Investing: Feeling snakebit? Try a conservative portfolio

— -- This year's stock market has probably made you long for a safer investment, like a cobra farm.

Before you start raising reptiles, however, you might consider constructing a sturdy portfolio of extremely diverse investments. You'll just have to fight the desire to ditch the portfolio once there's a new bull market — and that's harder than herding snakes.

The average stock mutual fund has lost 3.6% through Wednesday, tacking on one more miserable year to the 21st century's wretched record.

But most investors probably did better than the average stock fund this year. The fund industry started 2010 with 47% of its assets in stock funds, according to the Investment Company Institute, the funds' trade group. Another 22% was in bond funds, and 24% was in money funds.

Money funds yielded slightly more than a flea's toenail this year, but bond funds boomed. The average U.S. government securities fund gained 8.9%.

A portfolio with 50% in stocks, 25% in bonds and 25% in money funds — roughly the industry average — would have eked out a 0.4% gain. Nothing great, but not a loss.

Not all diversification is helpful. Adding international funds to your portfolio would have worsened your performance, thanks to all the woes in the eurozone. And high-yield, low-quality junk bonds gained just 2.5% as investors fled anything with the risk of default.

The main problem with international funds and junk, however, is that they are too closely correlated with the investments you want to diversify away from. Foreign stocks tend to swoon at the same time as U.S. stocks. And junk bonds track stocks more closely than bonds do.

Let's say, however, that you want to create a portfolio that will have some elements that will prosper under any given economic circumstances. For the good times, you want stocks. But you want other investments to protect you in bad times.

Investors should worry about two things: deflation and inflation. Deflation is a period of economic contraction accompanied by falling prices. The last big outbreak of deflation was the Great Depression, although the past three years have had many of the hallmarks of a deflationary period. (Yes, gas and food prices are up. But many of your biggest assets, from your house to your 401k, are down dramatically.)

Typically, high-quality bonds, such as Treasury securities, do best in a deflationary period. Bonds make regular income payments — and when prices are falling, those payments become more valuable each month. High-quality dividend-paying stocks also do well in deflationary periods.

During inflationary periods — a time of rapidly rising prices — gold, natural resources and real estate often do well. People prize tangible investments when paper money loses its value.

In theory, you could construct a sturdy portfolio with 25% positions in stocks, gold, Treasury bonds and money funds. You wouldn't get rich. But you wouldn't suffer mind-melting plunges, either.