Investors’ Flights to Safety Can’t Hide the Danger

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During a relatively calm stretch early in the year, the stock market rallied. But then the financial and political problems of the euro zone made headlines. At the same time, the outlook for the global economy dimmed.

Stock markets around the world began to stumble. Investors reduced the level of risk in their portfolios and started to pour their cash into all the usual places, with United States Treasuries near the top of just about everyone’s list. A bond rally was in full swing again.

“When people are worried, all roads lead to Treasuries, and that just doesn’t seem likely to change anytime soon,” said Kathy A. Jones, fixed-income strategist at Charles Schwab.

Even in an election year in the United States, with fiscal policy in a state of disarray and with a budget deficit of more than $1 trillion, Treasuries remain in great demand. Last week, prices rose, and 10-year yields fell as low as 1.84 percent.

German government bonds have been another consistent favorite for risk-averse investors over the last few years. Last week, despite pressure on Germany to shoulder more of the euro zone’s debt burden, they were, if anything, even more highly prized than Treasuries. Yields on 10-year bunds, as they are called, touched 1.49 percent during the week. And in Britain, where the government has been slashing costs, long-term bond yields fell to 1.88 percent — the lowest since the Bank of England started collecting data in 1703, according to The Financial Times.

"We are living in very unusual times," said Mohamed A. El-Erian, the chief executive of Pimco, the world’s largest bond manager. “History may not be as reliable a guide as it’s been in the past.”

JPMorgan Chase’s disclosure on Thursday night that it had lost an estimated $2 billion in a portfolio of credit investments put pressure on financial stocks on Friday, contributing to the global equity sell-off and to the bond market’s momentum. But this month’s elections in the euro zone were perhaps the most immediate cause of last week’s flight to safety.

In Greece, voters repudiated the government that had negotiated its bailout, placing the country’s future in the euro zone in doubt. In the French presidential election, voters embraced François Hollande, the Socialist candidate, who demanded an end to single-minded budget-cutting for its own sake and called for a new “growth compact” for Europe.

“Obviously,” Ms. Jones said, “the people have spoken in Europe and they don’t like austerity.” Bond investors tend to like austerity, however, because it may increase the likelihood that debt will be repaid. While traders flocked to Germany and Britain for sovereign bonds, they drove down prices of bonds perceived as riskier, like Spain’s; yields on its bonds moved above the critical 6 percent level for a time last week.

CONCERN about a “soft patch of economic data,” including a slowdown in China and a disappointing United States employment report, also weighed on investors, said Scott Minerd, chief investment officer at Guggenheim Partners. He says the long-term trend for government bond yields is “undoubtedly upward,” but adds that its emergence has been delayed by the protracted economic malaise.

“Right now, if the economy slows down further, bond yields could go even lower,” he said, suggesting that the Federal Reserve would be likely to intervene again in an effort to stimulate the economy.

Sovereign bond yields have traditionally defined the “risk-free rate” used to value a vast array of financial assets and investments, but after the traumas of the last few years, these yields are so low that such valuations are very hard to make, said Aswath Damodaran, a finance professor at New York University. “I think the main factor holding long-term rates down now is very weak global economic growth, and I don’t see that changing soon,” he said. One indication that the world had truly recovered from the financial crisis would be a rise in 10-year Treasury yields to 4 percent, he said, but he did not see that prospect as imminent.

David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto, has been writing bearish reports on the equity markets and the global economy for many months. He said in an interview that the debilitating effects of “global debt deleveraging” would continue for the foreseeable future. The economic recovery in the United States is precarious, he said, and “gridlock in Washington at this moment is not contributing to a solution of the country’s problems.”

He cited Ben S. Bernanke, the Federal Reserve chairman, who has warned that unless Congress and the White House take action later this year, the United States could hurtle over a “massive fiscal cliff.” That’s a reference to the impending Dec. 31 expiration of the tax cuts of President George W. Bush, and to the start of billions of dollars of across-the-board spending reductions passed in last year’s deal to raise the debt ceiling. Combining the tax increase and spending cuts would ensure a recession, Mr. Rosenberg said.

Government action to forestall these effects is urgent, Mr. El-Erian said. “It’s only a matter of weeks before the markets begin to really focus on that ‘fiscal cliff,’ ” he said. “It hasn’t really been priced into the market.”

If these fiscal issues aren’t resolved, he said, there will probably be far greater market volatility than we have seen recently, with major declines in stocks and a further rally in bonds. Investors would want to have “some dry powder” — cash on hand — to avoid excessive losses and to take advantage of opportunities that arise, he said.

We can’t derive too much comfort from the repetition of patterns in the markets, he said, noting the adage that while history doesn’t repeat itself, it rhymes. “At some point,” Mr. El-Erian said, “it will stop rhyming.”

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Another may, another decline of the stock market? Perhaps not

It is understandable, if may meet investors with apprehension.

