Turbulent market offers 6 lessons

GETTING GOING by JONATHAN CLEMENTS of wsj.com

1. GO MODERATELY WILD

No more than 5% of your portfolio should be in these fringe sectors such as emerging-market stocks, emerging-market debt, commodities, gold shares, high-yield junk bonds and real-estate investment trusts.

2. CHECK YOUR PULSE

Every investor should have exposure to the broad U.S. stock market, to high-quality U.S. bonds and to developed foreign stock markets. These three core holdings should probably account for 70% or 80% of your investment portfolio, and maybe more.

How you divvy up your money among these three core holdings will depend on your tolerance for risk and your need for returns. Think about what mix you can live with when markets turn volatile.

3. IT'S A BIG MARKET

At this juncture, blue-chip U.S. stocks may be one of the global stock market's most reasonably priced sectors. After all, the S&P 500 is trading below its March 2000 stock-market peak, while small-company stocks, emerging markets, REITs and other sectors have all posted impressive gains over the past seven years.

4. LOSE YOUR CONFIDENCE

Not only do we need to think about risk as well as reward, but also we shouldn't be nearly so confident in our predictive powers.

5. FUNDAMENTALS TRIUMPH

When investments are hot, it can seem like there's no limit to the possible gains. Yet there are always limits -- and economic fundamentals always win out in the end.

For instance, the broad market's share-price gains frequently outpace the economy's growth rate over the short run. But unless investors are willing to pay higher and higher price/earnings multiples for stocks, that can't go on forever.

6. WINNING TAKES TIME

The lesson: It's mighty tough to predict which sectors will shine and which will sink, so our best bet is to diversify broadly, never betting too heavily on any one investment.