Reassessing your investment portfolio
By Laura Bruce • Bankrate.com

If the performance of your investments over the past year matches, or is worse than, what's happened to the stock market indexes, you may be ready to throw in the towel and put what's left into CDs. Many of the major indexes such as the S&P 500 have regressed to levels not seen in years.

The total return of the S&P 500 over the past 10 years is less than one-half percent. If you put $100,000 in an S&P 500 index fund in 1998, and just looked at the account today for the first time, you'd probably have a loss when fees are considered. Ironically, you would have done better investing the $100,000 in a one-year CD and rolling it over each year. Heck, a three-month Treasury probably could have won.

But the reality is that during that 10-year period you would have had some very large gains that could have been harvested for reinvestment or provided cash for vacations, home improvements and the like. Minimizing losses during bear markets can be very difficult, and making up losses is often excruciatingly slow.

The need to rebalance
"What keeps you from having 10-year returns that look like that is a broadly diversified portfolio," says William Suplee, Certified Financial Planner and president of Structured Asset Management in Paoli, Pa.

"When the markets are really rolling, like 2003 and 2004, you're actually selling some of your equity and capturing profits. But you have to rebalance; you can't put it on autopilot.

"The downside of this is the people who are moving into CDs are getting crushed. What happens if the government prints a lot of money to pay for all its spending? The $800 billion bailout or the next $1 trillion in stimulus has to get paid from somewhere. If they print that money, it will be inflationary."

Adding asset classes
Constructing a portfolio is a tough enough task for the pros, much less the do-it-yourself crowd. If you simply piece together a portfolio of individual stock market indexes, you won't necessarily be doing yourself any favors, says Jason Flurry, CFP and president of Legacy Partners Financial Group in Woodstock, Ga.

"The S&P 500 is not an efficient method of investing because it lacks a lot of things. The way you create efficient portfolios is by using multiple asset classes. If you have one thing, it will produce a risk and a return. If you take stocks by themselves, there will be a certain risk and return. If you add some bonds, you'll get a different return because bonds are usually less risky than stocks. If you add a third asset class, you should have another return. As you add more asset classes in the right way -- you understand the relationship of how one interferes with the other and how they react with their correlations -- then you can produce more efficient portfolios that not only give you diversification but they give you allocation, and that gives you the types of returns you're looking for."

Here are examples Flurry provided of how certain portfolios would have performed during three particular periods: March 2000 to March 2003, November 1998 to October 2008, and November 2007 to October 2008. The examples provided for the three LPFG portfolios are not the exact mix that his company uses. Flurry created them to show that by adding multiple asset classes you can enhance return and reduce risk.

How to diversify
Flurry defines a diversified portfolio as one-third US S&P 500, one-third in an overseas index and one-third in a bond fund. Balanced is an even split among the S&P 500, overseas index, a bond fund and a short-term Treasury security. Allocation involves tweaking that mix a bit and adding a little more to one category and a little less in another.