After all, there are equities in a market near the bear that has pushed stocks lower by more than 19% a year. That came after a very promising start for the year, a model who is also produced in 2010. And this year until April, the index Standard & poor 500-stock returned almost 12%.

Will be economic concerns may dash of early signs of optimism once more this year?

Michael j. Cuggino, President of the permanent family of the portfolio of the Fund, sees troubling Parallels. This winter, he said, "you have the feeling that"boy, we are finally out of the forest. " And then all of a sudden you start seeing softer economic signs. »

Those are still another set of concerns from Europe - including the financial crisis and that Britain has slipped into recession the Spain - with high oil prices and a hand of work still-low of the market at home. In April, there is a net gain of only 115,000 jobs, much less than had been forecast.

But many strategists believe that enough has changed that other severe withdrawal is not a fait accompli. "The fundamental point of view, there are a number of differences," said Brad Sorensen, Director of the sector analysis and the market at the Schwab Center for financial research.

Take the price of the gasoline. In the first four months of the year, national action began to sink in May that soaring pump prices, weighing on the consumer already poorly. In early May 2011, a gallon of unleaded regular averaged $3.96, according to the Energy Information Administration. Which has increased 37 percent from the same period in 2010. So far this year, gas remains uncomfortably high, but at $3.83 a gallon on average fuel is actually less expensive that it was a year ago.

This is a critical point. Ned Davis Research analysis showed that the rate of change in price of gas is an important influence on the attitudes of the investors. Researchers there found that only when the pump prices jump more than 30% over a period of 12 months no actions tend to lose ground. And when the fuel prices have fallen over a period of one year, the s. & P. 500 averaged 12.8% of earnings.

Mr. Sorensen added that there were another big difference this year. Although oil prices are on the rise since January 1, it is not the price of many other products. Since the end of the year, have been the price of corn on the dish, wheat fell slightly and natural gas sank more than 23%.

Why is it important? In 2011, global fears about inflation, especially around the high cost of food in emerging markets, has led central banks around the world to increase interest rates. This year, the policy makers in many of these areas - including China and the India and even in Europe, the European Central Bank - have been lowering rates to boost growth. Last week, the Reserve Bank of Australia reduced rate of half a percentage point, citing the weakness of the economy and mild inflationary pressures.

"This significantly change the image of recent years," said Mr. Sorensen.

"Jeffrey n. Kleintop, senior strategist market of LPL Financial, said the Central Bank rate cuts" should help to mitigate the fears of global recession evident in the two years of spring slides. »

Of course, with treasuries 10 years producing little 1.88% today, down 3.7% in May 2010 and 3.29% a year ago, the bond market could be signalling that the economy remains troubled. But James w. Paulsen, strategist main Wells Capital management investment, note that the by-product of these low yields - falling borrowing rates - help consumers in the short term.

He notes, for example, that in May 2011 and may 2010, the average 30-year fixed rate mortgage were about 5 percent. Today, they are below 4%, which should stimulate the refinancing. In addition, household debt service ratio, which measures the debt payments as a percentage of disposable personal income, keeps declining. According to the Federal Reserve, debt payments accounted for approximately 13.4% of income available in early 2009. Which fell to 12.3% in the first quarter of 2010, 11.2% in early 2011 and 10.9% late last year.

During this time, the image of the profits of the business seems much brighter that he has also recently that there a month. In April, Wall Street analysts were forecasting growth flat profit of less than 1% for companies in the s. & P. 500 in the first quarter. But with autour 85percent of these companies having reported their results, forecasts of the consensus for the growth of earnings have increased 7.2%.

Finally, there is another factor that could buoy the market in spring and summer. Brian d. Singer, head of strategies global macro to William Blair, noted that in 2010, the threat of the possible expiration of the Bush reduced year-end tax could have accelerated activity that would have normally taken in 2011. That may have further weakened the economy last year, he said.

With these same defined new tax cuts expires at the end of this year, this could still accelerate 2013 activity in this year, Mr. Singer said, the economy in 2012. He said that this is one more reason to think that "it y more differences than similarities between this year and 2011.".

Paul j. Lim is the editor of money magazine. Email: fund@nytimes.com.

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Central banks are calm markets, despite Europe woes

EUROPE is to hit another rough patch. But this time, disorders have just rattled world financial markets. It is a huge change.

Even if the United States events precipitated some of the more acute stages of the financial crisis of 2007-8 - the collapse of Lehman Brothers is a good example - the crisis in Europe was the pivot on which world markets have rotated in recent years.

""We have seen on the global markets for trade in unison to a surprising degree,"said Stacy Williams, a strategist HSBC in London, in a telephone conversation last week." "" Concerns about the risk of a collapse in Europe were the main factor of the phenomenon - risk, risk offshore. "Global markets are closely synchronized, it said, and they are still moving up and down mainly in response to the assessment of risk in the short term.

