Conventional wisdom in creating a healthy, diversified portfolio needs to be updated to reflect new market opportunities. Small investors now, more than ever, have the opportunity to include what are historically institutional-only assets in their personal holdings.

An industry has been built around smooth talking salesmen advising people to diversify their portfolios into a variety of stock and bond products. These well-dressed businessmen extol the benefits of such and such value or growth stock fund. They sound sophisticated when they tell you that small caps are countercyclical to large caps, and so forth. The reality is that stocks are stocks and regardless of how you splice up and segment them into categories, they hold inherently similar correlations.

It’s easier than ever to pick up the same kinds of exotic investments as the most sophisticated hedge fund in days of yore. Regular people can now include all types of commodities (from agricultural to energy and everything in between), currencies, and select stock sectors in their portfolios simply by purchasing exchange-traded funds (ETF’s).

Americans should fear inflation and the long term decline of the US dollar. A great way to guard against these risks are to purchase foreign currency ETF’s. These are usually not correlated to bonds or US stocks, so offer a greater degree of overall diversificatoin to traditional portfolios.

Portfolio theory suggests that adding minimally or negatively correlated assets to your portfolio can decrease overall portfolio variance, or risk.

Analyzing stock indexes in relation to major world currencies shows that Swiss Franc, Japanese Yen, and Swedish Krona have negative correlations to US stocks, while Mexican Peso, Australian Dollar, and Canadian Dollar are positively correlated. To get the most out of diversifying a US stock portfolio, it would be advantageous to include the former and exclude the latter. However, there are other reasons to invest in currencies, such as hedging declines in the US dollar.

Including the negatively correlated currencies over the last year would have seen between 12% and 17% capital gains. This is due merely to appreciation relative to the US dollar. In addition to relative currency gains, each ETF offers dividends representative of each countries interest rates.

For investors concerned with income, they should consider holding the highest yielding ETF’s: Australian dollar, Mexican peso, and British pound.

Currency ETF’s offer a great alternative to traditional methods of diversification and are great to offset further declines in our own currency. Consider that commodities price growth is largely attributable to US dollar depreciation and you can see how foreign currencies can insulate individuals from energy, food, and other commodity-driven inflation.