August 19, 2009 - Most investors got slammed last year, down 50% or more in their investments. Didn't matter if they owned stocks or real estate, they got hammered. Many have to start over. And if they're near retirement, it's scary. Years of patient investing wiped out, gains that were made over a long time disappeared frighteningly fast. But now it's time to begin fresh, to rebuild. What's the safest way to regain some or all of the losses without suffering another wipeout?

With that as a fundamental, the next step is to think about where we are in this economic cycle. We're no longer at the bottom. For stocks, that was reached in March of this year. Since then, stocks in general are up about 40%. Some more. Some less. But many are still a long way from their all-time highs. The tech sector in particular has stayed depressed for many years. The tech heavy NASDAQ Index is still more than 60% below it's high levels. Not that those old highs were justified. There was plenty of froth up there.

We're most likely just starting a recovery. How sharp or prolonged is any one's guess. There are plenty of economists who argue for a quick rebound. Many others say it will be long and slow. Still a few think another dip is coming after a small rebound. No one knows. Smart investors don't bet the farm on any one outcome. They will overweight a sector or two because they feel certain events will most likely happen, but since they can't know, they don't put all their money on one stock or one sector and hope for the best. Most of the time, the best never happens. But the worst, losing all your money, can.

A good mutual fund is one way. Or an index fund such as the ITB which is made up of housing stocks in the U.S. Select Home Construction index. This is an Exchange Traded Fund (ETF). Here are the top ten holdings as of this writing and the percentage each represents:

Cavco Industries, Inc. CVCO 4.26
CENTEX CTX 4.83
D R HORTON DHI 7.51
KB HOME KBH 4.73
LENNAR LEN 6.04
LOWES COMPANIES LOW 4.07
MDC HOLDINGS MDC 4.88
NVR INC NVR 7.47
PULTE HOMES PHM 6.5
TOLL BROTHERS TOL 6.81

If you're bullish on the housing market and think it will rebound at some point, this is an excellent way to invest in it. Plenty of diversification. If you were to only buy one stock, you'd have much more risk exposure. This index fund is up from a low of $6.33 (as of this writing, it trades at $12.36) so it's already almost doubled. But it's still well off its 52 week high of $20.02. Look into ETF's for other index type funds that reflect an industry or commodity. There is literally an ETF for any category you can imagine. For more information see the ETF Center on AOL or any of the ETF sites on financial Web sites such as MarketWatch or Yahoo!Finance or GoogleFinance.

If you don't want to go with a mutual fund or ETF, make your own. If you have the funds, buy the top three companies in each sector in which you have an interest. For housing, you'd look at the same names that the ITB holds. After homework on each, pick the top three and buy a little of each. Then, if you like the outlook for autos, pick the top three there, carefully researching Ford and Toyota and several others before buying a little of each. You get the idea: build a portfolio that has an emphasis on sectors but within each one, have three or four of the strongest names. Again, you need more money to do this. If you have limited funds, a mutual fund or ETF works nicely.

What most ETF's or mutual funds will do is give you professional management, stock diversity and low fees. They also give you peace of mind (though when a sector or market goes down, these will as well). Any investing in the stocks or commodity markets has risk no matter how you invest in it. But these vehicles spread out the risk and will go down slower than any one stock and will also go up slower than any one stock.

And that's the most important part of going forward: invest with less stress. We've all been through the ringer in the last couple of years. We've felt the pain. Now it's time to rebuild smarter, take some risk but not too much, to regain some or all of our losses. To think you can save your way back to prosperity is to miss out on some great opportunities. Inflation will be back. It will be just as devastating as the latest economic recession. One way to beat it is to stay invested.

One other key element: keep some cash. We've all learned in this crunch that cash is hard to come by when things go wrong. The easy credit available from taking out a second mortgage is gone. The old rule of thumb was to have 6 months of cash in the bank before investing. Now it seems like a year's worth is more reasonable since unemployment is haunting almost everyone. Be more cautious now, rebuild with good diversity,. A recovery may take longer than any of us wants, but it will come. By following these simple rules, you can invest wisely and sleep better.

- Ted Allrich