For the moment, however, they did not respond significantly to the events in Europe, one way or another. It is as if traders may decide to add to their bet or head for the exits. For the moment, at least, the markets are moving laterally.

It is not as if the European economy is suddenly thriving. To the contrary. The Government in London statistics released last week, for example, suggest that the austerity of the United Kingdom program has helped plunge the country into recession. Although there are pockets of prosperity, the economy of the European Union as a contract in the fourth quarter of 2011, according to Eurostat. Many forecasters believe that an economic crisis in the region is in progress.

Economic pain and fiscal austerity led to the fall of the Dutch Government, last week and threaten the chances of Nicolas Sarkozy, President of the France, in the runoff at the end of next week against François Hollande, the Socialist candidate. Yields of sovereign bonds in Spain, located in the heart of the crisis of the euro area, test the level of 6%, a sign of serious trouble. Rescue plans are already underway in Greece, Ireland and Portugal, while the Italy remains in a precarious state.

But how the markets have reacted to all this? With a sigh and a collective shrug. Inventories rose week last in London, Paris and Frankfurt, and with the help of reassuring comments from the Federal Reserve, they did in New York as well.

Larry Kantor, head of research for Barclays, said the Central Bank European is in large part responsible for the benign market response of most recent problems of Europe. By March, he said, the Central Bank injected 1,153 500 billion euros, 1.52 billion dollars in the European banking system, and a large part of this money was used to buy sovereign debt, lowering yields and reduce the pressure on jagged Governments and the whole of the economy of the region.

"In November, there is the risk of a real credit freeze,", said Mr. Kantor. "" Lack of bank loans really"in the eurozone in recession," said. "Injection by the E.C.B. was very important, and it is really much of this scenario disaster off the table."

He said that Europe could fight resolve his financial problems for years, but the "pragmatic approach" of the ECB in its new President, Mario Draghi, has given the markets much comfort.

"In the short term," at least, he said, "many of the tail risk has been removed."

None of which is to minimize the fundamental problems to come to Europe, where friction is growing on the wisdom of the dominant orthodoxy of fiscal austerity is to reduce government debt loads.

In France, Mr. Holland including promotes a more Keynesian solution, involving Government stimulus to promote growth and Government revenue. Mr Draghi, who was firmly in the camp of austerity, last week shifted his rhetoric, calling for a "Compact growth" in parallel with the budgetary Treaty of the European Union, which limits budget deficits and the national debt.

"We must intensify our reflections on the long-term European vision actively as we have in the past to other defining moments in the history of our Union," Mr. Draghi said members of the European Parliament in Brussels. But he indicated that he was contemplating "structural reforms", intend to make economies more competitive, rather than more of the Government spending. This is an approach that also promotes the German Chancellor, Angela Merkel.

Of course, the United States must cope with similar problems, but its economy, although really robust steps, now is growing faster than most of Europe. Gross domestic product increased at an annual rate of 2.2% in the first quarter, according to the Department of Commerce of the published figures Friday. Is that Wall Street had anticipated.

The economy is low enough that the Fed Wednesday policy makers reiterated their commitment to maintaining short-term interest rates, now close to zero, at "exceptionally low levels" for an extended period. They embark on the new programs unorthodox to stimulate the economy, but according to calculations by Barclays, various quantitative expansion efforts the Fed has expanded its balance sheet by $ 2.35 billion.

The balance sheet operations, low interest rates, had an extremely stimulating effect, amounting to the equivalent theoretical rate of interest reference Fed about negative 4 per cent, according to Thomas Lam, Economist at OSK - DMG to Singapore group.

Clearly, the Fed policy makers remain on high alert, even if their assessment of the domestic economy was slightly more optimistic than their previous forecast in January. On average, they predicted last week that G.D.P. would increase from 2.65% in 2012, an increase in the percentage of 0.2 of a point of their estimate of January. The rate of inflation will remain below the target of 2% for the year the Fed, they thought, and the unemployment rate slightly, drop to 7.9% of its current 8.2 per cent, according to Fed figures compiled by UBS Investment Research.

"" In a press conference Wednesday, Ben s. Bernanke, the Fed Chairman, said the Central Bank"did not hesitate" to take other measures to support the economy. Mr. Kantor said markets could display this promise as "a sort of extension of the Bernanke put"-a guarantee of intervention should data deteriorate considerably - which should give traders some consolation.

With election campaigns in the United States as well as in Europe, major new economic initiatives are unlikely for now, if they amount to fiscal austerity or stimulus. If markets remain calm in the meantime, it may be mainly through the influence of the central banks.

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For frontier markets for the next big thing in investment

Emerging markets portfolio managers specialize in the search for the next big thing. But after the conversion of many economies in Asia and Latin America during the two decades and strong yields and dominant popularity of their markets, which are left to find?

