“Between now and around 2008, the most profitable asset classes will be Large Caps and International.”

“For Large Caps, I advocate diversifying among three fundamentally sound sectors: technology, financial services and health care.”

I have dubbed the Growth Boom that began in 1982 and will continue until around late 2008 “the Roaring 2000s.” It is, quite literally, the greatest economic boom in our history and it will be followed by a Deflationary Shakeout , a depression era similar to the 1930s. What more reason do you need to adopt the ultimate portfolio strategy and take advantage of this economy now, when you can?

I have developed six different back-tested portfolios suitable for this economic season and watched their performance over a ten-year period, starting in 1990. They covered the spectrum from aggressive to conservative, but each one had one thing in common: the assets were distributed among the top two investment categories that are currently favored by fundamental long-term trends, Large Cap stocks and International. (The more conservative portfolios also use fixed income to reduce risks.)

The secret to this portfolio strategy is that I chose the highest-performing sectors within each asset class. For large-cap stocks, I distributed assets among technology, financial services and health care. For International, I chose the best markets in Asia ; Hong Kong, Singapore and South Korea ; or leading multinational companies if the portfolio’s growth targets were more modest.

The performance of these test portfolios exceeded even my expectations. For example, the aggressive growth portfolio averaged 23.9% in annual returns, about 26% higher than the S&P 500. The risk level was only fractionally higher at 3%. As any good financial advisor will tell you, raising your cumulative returns by 26% with only a 3% rise in volatility is a good value.

This 1990s aggressive growth test portfolio distributed assets according to the following weightings:

• 32.5% in software and high technology
• 32.5% in financial services
• 15.0% in health care
• 20% in Asia, excluding Japan

Given that the technology sector has grown substantially in the last few years, I have modified these weightings slightly but I have not changed the sectors that I favor. Now, the optimum aggressive growth portfolio would include:

• 45% in software and high technology
• 20 in financial services
• 15% in health care
• 20% in Asia, excluding Japan

Why these changes? Due to the strong growth of technology stocks since the early 1990s, this sector ; at 30% of the market capitalization ; has become far and away the largest of the S&P 500. When you combine technology with communications services (media, telecommunications and cable) the result is 38% of the market cap. Hence to overweight in this sector ; and to outperform the S&P 500 ; now requires more like a 45% allocation.

Of course, you will need to determine the most suitable sector weightings for your own risk tolerance. That’s why I always recommend working with a financial advisor and actively managing your portfolio through static rebalancing and dynamic rebalancing.