NEW YORK (MONEY Magazine) -
You're smart enough to know that now is not the time to be taking out an interest-only mortgage to buy that second Miami condo.
Good for you. Real estate is sooo five minutes ago. Sure would be nice to catch that next big thing, though, wouldn't it?
Before you join the chase, remember that jumping on the next mania is one thing and profiting from it is another. The Internet may have changed everything, but that didn't mean eToys was worth $10 billion.
Don't start throwing money at whatever big idea is bubbling up among friends as you hang around the backyard grill. Do, however, pay a bit of attention to the conversation.
Look past the hype, and you may find a strategy that will strengthen your portfolio for the long run. How's that? Consider these current contenders for "next big thing" and how they can help you think smarter about your investments:
The dollar crash
THE THESIS A bet that the U.S. dollar will fall in value seems like a sure thing. Weighing on the dollar are the trade deficit, the budget deficit and the possibility that the U.S. won't continue its 70-year streak of economic domination.
Warren Buffett says he's bearish on the buck, so bet with him by clicking on one of those online ads announcing "The EURO is EASY to trade."
THE CATCH If you've made that "sure thing" bet since last fall, you've lost. Currency fluctuations are incredibly difficult to predict.
And given the sums of money that move in the foreign exchange market -- trading volume is more than five times that of the world's stock exchanges -- there's no reason to think that you can beat professional traders or central banks.
YOUR MOVE Worries about the dollar are worries that U.S. economic growth will lag that of other parts of the world. You can shield yourself sensibly against that risk by moving a few eggs out of your U.S. basket and increasing your international exposure to at least 20 percent of your stock holdings.
The MONEY 50, our list of recommended mutual funds, has several options, including Dodge & Cox International Stock (Research) (800-621-3979) and Vanguard Total International Stock Index (Research) (800-851-4999).
For bonds, you can invest in an unhedged fund -- one that doesn't attempt to minimize the effect of currency swings -- such as American Century International Bond (Research) (800-345-2021).
The anti-terror boom
THE THESIS As the July attacks on London's public transit system made only too obvious, spending on technology and services for homeland security will continue to rise.
"As long as we have a war on terrorism, national security is going to trump deficits," says Peter Arment, aerospace and defense analyst for JSA Research. Some investors have cashed in. Homeland security stocks have doubled in the past three years.
THE CATCH The homeland security sector is populated by small companies whose shares tend to swing wildly. Stun-gun maker Taser International, for example, recently dropped from $32 to $8 in less than four months.
Although the government is indeed spending more on homeland defense, it's not easy to forecast where the funds will go or how quickly they'll get there.
As T. Rowe Price analyst Tim Bei puts it, "the manner in which capital is being allocated to the private sector is inefficient and will take some time to play out."
YOUR MOVE Take a step back and look at the bigger picture. What's appealing about homeland security is the possibility of years of very strong earnings growth, the kind that a large company can't sustain in today's market.
A great business model in one division of a large company, notes Paul Ewing, a financial planner in Overland Park, Kan., may have only a very small effect on earnings. "But if that were a stand-alone business," says Ewing, "you get the juice."
The juice isn't limited to homeland security; that's just the flavor of the moment. You want to spread your bets and own rapidly growing businesses in lots of areas.
The easiest way to do that is with mutual funds that focus on small or mid-size companies, such as Vanguard Explorer (Research) and Meridian Growth (Research) (800-446-6662). Ewing and other planners recommend that a moderately aggressive investor allocate 15 to 20 percent of their stock portfolio to smaller growth companies.
Geniuses for hire
THE THESIS At a time when stock returns feel anemic and many market watchers expect long-term gains to be modest, hedge funds are gaining a lot of attention.
If you could get access to these loosely regulated private investment partnerships for the wealthy, the thinking goes, the resident investment wizards would provide you with outsize returns using exotic strategies not available via garden-variety investments.
THE CATCH For starters, hedge fund returns aren't that stellar. Over more than a decade, the total return of the S&P 500 has matched that of established hedge funds, according to CSFB/Tremont, though the hedge funds have been less volatile.
Plus, researching hedge funds is difficult, and it's not easy to move in and out of them. Given that the minimum investment in a fund is often $1 million or more, the only way for most people to buy in is via "funds of funds," which add expenses on top of hedge funds' hefty fees.
Finally, exclusivity doesn't guarantee quality. Hedge funds can fail, sometimes spectacularly.
"I wouldn't be a bit surprised if more than half the people entering the business don't make any money for their investors," says Phil Maisano of EACM Advisors.
YOUR MOVE Go ahead and look for better-than-average returns. Just don't bet your retirement that you'll succeed. Put 5 percent of your portfolio into a mutual fund run by a proven manager who can make large bets as he sees fit.
One option is Ken Heebner's CGM Focus (Research) (800-345-4048), which has trounced the S&P with a 33 percent annualized return over five years. Or try the Legg Mason Opportunity Trust (Research) (800-822-5544), run by legendary S&P beater Bill Miller. That fund has performed even better than Miller's famed Value Trust (Research), but you'll pay higher fees, and its returns are more volatile.
For more mutual funds, check out the MONEY 50.