What stock markets in Africa, the countries of the Middle East and Asia, as well as to the Viet Nam, in Bangladesh and Sri Lanka? Investment advisers who focus on developing countries argue that many of these so-called border, especially in Africa, markets offer opportunities similar to markets emerging of previous generations.

"Africa will be the next great growth story that has largely unknown," said Larry Seruma, Manager of the Nile Pan Africa Fund, a mutual fund U.S. holding shares in companies that are based in the region or that are of important cases. "It can supplant the Brazil, China and the Russia if its potential is realized," he said.

It is a big if, and consider problems of Africa he only seem larger. There is misery, disease and hunger, aggravated by the other scourges that limit opportunities for Africans to improve their conditions of life: political instability, inadequate education and in some cases long military conflict.

But the case for the region and border markets elsewhere are precisely that they only set on the path of economic and social progress and still have a long way to go. It is the same journey made by the major emerging economies of today. There are barely four decades since Chinese farms were decollectivized, for example, and less than two decades the Brazilian inflation was running at more than 40 per cent per month.

"Frontier markets are often in a State of economic development much earlier than the major emerging markets and may have only recently opened to foreign investment," said Mark Mobius, one of the pioneers of investment in developing countries, who heads operations in emerging markets in Franklin Templeton, the fund company. "This helps explain their high growth potential." New markets were generally more space to grow, and the research of acute potential growth in global instability encouraged many investors to expand their horizons. »

A recent report by Citigroup has identified 11 economies should show exceptional growth in the century, including two of the usual suspects, China and the India. Most of the others are frontier markets - Bangladesh, Iraq, Mongolia, Nigeria, Sri Lanka and Viet Nam - otherwise minor emerging markets that managers of the border sometimes Portfolios invest in, as Egypt and the Philippines.

Calls to invest in places as they expect that they become future markets. Today and yesterday, it is another story. The MSCI index markets lost border approximately two-thirds of its value in the global collapse of 2008 and 2009.

This is a little more global harm than the index of MSCI emerging and mature markets, but where frontier markets are really suffering in comparison is in the period since then. The resumption of border markets was much less deep, leaving the index at least half of its 2008 high, while the other two indices have recovered almost all of their lost ground.

Pradipta Chakrabortty, a manager of Harding Loevner New Frontier market fund, attributed the weakness, especially in Africa, of the political unrest of the revolts of Arab spring and a series of economic and financial difficulties, steps over there, but to the North.

"Africa has many capital from Europe," he said. "It all started in 2010 flowing into frontier markets, but recovery is suppressed in the egg of the sovereign debt crisis".

Mr. Chakrabortty pointed out, however, that some investors deep pockets continue to funnel money markets of the border. Chinese companies make huge purchases of industrial and agricultural assets in places such as Africa and the Viet Nam.

Whenever investors decide to join them, there are three themes that fund managers expect returns of drive for the coming years: the growth of a consumer society of middle class, with all services and products which are its attributes; production and export of natural resources. and the development of infrastructure, including transport and communication networks necessary to the success of companies involved in the other two themes.

Mr. Chakrabortty is some of the best opportunities of these days in Africa and the Middle East and the Viet Nam and Bangladesh, where labour is cheaper than elsewhere in Asia. His portfolio is invested strongly focused on consumption of stocks such as Safaricom, a provider of telephone services Kenya and Equity Bank, also in the Kenya. Other selections include Squire Pharmaceuticals in Bangladesh and First Bank of Nigeria.

Mr. Mobius sees encouraging prospects for the border of the markets almost everywhere. He was "optimistic about the potential for growth in the long term in many countries" in Africa and said that "we must not forget countries of Latin America, such as the Colombia and Peru, the countries of Europe, such as the Romania and countries in Asia such as the Viet Nam, Pakistan and Sri Lanka."

Mr. Seruma focuses on Africa, but he does not feel the need to invest it to capture the promise of the continent. Its portfolio includes funds such as oil in Africa, who discovered the Kenya reservations, but have a shares listed on the Canada and Tullow Oil, which is registered in Britain and has assets of energy in Ghana and Uganda.

The Fund also has hybrids developed border as East African Breweries, which is half owned by the conglomerate global beverage Diageo and the Nestlé Nigeria. Among stocks African pure love are Guaranty Trust Bank in Nigeria and Flour Mills of Nigeria, a producer of basic food.

"As more capital gets employees" markets follows, "you will see the return to catch up with the rest of the world", Mr. Seruma predicted. For how long it will take to become a big thing, it is uncertain. "We must focus on the history of long-term growth", he said "" and be a patient investor.""

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Why Panic? A Couple’s Nest Egg Better Left Alone

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With that guidance, would you have done anything differently with your retirement savings?

Many retirees or those close to retiring would have probably dumped their money into cash and then waited for the markets to stabilize. But would that have been the right decision?

