the cheapest gold ETF by cutting its expense ratio to 0.25%.

Best Funds in Four Essential Categories

BALANCED FUND: Vanguard Wellington (VWELX (opens in new tab)), in business since 1929, combines stocks and bonds in one portfolio. Co-managers Ed Bousa and John Keogh generally allocate 65% of the fund to large-company stocks, such as AT&T and IBM, and 35% to high-grade bonds and cash. The annual fee is low (0.34%), and the fund recently yielded 2.4%. Wellington returned an annualized 6.7% over the past decade. Minimum investment: $10,000.

EMERGING MARKETS: For decades now, Asian economies have been the most dynamic in the world. Matthews Pacific Tiger (MAPTX (opens in new tab)) invests in stocks in Asian emerging markets. Chinese native Richard Gao and Indian native Sharat Shroff co-manage Pacific Tiger from Matthews's San Francisco headquarters. The fund returned an astounding 21.4% annualized over the past decade.

RETIREMENT INCOME: One-stop shop T. Rowe Price Retirement Income (TRRIX (opens in new tab)) holds a mix of 40% stocks and 60% bonds, and it is well diversified among domestic and foreign issues. The fund returned 5.0% annualized over the past five years.

SMALL-COMPANY FUND: Veteran manager Preston Athey typically holds a broad basket of about 300 small companies in T. Rowe Price Small-Cap Value (PRSVX (opens in new tab)). His picks have produced annualized returns of 10.5% over the past decade.

Best Dividend Payers

The key is steadily increasing payouts.

To find the best-paying dividend stocks, we went to Standard & Poor's list of big companies that have annually increased their dividends for at least 25 years. Dividends are never guaranteed, but the record reveals superior management teams that drive higher profits and generate tons of cash. And while yields may look just moderately attractive now, consistently growing dividends keep boosting the yield paid on your initial investment.

Kimberly-Clark (KMB (opens in new tab)) manufactures products consumers need to buy regularly, such as diapers and tissues, making it a recession-resistant company. It currently yields 4.0%. Fast-food giant McDonald's (MCD (opens in new tab)) yields 3.0%, but the dividend growth rate has averaged 30% over the past five years, more than tripling the payout. Johnson & Johnson (JNJ (opens in new tab)) yields 3.4% and has a 14% five-year annualized dividend growth rate. Drug recalls hurt earnings, but profits should grow 9% in 2011 based on a strong drug pipeline and acquisitions.

Best T-Bill Alternative

Government-backed and a 3.5% yield.

Just like Treasury bills and bonds, Ginnie Mae securities are backed by Uncle Sam's full faith and credit. But they pay way more. The defensive portfolio at Vanguard Ginnie Mae fund (VFIIX) yields 3.5%. Mortgage rates would have to leap close to a full percentage point over the next 12 months to trim the fund's share price enough for its total return to trail the current T-bill yield of 0.12%.

ETFs: Best in Class

Four timely, low-cost selections.

CURRENCY

CurrencyShares Japanese Yen Trust (FXY (opens in new tab))

Three-year annualized: 12.2%

This fund boasts the best three-year record in its category and the lowest expense ratio (0.4%) among currency exchange-traded funds. The ETF is currently a bet that the yen will continue to appreciate against the dollar.

BONDS

iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD (opens in new tab))

Three-year annualized: 8.5%

With Treasury-bond yields in the dumps, a fund that invests in high-quality corporate debt is a good way of picking up extra income without taking on much more risk. The ETF pays interest monthly, yields 3.8% and charges just 0.15% annually.

WATER

First Trust ISE Water Index Fund (FIW (opens in new tab))

Three-year annualized: -4.4%

Water is a niche market, but it's an essential commodity that will only grow more valuable. The ETF holds utilities and firms that make materials and equipment used for purifying water. The three-year return stinks, so now could be the time to buy.

EMERGING MARKETS

WisdomTree Emerging Markets SmallCap Dividend Fund (DGS (opens in new tab))

Annualized return since inception: 3.4%

This ETF allows you to benefit from not just rapid growth in emerging markets but also the ability of small firms to grow faster than big ones. That all the holdings pay dividends is a sweet bonus. The fund, which launched October 30, 2007, yields 3.8%.