Performance chasing with exchange traded funds (ETFs) and your investments is not a good idea for the overall well-being of your portfolio. Lately, the best-performing ETFs have been in the developing markets and natural resources. Although they’ve had solid runs already, it isn’t clear if success will continue. Zoe Van Schyndel for The Motley Fool gives a simple approach to build your portfolio, and protect yourself during a market plummet. Keep in mind your own financial goals and risks when building your portfolio.

  • Step 1: Shop at home.
    A diversified portfolio should start with U.S. equities as a base. Exposure to the world’s largest market is important and should be the most significant holding in your portfolio. SPDRs (SPY) gets the job done, cheap and easy.
  • Step 2: Add some bonds.
    A domestic fixed-income fund adds safety and income to your portfolio. iShares Lehman 1-3 year Treasury Bond ETF (SHY) is one option.
  • Step 3: Go global.
    The world is getting smaller as the global economy is getting bigger. Looking beyond our borders when investing is imperative these days. To broadly diversify across many borders, consider the WisdomTree DEFA Fund (DWM) or the new SPDR Lehman International Treasury Bond Fund (BWX).
  • Step 4: Specialize your portfolio.
    Once you have a solid base of global and domestic ETFs, you might want to round out your portfolio with a few specialized funds. Narrowly-focused ETFs are risky, but they can offer high returns. Check out the Vanguard Emerging Markets ETF (VWO), or get international real estate exposure with WisdomTree International Real Estate Fund (DRW). For commodities, consider the iPath Dow Jones AIG Commodity Index ETN (DJP). Perhaps a country-specific ETN such as the iPath MSCI India ETN (INP) is right for you.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.