This is a situation that Mark Gochnour, a vice president at the mutual fund managers Dimensional Fund Advisors, sketches out as part of a presentation he has made to nearly 1,000 financial professionals over the last year. And he makes a strong case that it would have paid to remain invested in a well-diversified portfolio — and he uses his own retired parents as an example.

After all, his parents, Bryce and Luanne Gochnour of Boise, Idaho, a former orthodontist and homemaker, have already endured two recessions — including the Great One — since Mr. Gochnour stopped working in 1997. Their portfolio’s peaks and valleys are traced in the big chart at right, which their son likes to contrast with the more volatile course of the Standard & Poor’s 500-stock index.

Their portfolio, which is evenly divided between stock and bond funds, has certainly had its share of rough patches, particularly during the market plunge in 2008 and 2009, which caused their savings to dwindle about 25 percent from the market peak. But it has come back since then, and things could have turned out much worse had they not followed their son’s investment mantra: Focus on the things you can control.

“It is really the simple things that I call the blocking and tackling of investing,” the younger Mr. Gochnour said. “And you have to stay disciplined and stick with your plan, not only in good times but in more challenging times as well.”

You have heard this refrain before. It includes building a well-balanced portfolio, while keeping investment costs and taxes to a minimum. It also means giving up efforts to pick the next Apple or the next hotshot money manager and not trying to get out of the stock market before it crashes again. It also helps to turn off the television.

And that’s precisely what his parents — his father is 75, his mother is 72 — have continued to do. Their portfolio is invested in a collection of 15 mutual funds from D.F.A., which are sold through a select group of financial advisers. (D.F.A.’s approach, a twist on index investing, also tends to include heavier helpings of smaller-cap and value stocks, based on research showing that they tend to outperform the broader market over time.) Taken together, the funds, which represent more than 11,000 securities from 44 countries, have fees that cost 0.30 percent of assets each year.

That does not include the annual fee the couple pays to their financial planner, which typically costs an additional 1 percent. But Mr. Gochnour is adamant that it is well worth the price because of the invaluable hand-holding you will need during your darkest hours of doubt.

With a nest egg of about $1 million, the Gochnours entered retirement with more money than the typical American retiree. But a smaller portfolio with an identical investment mix would have had the same track record. From January 1995 through February 2012, the portfolio has delivered an annualized return of 7.85 percent, before inflation, compared with the S.& P.’s 8.55 percent. (For clarity’s sake, the chart does not reflect any withdrawals.)

In exchange for a less volatile ride that resulted from their not being 100 percent in stocks, the Gochnours had to give up nearly a percentage point of return, which seems like a worthwhile trade. “A well-diversified portfolio is a much smoother experience,” the younger Mr. Gochnour said.

And during the “Lost Decade,” the nickname for the decade ending in 2010 that relates to the stock market’s paltry returns during the period, the portfolio earned a respectable annualized return of 5.9 percent.

Anyone who doesn’t have a financial planner or simply can’t stomach paying for one could have achieved similar results over the same time period, with a smaller collection of funds that are accessible to all investors. A portfolio recommended by Vanguard that was also evenly split between stocks and bonds — using only three index funds — delivered an annualized return of 7.59 percent return over the 1995 to 2012 period. Meanwhile, a portfolio that comes as close as possible to replicating the Gochnours’ investments using only Vanguard mutual funds had a return of 7.61 percent.

These results look good now, from the rearview mirror. But during the scarier moments, particularly as the market struggled to find a bottom in 2009, Mr. Gochnour’s mother began to worry. So she called him one evening and told him they were thinking about selling their two-bedroom home in Palm Springs, which they bought after retirement and where they live for half the year. “I asked her, ‘What changed?’ And she said, ‘Well, I don’t know if we can afford it anymore.’ ”

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Stocks and the Economy, Singing Different Tunes

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“THE test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function,” F. Scott Fitzgerald wrote in 1936. He might have been describing the difficulties faced by current analysts of the financial markets.

The stock market roared through the first quarter of this year, yet most people believe that the economy isn’t really healthy.

That may not be a contradiction, but making sense of it may require some awkward mental gymnastics.

Certainly, the market’s recent rise has been spectacular. While stocks have dithered in April, the Standard & Poor’s 500-stock index returned nearly 30 percent from its low of last Oct. 3 through March this year.

Yet the economic picture has been mixed at best, with unemployment still above 8 percent and the gross domestic product growing at an estimated annualized rate of only 2.5 percent in the first quarter, according to the Wall Street consensus. The latest New York Times/CBS News poll last week found that unemployment and the economy remain the main concerns of most voters, 70 percent of whom said the economy is “very” or “fairly” bad. That was an improvement over October, when 86 percent said the economy was “very” or “fairly” bad, but it’s hardly upbeat.

This kind of dichotomy — market returns that may not accurately reflect the underlying economy — actually occurs rather often, and it poses a ticklish problem, both for professional money managers and for the rest of us.

