Risk is back in vogue. For small investors, that means now is the time to practice some prudence.

Even as the Dow Jones Industrial Average and other major indexes flirt with multiyear highs, people ranging from mutual-fund buyers to high-net-worth investors are embracing riskier investments in a hunt for even higher returns. That is not necessarily a bad thing. U.S. investors have historically been light on certain asset classes -- such as international stocks and commodities -- that can, in moderation, actually reduce a portfolio's overall volatility while improving returns.

But in a throwback to the dot-com era, too many investors these days are simply chasing these hot markets in order to juice their returns. Consider: At T. Rowe Price, 6 percent of all money flowing into the fund company this year is going into the once-sleepy Emerging Europe and Mediterranean fund, where returns have been astronomical -- up 69 percent, 30 percent and 59 percent in the least three years, respectively, and up more than 20 percent so far this year. At AIM Investments, weekly money flows into the Gold & Precious Metals fund are up nearly 250 percent in 2006 from last year, as investors chase the torrid metals market.

Cash is flowing into riskier small-cap and aggressive U.S. stocks, too. Financial Resources Corp., which tracks mutual-fund data, reports that investors are shoveling billions of dollars into more aggressive domestic small-company funds at the expense of conservative and moderate mutual funds, where dollar flows are down sharply.

"This is beyond clients just following our advice to be more balanced," says Mary Doucette, a senior vice president at Northern Trust, a private bank catering to wealthy clients. "It's startling that in almost every client meeting I go into these days, clients are saying the same thing: 'I want higher returns; I want higher risk.'"

Indeed, investment strategists and money managers are increasingly counseling investors to include in their portfolios assets that, viewed singularly, are risky -- including emerging-market stocks and bonds, commodities and currencies. Inside a broad portfolio, those investments can smooth overall volatility and improve returns because their movements often don't correlate with domestic stocks and bonds.

The problem is that in good times, like now, investors often go overboard.

Consider how risky these sectors can be: Over the last 13 years, the total return for both gold-company stocks and Chinese-listed companies has been roughly three times more volatile than the Standard & Poor's 500-stock index, according to research firm Ibbotson Associates. Emerging markets have been 65 percent more volatile; small-cap U.S. stocks a third more volatile.

Since 1993, for example, the Standard & Poor's index of gold-company stocks was up more than 83 percent in its best year, and down more than 34 percent in its worst.

The potential risk is exacerbated by the big returns these sectors have already posted, which could mean they have farther to fall. Emerging markets are up an annualized 32 percent over the last two years. China is up 24 percent; the spot-price of gold, 17 percent; small-cap U.S. shares, 16 percent. By comparison, the S&P 500 is up an annualized 10 percent over that time.

High-net worth investors can afford to take a hit if some of their bets go wrong. But for small investors with less of a financial cushion, chasing hot assets can increase the risk of greater pain once particular markets cool. Already, some Wall Street shops are raising cautionary flags.

In a recent report, Lehman Brothers encouraged investors to reduce their exposure to small-cap U.S. stocks, emerging markets, high-yield bonds and arbitrage funds. Bank of America is telling high-net-worth clients to take some risk off the table, particularly in emerging markets, small-cap U.S. stocks and some hedge-fund strategies designed purely for market-beating returns.

"We're growing more cautious" because investments ranging from high-yield bonds to emerging-Europe stocks have become so expensive, says Tom Fay, a managing director at Bank of America Private Advisory Services. Emerging markets, Mr. Fay says, "is top of the list with clients" these days -- even as managers say their ability to find attractive investments overseas has diminished. "We're counseling people not to forget about risk," Mr. Fay says.

Are you taking on too much risk? A fundamental rule of investing is managing risk. Loading up on hot sectors doesn't constitute risk management. Remember: Return of capital is just as important as return on capital.

That doesn't mean you should sell off your entire position to avoid the risk that certain markets turn down. Instead, if you've benefited from a profitable surge in emerging markets, gold or elsewhere, chances are good your portfolio is now too heavily weighted in that asset, so scale back to a level more appropriate to your risk tolerance, or at least in line with a predetermined asset-allocation mix.

What that mix is depends on how you'll react to a downturn. If a bear market in emerging countries, an extended period of underperformance in small U.S. stocks or sliding commodity prices would lead you to sell, be careful about buying into hot sectors today. They will inevitably cool, and investors who started buying into these stocks too late will likely end up selling out at a loss -- just as so many did during the dot-com bust.

In general, a traditionally balanced portfolio split 60 percent stocks and 40 percent bonds should have somewhere around 10 percent and 20 percent in international shares, with a small piece of that in emerging markets. Investors with greater risk tolerance can up that to as much as 30 percent in international stocks. Those with a shallower tolerance should scale back to less than 10 percent. A much smaller portion -- about 5 percent combined, strategists say -- should go to so-called alternative investments, such as commodities, real estate investments and currencies.

With money raised from taking profits, consider adding large-cap U.S. growth stocks. They've been laggards for a few years, meaning that while much of the market is hot, you can still buy these companies at relatively inexpensive prices.

Got Risk?

Here's how to allocate the riskier parts of your portfolio:

International stocks: 10 percent to 30 percent of your portfolio. Currency risks aside, developed markets are about as volatile as the S&P 500.

Emerging-market stocks: 5 percent to 15 percent of your overall international exposure. These are about 60 percent more volatile than developed-market stocks.

Alternative investments: 5 percent should provide adequate exposure to this category, which includes commodities and currencies.