Editor's note: It's never too late to start following a few basic tenets for building wealth...

This includes properly diversifying your portfolio – keeping positions small and spreading your money among multiple asset classes. But not everyone knows how to do this...

In today's Masters Series – adapted from a pair of essays that appeared in the free Health & Wealth Bulletin e-letter last fall – our colleague Dr. David "Doc" Eifrig tells the tale of one reckless investor and explains what you can do as this historic bull market churns on...

Don't Make the Same Mistake as 'Dr. Internet'

By Dr. David Eifrig

Medical doctors are notorious for bungling their financial decisions.

First, they always start in a hole. They usually have a six-figure pile of student debt. And they don't start earning much money until their early 30s.

Worse, doctors are overconfident. They've spent years in school honing their specialty in medicine. They think good grades and paper intelligence in the medical field translate to success in finance. They don't.

That's what happened with an attending physician I trained under. I like to call him "Dr. Internet."

Dr. Internet made a particular kind of investing mistake. And unfortunately, it led him to financial ruin. Let me show you how it happened and how you can avoid making the same destructive mistake today...

Once he found out I had previously worked on Wall Street, Dr. Internet pulled me into his office almost daily. "I've been doing pretty well in the market," he told me.

He talked about his positions in technology companies that are still around, like Oracle (ORCL) and Qualcomm (QCOM)... as well as a number of long-gone Internet stocks.

The year was 2000... right before the big tech-stock bust.

He mentioned large dollar figures. Instead of teaching me about medicine – what I was there to learn – he was trying to convince me how smart he was with stock investing.

He had way too much money in these overhyped tech stocks. And he wasn't worried. That's usually the sign of a market top. When your dentist, your plumber, and the intern working in your office have hot stock tips for you... it's time to sell your stocks.

I tried to tell Dr. Internet that he was being reckless. I told him that these stocks could rise, but the economics didn't make sense. He also needed to consider that they could fall. Many of these companies had no cash flows and no profit margins. They weren't making money yet...

He didn't listen. The Internet bubble collapsed. And this smart, successful doctor filed for bankruptcy. He lost his house and his wife.

Dr. Internet's mistake wasn't that he invested in tech stocks during a bubble. He was guilty of a far more common error... a blunder that you may be making right now.

His mistake was that he didn't have a plan. He had only one way to win. Tech stocks had to keep going up and not go down. If anything else happened, he'd go bust.

That's a narrow path to success. It leaves you no room to maneuver.

You should invest to boost your wealth over the long run. And you can't expect to spot every boom and avoid every crash. Even professionals can't do that.

A Yiddish proverb cautions, "Man plans, and God laughs." The real world is a complex and unpredictable place. If you draw a specific timeline for how you expect things to go, the world will almost certainly prove you wrong.

Did any of your investment plans four years ago include a potential British exit from the European Union or a potential President Donald Trump?

You don't know what's coming around the corner. I don't either. And that's the key. Armed with a balanced portfolio, you don't have to worry about the future.

Had the doctor stuck to his work as a medical teacher... invested the bulk of his portfolio in safe, blue-chip companies or low-cost index funds... and only used a few thousand here and there to speculate on the trendy Internet stocks... he'd have had all the fun of gambling, the bragging rights, and even plenty of money to roll into other investment ideas as his fortune grew.

His life wouldn't have been destroyed. But instead, he only gave himself a narrow path to victory.

Take a close look at your financial picture. Is the majority of your portfolio relying on a big prediction of the future? That's a warning sign. Major predictions shouldn't be necessary for your wealth to grow...

That's why I urge you to take some time this week to review your entire portfolio. We're in the late stages of this long-running bull market. You must figure out how your portfolio can stand up to these uncertain times. If you only have one way to win, you need to make some adjustments immediately.

Over the long term, the stock market is the greatest wealth-creation tool at your disposal. It's likely the market will go on to hit new all-time highs. And you want to be sure that the stocks you hold will take you and your retirement wealth to new highs, too.

With a little bit of planning and knowledge about the businesses you own, you might also get to laugh with God.

How to Prevent a Bear Attack

"Don't sell the bear's skin before you've killed him."

Sounds like practical advice... but that was exactly what the "bearskin jobbers" did.

Bearskin jobbers were the middlemen in the bearskin trade, back when selling animal skins was a way to put food on your table.

They had some shady practices. They would sell bearskins they had yet to receive. Basically, they would speculate on the future price of the skins, hoping the price would drop in the future. The difference between what they received and what they paid down the road would be their profit.

As you might guess, bearskin jobbers had an unpredictable income stream. Hence the phrase, "Don't sell the bear's skin before you've killed him."

Fast forward a few centuries... Folks gambling in the stock market were doing the same thing as the bearskin jobbers. An investor would sell a stock he or she didn't own and hope to buy it back for a cheaper price in the future.

We know this as "short selling" today. At the time, it was known as "selling the bearskin."

Bearskin jobber was shortened to just "bear," which is where the phrase "bear market" originated.

Or at least that's one popular theory.

You can find a number of theories out there about how the bear and bull markets got their names... but it's important to understand the nature of both if you want to be successful in the market.

By definition, a bear market is a 20% decline in securities prices. During a bear market, investors display widespread pessimism and fear. The last bear market was in 2007-2009, when the S&P 500 Index fell by a monstrous 57%.

And a bull market is a 20% increase in securities prices. Typically, that means widespread optimism and strong investor confidence. Right now, we're still in the longest bull market in history.

Let's look at the characteristics of bear and bull markets. There have only been 20 bear markets and 23 bull markets since 1928.

The major difference is that bear markets tend to be much quicker than bull markets. The average bear market lasts about one year, while the average bull market lasts about three years.

That's why bear markets sting so much. It's a sharp price drop – with the average drawdown around 40% – in a short amount of time. Think back to 2008... Bear markets cut deep.

There are typically a few phases to a bear market. The first happens during a time of high stock prices and high confidence in the market. Some investors start to get out of the market and take profits off the table.

Next, prices begin to fall rapidly. Maybe corporate profits drop, or an economic indicator turns red and investors panic. Everyone is in a mad rush to hit the "sell" button, which pushes prices lower and lower.

For example, you may want to sell your stock for $40 a share, but the stock is trading for $33 a share. You just want out, so you accept a lower price. The downward movement in stocks becomes self-sustaining.

Then, speculators will typically step in, raising prices and trading volume. The market soon hits a bottom, and then a bull market starts.

Stocks roar up as the economy recovers... And the cycle starts all over again.

Today, we're at a crossroads. We're in the late innings of the longest bull market ever. The economy is strong, and up until recently, stocks have been shrugging off market corrections. But investors always have this fear of when the bear will attack.

So, what do you do?

You need to hold some cash.

That doesn't mean sell everything. But having some money in short-term cash and cash-like investments will save you a lot of heartache when the selling starts. Think money-market accounts, certificates of deposit, and Treasury bills.

Typically, we recommend that as you get closer to retirement, you should start moving some of your investments over to cash. You should start this phase five or 10 years before retirement. And you could gradually grow your cash allocation from, say, 5% to as high as 20%, depending on your goals.

The economy is thriving right now. And bear markets usually only happen when the economy turns. I don't think the bear market is coming today... or even next week.

There's still money to be made in this bull market. But it never hurts to be prepared.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: Doc will host his first-ever Trading Master Class on Wednesday, at 8 p.m. Eastern time. During this free online event, he'll walk a group of readers like yourself step by step through a powerful strategy that can help you make big gains in any market – up, down, or even flat. He'll also share a market update and give away one of his highest-conviction "buy" recommendations to everyone who tunes in. Save your spot right here.