For example, if you focus on the economy and find that it’s weak, you might think it wise to lighten the risk in your portfolio and concentrate on protecting your assets. On the other hand, if you focus on the market’s momentum and believe stocks are likely to keep climbing, you might try to ride that wave until it crests.

But if you look at both the economy and the market, and believe both that the economy is weak and that the market’s momentum is upward, you may not be entirely comfortable with any course of action. Yet if you’re fortunate enough to have money to invest, you must do something. In a report last week, Ned Davis, founder of Ned Davis Research, an investment research firm in Venice, Fla., put the problem this way: What’s more important, he asked, “being right or making money?” He lands squarely on the side of making money, and says stocks are likely to rise over the next six months or so. But he acknowledged that he must balance his short-term views against his longer-term convictions about the state of the economy.

As a “secular bear,” he says he is convinced that the economy is plagued by deep-seated maladies that will take years to clear up and that, at some point, the stock market will resume a long-term downward trend. But as a close analyst of technical market indicators, he is advising clients that by year-end the market is likely to rise, though with some caveats.

There may well be a correction — a relatively modest decline — in the next few months, his firm has concluded. But it is telling clients that a cyclical bull market is in place — a strong upturn within the longer downward trend.

This may well seem confusing. Mr. Davis said as much, reassuring clients: “I remain a secular bear. I am concerned about the long-term consequences of the Fed’s zero interest rate and easy credit policies and exploding government deficits.”

Despite these worries, he also said that it didn’t make sense, at least right now, to “fight the Fed and fight the tape.”

In a telephone conversation, Ed Clissold, United States market strategist for Ned Davis Research, explained the firm’s analysis, which has a wide following among money managers. Much of the apparent paradox is a question of timing, he said. “Four years from now, you may find that the stock market is trading in the same range as it is today,” he said. But, he added, it is likely to cycle up and down in the interim. And over a much longer time frame, “global deleveraging still needs to be completed, and that will have negative effects for the stock market.”

While the market may consolidate in the weeks ahead, two main factors argue in favor of a continuing upward trend this year, the firm has concluded. The first of these is “the Fed” — meaning the Federal Reserve and other central banks around the world, which have adopted extraordinarily accommodative monetary policies and committed to redoubling their efforts if economic growth falters. The stock market generally responds favorably to loose money.

The second is “the tape,” the momentum of the market and its individual sectors, which continue to show favorable patterns. In essence, what goes up tends to keep going up — until it no longer does.

And there are certainly many factors weighing on the market, both technical and economic.

A short-term consolidation might be in order after a stock market rise as sharp as the recent one; in a benign forecast, a modest decline would prepare the way for a bigger run upward for several months, which Ned Davis Research sees as the likeliest outcome. Stock valuations are already elevated, the firm says, and while that may not be an immediate problem, it implies that some excesses will need to be wrung out of the market down the road.

ENORMOUS problems remain for the global economy. The European financial crisis has been contained but not solved; further flare-ups are quite possible and could derail the market. Longer term, Mr. Clissold said, reversing the credit expansion and reducing debt loads are likely to have negative effects on riskier assets.

Buy-and-hold investors who maintain diversified portfolios and rigorously reinvest dividends and interest can try to ride out these cycles, Mr. Clissold said, and “have what will probably be modest returns” in the years ahead. Market professionals who try to do better than that will need to be nimble indeed.

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Low Bond Yields Make Building a Portfolio Harder

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United States Treasury bonds and other high-grade bonds used to be the safe way for older investors to generate income in their portfolios. But yields on these bonds are now so low, they are not generating much income.

The Federal Reserve’s announcement on Wednesday that short-term interest rates would remain close to zero through 2014 confirmed that there was little hope in the near term for much change in bond income.

But it is not easy to find something to replace that income. Other options are not nearly as safe. The wild gyrations in the stock market at the end of last year further unsettled investors who did not need much to remind them of their losses from 2008.

“We think the search for yield will continue for a few structural reasons,” Barbara M. Reinhard, chief investment strategist at Credit Suisse’s private bank, said.

The first, she said, is low interest rates. But the second reason is what keeps many retirees awake at night. “You have this aging population in the U.S. saying: ‘I need to supplement my retirement through income generation. My life expectancy is long. I retired at 65, but I could live another 18, 20 years,’ ” Ms. Reinhard said.

So what can investors, particularly those nearing or in retirement, do to guarantee a big enough and regular stream of income? Here is a look at three variations.

LESS RISK It may seem obvious, but low risk means lower return. Tom McNulty in Scottsdale, Ariz., who worked in the automobile and mortgage businesses before retiring six years ago, found an adviser who practiced a variation on this theme.

Mr. McNulty said he depended on income from his portfolio for about 70 percent of the living expenses for him and his wife, Peggy. His adviser keeps four years of expenses in safe but low-yielding bonds, leaving the rest of the portfolio to grow.

