•Asset allocation For longer-term goals, you will need to decide the mix of stocks, bonds and cash in your portfolio. This asset allocation will depend on how much time you have to invest and your ability to handle risk.
As a starting point, some financial advisers suggest subtracting your age from 100 or 120 to figure how much you should hold in equities. A portfolio for a 60-year-old, for instance, would contain 40 percent to 60 percent in stocks, with the rest in bonds and cash. A 25-year-old, though, might maintain 75 percent to 95 percent in stocks.
Or, if you want to know what the professional money managers think is ideal, look at the asset allocation of target-date funds for your age. These funds invest based on the expected date of retirement. They gradually grow more conservative as the retirement date approaches.
Vanguard's Target Retirement 2015 fund — geared for investors age 59 to 63 — is made up of 59 percent stocks and 41 percent bonds.
These asset allocations are designed for the typical investor but might be too aggressive for some. You can revise them to fit your risk appetite, but don't go too conservative. You'll need the growth stocks can provide to meet long-term goals and keep up with inflation.
Some advisers warn that without 25 percent to 30 percent of your portfolio in stocks, you run the risk of not keeping up with inflation.
•Diversified portfolio Another way for the risk-averse to get some sleep is to make sure they have a diversified portfolio. So if one sector falls off the rails, others might go up and lessen losses.
Advisers suggest a stock portfolio made up of domestic and international, growth and value, large-, medium- and small-cap equities. Some recommend investing in commodities or real estate.
The fixed-income portion of your portfolio should also be diversified, Adam says, and made up of U.S. government, corporate, international and inflation-protected bonds.
•Rebalance Over time, some investments will do better than others. Review your portfolio at least once or twice a year to see if it needs to be rebalanced to get back to the original asset allocation.
When rebalancing, you sell securities that went up, and put the proceeds into those that went down or stayed flat. Advisers suggest doing this when your asset allocation is 5 percentage points out of whack. So if your desired mix is 65 percent in stocks and that's jumped to 70 percent, it's time to move some money out of equities and into other investments.
Rebalancing forces you to sell high and buy low — time-honored advice.