Build a Sturdy Retirement Portfolio

Hedging stock-market risk. Near-term fluctuations in the stock market don't mean much for young investors with a half century of compounding growth ahead of them. But the danger for investors in retirement is the prospect of having to sell holdings in a market downdraft. "The worse thing you can do is lock in that loss by cashing out," says Dimitriou.

Tom McGuigan, a Connecticut-based financial planner with Burns Advisory Group, says the firm has come up with a strategy to solve that issue: a five-year cushion. "We carve out the next five years' worth of income needs from the portfolio," says McGuigan. "Let's pretend an investor needs to draw $50,000 a year from the portfolio. We multiply that by five years and set it aside in a fixed-income portfolio that's more stable and won't fluctuate as wildly as stocks."

The rest of the investor's money goes into a diversified portfolio of stocks funds and real estate. "What we've done is bought ourselves time—five full years to let the stock market do what it does. Meanwhile, the investor is sitting on five years of stable investments."

Staying diversified. Since different types of stocks take turns leading the market—and those shifts are largely unpredictable—it makes sense to keep your retirement portfolio stocked with funds representing a variety of investing styles and company sizes. "There should be a wide range of asset classes, the idea being that we don't know ahead of time which will outperform, so you need exposure to them all," says Barnes.

For the portion of your portfolio devoted to stocks, he recommends allocating 60 percent of assets to large companies, 30 percent to small and midsize companies, and 10 percent to emerging markets. "We no longer differentiate between foreign and domestic stocks—globalization has reached the point where it's getting too difficult to draw hard lines," Barnes says.

Shoot for variety not only in company sizes but also in investing styles: Hold funds that specialize in fast-growing companies, as well as those that focus on finding undervalued firms (some funds invest in a combination of both).

When it comes to your bond money, Barnes suggests keeping 20 percent of assets in high-yield bonds, 20 percent in foreign bonds, and the balance in investment-grade IOUs.