“It wasn’t just providing us the income but protecting the asset base we did have,” Mr. McNulty said. “We hope to live another 20 or 30 years. We learned that 70-30 in stocks and bonds in the accumulation phase and reversing it in the distribution phase is just not going to work.”

Jeremy A. Kisner, president of Sure-Vest Capital Management, which works with Mr. McNulty, said his firm wanted clients to feel as if they had a pension even if they did not. “What we’ve found is that retirees who have a pension sleep really well at night and they’re happy,” he said. “The clients who don’t have that worry about running out of money, no matter how much money they have. We try to create a pension for them.”

Mr. Kisner said his firm settled on putting aside four years of income for two reasons: If the growth part of the portfolio has a down year, money will not have to be moved into the safe assets, and the firm found that five years of safe money was too much, given the need to increase the rest of the portfolio through retirement.

“The strategy of ‘I’m just going to live off this interest’ was never the right strategy,” Mr. Kisner said. “This low-interest environment has laid that bare.”

MORE INCOME Henry Fleischer, a retired engineer who lives outside Detroit, has opted for a strategy that will provide more income now, require him to dip less into the principal of his retirement account and still have little exposure to equities.

His sizable nest egg is divided among investments in three income-producing assets: real estate investment trusts, master limited partnerships — most commonly companies involved in the transportation of natural resources — and annuities.

“We don’t need to be superaggressive,” said David B. White, his adviser, who runs David B. White Financial. “We don’t want the volatility of the stock market.”

Last year, REITs had yields of 4.5 percent, according to the FTSE Nareit index, and master limited partnerships had 5.6 percent yields, according to the Alerian MLP index. But neither is risk-free. Another downturn and collapse in the rental market could hurt REITs, and master limited partnerships can be volatile; they fell as much as the equity markets in 2008.

What is telling about these nervous times is that Mr. Fleischer should not have to worry. He is 89, and while he wants to make sure his wife has enough money if he dies first, he is less concerned about his two sons, who are successful and self-sufficient. Still, his portfolio lets him sleep well.

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New Investment Books Aim to Right Your Wrongs - Review

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Tomorrow? Who knows?

But one constant, say the authors of two new business books, is the real possibility that you will do something to make your portfolio worse. The writers are out to save you from yourself.

The better of the two books, “Investment Mistakes Even Smart Investors Make and How to Avoid Them” (McGraw-Hill, $28) is, in essence, a detailed checklist — in the form of short, focused chapters — of what not to do. Larry E. Swedroe, director of research for the Buckingham Family of Financial Services, which manages $3 billion of clients’ money, and RC Balaban, a media specialist at the firm, have created 77 things to guard against in making investment decisions.

First, let’s get the nits out of the way. Of the 77 mistakes the authors describe, there are a handful like “following the herd,” not starting to save soon enough, and being too conservative (and being victimized by inflation as a result). These are things you may have heard 873 times.

And as the number climbs to 77, the authors come dangerously close a number of times to double-counting. For example, there is a chapter on not believing in luck, followed closely by one warning against winning streaks (as in, just because a mutual fund manager has outperformed the market for three consecutive years doesn’t mean she is guaranteed success in Year 4.).

And there is a chapter cautioning about believing “experts” and another about not blindly following market gurus.

No matter. A significant number of chapters should at least get you to reconsider your investment strategy.

For example, many investors minimize their exposure to real estate investment trusts, figuring that because they own a home, real estate is already represented in their portfolios.

“A home is clearly real estate. However, it is very undiversified real estate,” the authors write. “It is undiversified by type. There are many types of real estate: office, warehouse, industry, multifamily, residential, hotel and so on.” In addition, “a home is undiversified by geography.”

Another common mistake is buying an index fund and believing that you own equal amounts of the stocks in the index.

That is usually not the case. Most indexes are market-cap weighted. That means an individual stock’s representation in the index is based on that stock’s market capitalization as a percentage of the total market cap of all the index’s stocks. The larger the stock’s market capitalization, the greater the percentage of the index fund it will represent.

As a result, the authors write, “most investors would be surprised how little exposure a total market fund has to the asset classes of small-cap stocks and value stocks.” Small-cap stocks accounted for just 8.2 percent of the total at the end of 2008, the book says, while the figure for value stocks was only 5.4 percent.

The authors are huge fans of buying index funds, but they add that “indexing does not mean that an investor should hold only an S.& P. 500 Index fund or a total stock market fund.” Instead, they say, you should determine how you want your money allocated by asset class — large cap, small cap, international, etc. — and buy index funds for those classes.

Here’s another example of a common mistake: Most people know that when it comes to investing, costs matter, but the authors say investors usually don’t consider every possible expense when putting money into a mutual fund. They will look at operating expenses and may forget about taxes — yet some funds are far more tax-efficient than others. And, the authors warn: “The least-understood hidden cost is the cost of cash. The cost of cash occurs when a mutual fund holds a cash position instead of being fully invested in the market. The greater the cash position held, the greater the impact.”

