But even so, years of market turbulence and tumbles have left investors nervous about whether their portfolio is set up properly to weather future financial storms. With the last market meltdown still fresh in our memories, even mild declines in stocks get people wondering if they're going to end up watching their assets plunge in value again.
Countless studies have shown that investors can't expect to succeed at timing the market. Therefore, the key to investing success is to find a mix of investments that will serve you well no matter what the markets are doing. Then, you can tweak your exposure within those broad investment categories to take advantage of changing market conditions.
Here's how to build your own mix to take advantage of any market environment.
1. Start With the Right Strategy for Your Needs
A long-term investing strategy should provide a mix of many different types of assets, including stocks and other higher-risk investments for growth, bonds and other income-producing investments for cash flow, cash for immediate needs, and other niche investments that provide specialized exposure to various corners of the financial markets.
Everyone's financial needs, resources and goals are different, so customizing your own investment mix is much wiser than accepting a one-size-fits-all solution. But generally, for the portion of your money you won't need for 10 years or more, you should own predominantly stocks and other "higher-risk, higher-reward" investments. For nearer-term goals, you'll want more predictable investments like bonds and bank CDs, despite their lower expected returns. And for immediate needs, keeping cash on hand is the best way to avoid unexpected market surprises. By maintaining what many call the "bucket" approach, you can earn the best returns you can while having money to spend when you need it.
2. The Right Stocks Right Now
Keeping overall stock allocations constant is generally the right move, but which stocks you favor should vary depending on current conditions.
After the market has risen sharply, sticking with solid blue-chips with dependable dividend income and reasonable valuations can stem your losses should a bear market follow. Good examples are Kraft Foods (KRFT) and energy giant Chevron (CVX). But when stocks have already fallen and are more reasonably priced, fast-growing companies tend to bounce back faster, such as homebuilder Pulte Group (PHM), for example.
3. With Bonds, Timing Matters
Trying to time the bond market is just as ill-advised a strategy as trying to guess when stock markets will rise or fall. But where timing does matter is in when you need income.
4. Let Your Money Travel the World
Whether you're talking about stocks or bonds, having both domestic and international investments is smart. Tailor and adjust your mix as market conditions in various places change.
For instance, even as the U.S. stock market has soared close to record highs, stock markets in China and Brazil remain well below their levels from two years ago. Betting on growth companies in emerging markets to recover -- Chinese Internet giant Baidu (BIDU), for example -- while focusing on safer value stocks like Pfizer (PFE) in the U.S. can give you balanced exposure in your overall portfolio.
5. When It Comes to Alternatives, Be a Dabbler
Hot investing fads come and go, and you shouldn't discard your basic allocation strategy to jump on the latest bandwagon. But if income alternatives like real-estate investment trusts, timberland and cropland, or master limited partnerships focused on natural resources appeal to you, then having a small part of your portfolio set aside for them makes sense. Gold and silver investments also fall into this category, as they often (though not always) hold their value even during the harshest of conditions.
Get Into the Mix
Even the best investors get scared of falling markets. But having the right investment mix in your portfolio will make you more confident and better able to face whatever market conditions are around the corner.
You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+. He doesn't own shares of the companies mentioned. The Motley Fool recommends Baidu and Chevron. The Motley Fool owns shares of Baidu.