Seven Pillars of Asset Allocation Wisdom

"It [is] a common defect of men in fair weather to take no thought of storms." -- Machiavelli

For most folks reading this article, the past three years have marked the first storm in their investing lifetime -- many neglected to stock up on umbrellas back in 1999.

Three years into the storm, the forecast for the markets isn't great: There's a decent chance the markets will be fairly lousy over the next decade or so.

"From 1966 to 1982, the markets went sideways," says Louis Stanasolovich, founder and chief executive of Legend Financial Advisors in Pittsburgh. "It looks to me like we're in 1968 -- when stocks didn't return very much, middling bonds were barely better and inflation beat them both."

There's a silver lining in the clouds: It's not too late for investors to get some protection.

"Proper asset allocation is one of the hallmarks of investing -- this isn't news," says James O'Shaughnessy of Bear Stearns Asset Management. "But the last three years have reawakened investors to the risks of overly concentrated portfolios. Many have suffered a great deal of pain overallocating to extremely aggressive portfolios."

Stanasolovich, O'Shaughnessy and many others warn that large-cap growth stocks, including the busted technology sector, and long-term bonds -- the asset classes many investors still have too much of -- are going to be weak for the foreseeable future. Investors have two choices: Rebalance their investments now to achieve a reasonable and diversified portfolio, or do nothing and let the long, ugly "reversion to the historical mean" do it for you.

Today, as part of the Long Run's series on asset allocation, we will offer a few examples of solid diversified portfolios for the future. While every investor needs to determine the best allocation for himself, all would be well served adhering to the seven pillars of asset allocation wisdom.