Fix your portfolio

Problem: Like many people, you scattered chunks of money into such trendy investments as commodities and emerging markets stocks. (In 2006 and 2007, investors plowed three times as much into international stock funds as domestic ones.) But rather than lowering your risk (the whole point of diversification), you raised it because it turned out that many of these investments were making similar bets. You bought at the top - then sold and locked in your losses.

Losses: last year 35% to 45%

Goal now: You're willing to take some risk in the pursuit of market-beating returns - but the right way this time.

How to get there: Think like a Pilates instructor: Before you do anything fancy, you need to build a stable core. That means using high-quality large-cap stocks and intermediate-term bonds as the heart of your portfolio. Once you've got those, you can venture into riskier assets - but limit them to 10% to 15% of your total. Your best prospects in that category are beaten-down investments that look poised to rebound sharply when the market recovers. Chris Cordaro, a financial adviser in Morristown, N.J., likes emerging markets stock funds (yes, it may be time to tiptoe back into them) and real estate investment trusts.

While there are no guarantees that an actively managed fund will surpass its index - in fact, most underperform - index funds by definition won't beat the market. If you have a long time horizon and are comfortable with risk, actively managed funds like those above may make sense.



NEXT: Scenario 3: You went too risky near retirement