NEW YORK (MONEY Magazine) - Paul Plasterer works for a high-end sporting goods company in Chicago, and if you ask him about his job, you'll quickly realize that he's a pretty business-savvy guy. He doesn't, however, have any illusions that he's a market whiz.

His strategy: "When I see that one of my funds isn't doing well, I cut back on it and move that money over to the fund that's putting up stronger numbers."

Uh-oh. Paul might not see himself this way, but he's a performance chaser, and these are heady - and dangerous - days for folks like him. The Dow and the S&P 500 are starting to look reasonably good, but the big action is in, well, just about everything else, and the more exotic the better: emerging markets funds, portfolios hitched to soaring commodity prices, and the stocks of small, risky companies.

Look through your 401(k) plan choices and you'll likely find funds in these areas that have doubled in the past three years. What's all too easy to forget is how far, and how fast, these kinds of investments can fall.

The average emerging markets fund, for example, lost 26 percent in 1998, rebounded and then fell another 30 percent in 2000, according to Morningstar.

This is where you might expect us to poke a little fun at Paul and then tell you to run from the craps table before you lose big. Not exactly. Paul's a smart guy who's just being human: We're all instinctively drawn to winners.

More to the point, emerging markets, small-caps, commodities, even last year's hot ticket - real estate - can play a role in a sensibly diversified portfolio.

So unless you have perfect market-timing instincts (hint: you don't), the challenge for you isn't deciding whether to rush into or cash out of these areas. Rather, it's figuring out how much of your money belongs in these kinds of investments over the next decade, and resolving to stick to that plan.

Read on to see what you can expect from the market's hottest spots, and how they might fit into your portfolio.

First, here are four rules you have to remember at a time when risk is back in vogue.

When you buy, say, a small-cap growth fund, there's a bad thing and a worse thing that can happen. The bad thing is that the fund might have a lousy stretch. (Count on this one.)

The worse thing is that you may be so shaken that you sell just in time to come out a loser and miss the rebound.

So remind yourself that you bought the fund not just to capture high returns but to have something that doesn't move in lockstep with your blue-chip stocks. That means living with bad years. "You should always have a dog or two in your portfolio so you know you are diversified," quips financial planner Chris Cordaro of Regent Atlantic Capital in Chatham, N.J.

During the late-'90s bull market, notes Morningstar director of fund research Russel Kinnel, "if you were chasing performance, you ended up buying different flavors of tech."

In other words, if you owned both a technology fund and a large-cap growth fund with big stakes in Dell and Cisco, you were doubling down on the New Economy whether you knew it or not.

"Now performance chasers are buying different flavors of commodities," says Kinnel.

Example: Latin American economies have been stoked by the demand for those nations' commodities. And China's and India's booms helped create the feverish demand in the first place. So there's a good chance that when emerging markets funds and natural-resources funds start to lag, they'll do it together.

When you own a fund that's been putting up double-digit returns for years, it's tempting to let it ride and hope to get out when the momentum is gone but before the crash. That's tough to pull off.

One reason the markets look so lopsided now is that hedge funds and other institutional investors have been doing a lot of performance chasing too. And they're a whole lot quicker than Paul or you.

"As soon as this strategy stops working, that money will come right out," says Prudential Equity Group small-cap analyst Steven DeSanctis. Don't count on beating the pros to the exits.

Strong returns can throw off your asset allocation, as your best investments take up a bigger chunk of your portfolio. So take a look at what you have to make sure you haven't become overexposed to risky plays, and then rebalance if necessary.

Take some of your hot-fund profits and put them into cash, bonds or lagging areas such as blue-chip U.S. growth stocks or funds. (Not that those can't go down. They're cheap now in part because they weren't in 2000.)

You'll be locking in some profits and, with luck, buying shares at what will later prove to have been low prices.

Now for that closer look at what's driving the market's most explosive sectors. Overlap alert: You may not need any of these types of funds, especially if you invest in diversified index or target retirement funds.

If so, you already own most or all of these asset classes. In general, allocating 15% to 20% of your portfolio to small-caps can make sense if you are an aggressive investor; emerging markets, natural-resources and precious-metals funds are bolder plays. Think single-digit allocations.

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