Editor's note: Some investors don't understand this important concept... so they choose to ignore it instead. And that leaves their portfolio in jeopardy. In this piece – adapted from the October issue of The Total Portfolio – editor Matt Weinschenk explains what you should be looking for if you're trying to diversify your portfolio...

It's the end of an era...

In the old days, hedge funds raised money by finding wealthy investors and institutions who wanted high returns. The industry was built on stars who were willing to take big risks.

The days of audacious hedge-fund managers willing to chase high returns at any cost are over. Those guys have retired, converted to family offices, or evolved to a new kind of investment strategy.

The richest investors and the biggest institutions have gotten more sophisticated and wary of risk...

These days, they're opting for more controlled and reliable investment methods.

And that has made "pod shops" the big stars of today's hedge-fund world.

This evolution in finance highlights an important idea you need to think about as you build a portfolio. It's something many stock pickers don't really understand... But if you can learn it for yourself, it's the holy grail of investing.

Let me explain...

Pod shops are sometimes called multi-strategy funds.

They collect a whole bunch of smart investors, have them all run unique strategies, and use state-of-the-art risk management to generate steady and predictable returns.

Each pod in a pod shop is like a hedge fund on its own. Combine them, and you can get smoother results.

They also strive to retain market-neutral portfolios.

For instance, one pod may focus on health care. The portfolio manager will go long the best health care companies... and short the worst health care companies.

If the market rises and they pick stocks properly, they may earn 10% on their longs and lose 8% on their shorts, so they make 2% based on their true skill.

If the market falls and they pick stocks properly, they may lose 8% on their longs, but make 10% on their shorts – still earning 2%.

No one looking to build a big nest egg for retirement gets particularly excited about 2%. But that kind of steady, reliable return does appeal to big institutions...

If a handful of the pods can make 2% each no matter what the market does, that can really strengthen a portfolio over the long term.

Now, you probably can't get your money into a pod shop. They might not even talk to you because their minimums are in the millions.

But you can learn from this strategy.

In The Total Portfolio, we're not simply looking for "stocks that go up." In an ideal world, sure, you'd want to pick a perfect portfolio in which every stock goes up forever... But that just won't happen.

Our portfolio contains both cyclical stocks we expect to grow in a strong economy and defensive stocks that will protect us if the market falls.

Of course, while this strategy does hedge our portfolio, it's not foolproof. All of those holdings are tied to the stock market. If the market dives, they will lose value across the board.

That's why we're always looking for something better...

An uncorrelated asset.

This is another way to practice market-neutral investing. If you can find an uncorrelated asset – one that truly doesn't care about the direction of the market – it can be worth its weight in... well, gold.

Gold is often considered an uncorrelated asset. It stands to reason that gold should march to the beat of its own drum. It's not a business that is affected by the economy. And it should hold its value when people are fearful.

Going back to 1970, you can see gold roughly tends to "zig" when the market "zags"...

It isn't perfect. But most of the time, gold is a good option for diversification.

For a long time, bonds were a diversifier to stocks. But that broke down over the past few years when interest rates sent both stocks and bonds down together.

For a while, bitcoin seemed like it would be a new, uncorrelated asset. But its actual behavior shows it acts very much like a tech stock.

A true uncorrelated asset is hard to find. That's why so many investors shrug their shoulders and just buy the S&P 500 or follow the 60/40 portfolio. They figure it's good enough.

It's not.

Picking stocks is fun. And growing your wealth is rewarding. But adding portfolio diversifiers can make your path to wealth steadier and more predictable.

Good investing,

Matt Weinschenk

Editor's note: On Tuesday, January 28, we're making a big update to our research. It's a new way to access nearly all of our best recommendations across the entire Stansberry Research platform... all in one place. And it has the potential to more than double your portfolio – without big risks or speculations. So don't miss this opportunity... Get the details here.