The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money

Chapter 11. Wild Investments Can Tame Our Portfolios

Looking to Zig When Everything Zags

Go crazy. You'll feel calmer.

At the end of the last chapter, I mentioned specialized index funds that invest in niche areas like commodities, emerging markets stocks, and real estate investment trusts. These narrowly focused funds can generate both spectacular gains and stomach-churning losses.

Indeed, such "wild" investments are periodically popular with the gambling set, those folks who are gunning for the big win. But forget such nonsense. As I have argued in earlier chapters, you can't forecast returns—but you can control risk. And that, ironically, is a good reason to buy these volatile investments.

Staying Calm

This might have you scratching your head. How can wild investments help you control risk? As you'll notice from following the markets, investments don't move in lockstep with one another. Sometimes, large-company stocks soar, while small stocks struggle. Sometimes, foreign shares roar ahead, even as U.S. stocks post modest gains. Sometimes, everything gets pummeled, except maybe a single oddball sector. Consider the 2000–2002 collapse, which saw the broad U.S. stock market cut in half. Technology stocks got crushed, but bonds posted offsetting gains—and we got surprisingly good performance from real estate investment trusts and small-company value stocks.

Because different parts of the market don't rise and fall in lockstep with one another, you can reduce your portfolio's overall price ...