Step 3: Now, come up with an asset-allocation plan. This Wall Street argot for deciding how to spread your money among stocks, bonds, and other asset classes sounds dull. But unlike most of what you hear from Wall Street, long-term, academically tested research lies behind recommendations for how to divvy up your funds.
The Web —— including virtually all online brokerage sites —— is loaded with tools to help you figure out your ideal asset allocation given your own risk tolerance and time horizon. For instance, here's a fairly conservative asset-allocation plan that's common for someone saving for retirement: 60% in stocks, 20% in fixed income, and 20% in cash.
For the fixed-income portion, Budde recommends a mix of corporate and government bonds and some exposure to Treasury Inflation-Protected Securities（TIPS）, which yield more if inflation rises. He also recommends that investors have about 10% exposure to income-producing real estate, which TIAA-CREF makes possible through a fund in its retirement accounts.
Commodities are another asset class investors are increasingly adding, since its returns don't correlate with those for stocks. Plus, several commodities mutual funds are now available. "People used to think diversification was adding more equity funds," says Budde. "Real diversification comes from adding these whole different asset classes."
Step 4: Diversify your stock holdings. About 90% of the advice you'll ever get about investing, concerns this one step. To boil it all down: Make sure you have a mix of large and small, international and domestic stocks. Of your stock funds, you could put 50% in large-caps, 20% in mid-caps, 10% in small-caps, and 20% in international, including a small percentage in emerging markets, for example, says Budde.
The easiest way cover your bases: Buy a stock fund that owns all the stocks in the Russell 3000 index and add a broadly diversified international fund, Budde recommends.