When it comes to diversifying your portfolio, simply holding a broad array of stocks won't reduce your overall risk profile. You've got to focus on holding noncorrelated assets — that is, something that will zig while the rest of your portfolio zags. Among market scholars, creating that perfect "mixture" of assets has become known as the "efficient frontier." Not avoiding risk, but dealing with it. Elimination by mitigation.

Bonds are a perfect place to start. While they don't boast the historical returns of stocks, bonds have outperformed the broad market for more than a year and are still sorely absent from many investor's portfolios — especially those who are in it for "the long haul." According to the Investment Company Institute, stock mutual funds still contain roughly four times as many assets as bond mutual funds. While the returns of individual bonds can be highly volatile, bond mutual funds, even those tracking corporate and junk issues, are statistically uncorrelated with the equity market. Again, I have used Vanguard funds since they tend to be the lowest-cost proxies for their respective indexes.

But bonds are just the beginning. Commodities, currencies, precious metals, real estate and international securities are all generally uncorrelated with stocks. And thankfully, the ever-crafty mutual-fund industry has developed products to allow even the sophomore-sized Soros to take positions in each, spreading bets around among uncorrelated asset classes — just as hedge funds do.

The Oppenheimer Real Asset fund (QRAAX) invests in futures and fixed-income instruments that move in relation to commodity prices, and is highly uncorrelated with the stock market (0.01 for the S&P 500 and Dow, 0.04 for the Nasdaq). The fund is off about 8% year-to-date after gaining 36% in 1999 and 44% in 2000. From a macroeconomic perspective, it's one way to benefit from rising fuel prices, since the fund's underlying index (the Goldman Sachs Commodity Index) is highly sensitive to fuel prices.

The Franklin Templeton Global Currency fund (ICPGX) holds money-market instruments denominated in three or more of the world's major currencies, and is one of the few ways most investors can quickly hedge themselves against fluctuations in the U.S. dollar. Even more important, it's negatively correlated with the stock market, meaning that when the market falls, the fund should rise. Sadly, the fund has been recently closed to new investors, and will soon be merged into the company's global bond fund, which has much less favorable correlation statistics, as high as 0.32 with the S&P 500.

An alternate option could be a precious-metal fund, as gold tends to be negatively correlated with both the dollar and the major equity markets. The Vanguard Gold & Precious Metals fund (VGPMX) is a cost-effective way to get exposure to precious metals. This has been a perennially poorly performing group — but its low correlation to stocks means that it has posted a slightly positive return so far this year.

Real estate investment trusts, or REITs, continue to boast solid returns and low levels of correlation with the equity market. The iShares Dow Jones Real Estate Index fund (IYR) can be traded like a stock and offers immediate, diversified exposure to REITs, albeit with an emphasis on the index's two biggest names, Equity Office Properties (EOP) and Equity Residential Properties (EQR).

Finally, international investing is often suggested as a way to diversify a portfolio away from domestic stocks. But as markets have become more advanced, so have the correlations that link them. Most developed European and Asian stock markets tend to be positively correlated with those in the U.S. Among the notable exceptions is the iShares MSCI Austria fund (EWO), which boasts a low correlation with all major U.S. indexes and is up 10% year-to-date.