Think back to the years 2000 through 2002 when, quarter after quarter, your investments in the stock market dropped in value. These are painful memories for investors who were seduced by the "irrational exuberance" of the late 1990s. Whether intentional or not, many found themselves over-exposed to the stock market in general, and technology stocks in particular. When the NASDAQ dropped from 5,000 to 1,500, and the DOW plummeted from a high of almost 11,000 to 7,000, investors were faced with an ugly reality. Many had seen a third of their account values evaporate on paper.

The sentiment many shared was that "next time" we would avoid the costly mistakes that allowed this train wreck of our investment portfolios. However, human nature being what it is, many investors are reluctant to face the pain of change. Rather than being overly aggressive with their portfolios, we are now seeing a dangerous tendency to ignore them altogether and just hope for the best.

With this year's rise in the market, now is that "next time". It is critical for serious investors to take the time to review their investment portfolios and ensure that basic prudent investment principles are being followed.

Appropriate asset allocation: Your exposure to equities (stocks and stock mutual funds), fixed income (bonds, bond mutual funds, treasury notes) and cash (CDs and money markets) should be a deliberate decision, not a by-product of market activity. You should intentionally include an appropriate allocation among the various asset sub-classes to reduce risk while potentially enhancing returns. Many investors fail to understand the specific role that each asset class should contribute to a portfolio, and are reluctant to rebalance their portfolios when market returns overweight one asset class over their desired allocation.

Diversify, Diversify, Diversify: Not only should a portfolio be diversified among several asset classes and sub-classes, it should also be diversified within each asset class to reduce volatility. One or two stocks, even a concentrated portfolio of 10–15 stocks, is inherently more volatile than a broadly diversified portfolio of stocks. Ask anyone who owned Worldcom, PSInet, or Enron stock how valuable diversification can be. If you still own some of those "dogs from the bubble", now is the time to bite the bullet and take those losses. Many investors are waiting until their stocks return to the original purchase price, but if these are stocks you would not purchase today, then they should be sold.

Ignore the media: Remember the headlines that were screaming the death of conventional financial principles? How magazine after magazine, month after month chastised investors for owning anything but dot.com stocks? How often were the terms "new economy" and "new paradigm" used on the 24-hour financial news programs that sprung up on cable TV? Is it any wonder that a sensible investor felt anxious and overwhelmed? We are already hearing the rumblings of that same old song. The news media assumes that because everyone uses Google, everyone should own the stock. Do yourself a favor. Turn off the television and spend some quality time with your portfolio statements.

Sandra Costin Atkins and Helen L. Modly are principals of Focus Financial Consultants, Ltd., in Middleburg, VA. The firm offers wealth management services, including comprehensive financial planning, fee-only investment management, and specialized divorce-related consulting. Ms. Atkins is a CPA with a specialty designation as a Personal Financial Specialist (PFS). She has been a member of the Middleburg business community for 28 years. Ms. Modly is a Certified Financial Planner, as well as a Certified Divorce Financial Analyst. She has lived in Fauquier County for 20 years.