The ideal portfolio contains investments that react to economic changes in opposite ways. For example, you can protect yourself against fluctuations in the price of oil by buying shares in both an electric utility and an oil producer. Higher fuel costs will hurt the utility but help the oil stock, while lower prices that hurt the oil stock will help the utility. Such a move not only protects your portfolio against sudden shocks, it also enables you to take greater risk with a few stocks, which is likely to increase your total return.

To achieve this advantageous mix, it helps to take a look at the business cycle. On average, the economy expands for three to five years and then contracts for 18 months or so. When there isn't a full-fledged recession, there's a slowdown known as a soft landing.

Most stocks do best when the economy is growing at a brisk clip, corporate earnings growth is accelerating and interest rates are falling, or at least not rising very much. During this expansion phase, blue chips can double in price. The problem comes when the economy starts to slow.

In a recession or major slowdown, the Dow can lose anywhere from 20 to 45 percent. And risky growth stocks can dive more than 75 percent. The classic way to avoid such horrific losses is to include high-quality income investments in your portfolio. During the 1987 crash, for instance, when blue chips fell more than 20 percent in a single day, Treasury bond prices actually rose.

Typical investors (those with horizons of ten years or more who are willing to assume a reasonable amount of risk) should keep 35 to 50 percent of their money in individual blue-chip growth stocks. You might also want to put 10 percent of your money in mutual funds that focus on small-cap stocks and a similar amount in funds that hold foreign blue chips. Other equity choices include low-P/E stocks and inflation hedges, such as mining shares and real estate investment trusts.

We don't advocate market timing, making big portfolio changes based on the stock market outlook. But value-conscious investing makes a lot of sense. When the stock market starts looking overpriced, trimming stock holdings and raising the amount you have in bonds and money funds to more than 25 percent can make a lot of sense. As an alternative, preferred shares and tax-free municipals can be very attractive because of their stability and high income.

In any event, assembling the portfolio that's best for you isn't a one-time act. You need a plan for what you want to end up owning and you need to adjust it as conditions change.