A majority of investor mistakes can be summed up by the phrase “try not to shoot yourself in the foot.” And that, as David Dreman shows in his revised and updated “Contrarian Investment Strategies: The Psychological Edge” (Free Press, $30), is a lot harder than it sounds.

The good news is that Mr. Dreman, chairman and managing director of Dreman Value Management, which invests more than $5 billion of money for individuals and institutions, points to all kind of work in cognitive and neuropsychology that proves why investing is so darn difficult. For example, “the more we like an investment, the less risk we think it entails even if it is riddled with it.”

What follows from this understanding, Mr. Dreman says, is that “the psychology-aware investor holds a superior advantage, not just more theoretical knowledge, but a genuine practical investment edge.”

But the bad news is that it takes substantially more than 200 pages before he starts to tell the reader how to use that edge. The early going is all about the psychology; what’s happened in the more than 13 years since the last edition of the book, and why just about everyone else is wrong when it comes to investing. (He is particularly harsh on people who believe in “the efficient market theory,” which suggests that it’s very hard to beat the market over time.)

When he does start offering specific investment advice, Mr. Dreman presents a classic value-investing approach. This recommendation is typical: “Buy solid companies currently out of market favor as measured by their low price-to-earnings, low price-to-cash flow, or low price-to-book-value ratios, or by the high yields.”

The payoff is fine, but you have to wade through an awful lot of neuroscience and psychology, and people with even a passing understanding of behavioral economics will already know much of it.

But taken together with “Investment Mistakes,” this book is a solid reminder that one of the biggest risks to your overall investment health is staring back at you in the mirror.

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It’s Time to Rebalance the Investment Portfolio - Your Money

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As the markets ebb and flow, the mix of investments that you originally put into place will probably change shape over time. And if you let your portfolio roam free for too long, your long-term plan can be thrown off kilter. Your retirement savings could become too heavily invested in stocks, potentially magnifying your losses when the market takes its next dive. Or your savings could become too conservative, and that’s a problem, too.

You can solve all of this, though, by regularly rebalancing, the industry’s term for putting your investments back in the proportions you originally set. But unless you hand off the reins of your portfolio to a financial planner, you need to make the time to do this yourself (ditto for investors who periodically hire a professional and want to carry out the advice themselves).

So, in theory, the task should be as simple and as automated as possible. Otherwise, you probably won’t find the time to do it. And really, most of the time, you just need to do a little maintenance.

Going through the exercise should be as easy as it is at TIAA-CREF, the financial services organization. When I recently set up a new 403(b) there for a family member — 403(b)s are essentially another flavor of 401(k) plans — I was pleasantly surprised by one of the options presented: Would you like to rebalance your portfolio back to your original allocations on your birthday?

That’s genius, I thought, and so incredibly simple. Why doesn’t my 401(k) plan offer this? Why doesn’t everyone’s plan offer this? And what online brokerages offer similar types of automated services?

As it turns out, automatic rebalancing is a standard option in many, but not all, 401(k) plans. But it should be. There’s little downside as long as you’ve already set up the proper investment mix. It shouldn’t cost you anything, there are no tax implications and you’re simply keeping your risk level intact. Aon Hewitt, a giant retirement plan administrator, said that more than half the companies in its database that offer 401(k) plans — covering more than 12 million workers — offered employees the ability to rebalance last year. That’s a large increase from a decade earlier, when less than 15 percent offered the feature.

Surprisingly, only a few of the larger online brokerage firms, including TD Ameritrade and Fidelity, offer anything remotely similar. Part of the reason, some providers said, is that the situation becomes more complicated when investors hold a mix of taxable and nontaxable accounts, since there can be tax implications and trading costs.

Of course, there are plenty of investments, namely target-date funds, that will automatically rebalance for you. These funds include a mix of investments that gradually becomes more conservative over time. As long as you fully understand what you’re buying and you’re not overpaying, they are good options for many investors, particularly those with smaller balances. Unfortunately, the entire category came under fire after the big market dive because many funds were too aggressively invested and managed to lose more than the broader stock market.

But if you’re trying to do this on your own, the question becomes this: How often should I rebalance and which providers make this as easy as possible?

There are a couple of schools of thought. Some experts recommend rebalancing based on an indicator, like when a piece of your portfolio moves a certain percentage outside your desired range, while others say it’s perfectly fine to pick a date and do it once a year. Vanguard has found that, historically, rebalancing once or twice a year — and only when a portfolio has drifted from its goal by at least 5 percent — produces results that are just as good as more complicated, frequent rejiggering strategies.

Consider what might happen if you did nothing at all. Beginning in 1987, a portfolio of 60 percent stocks and 40 percent bonds would have ballooned to 71 percent stocks by the end of last year, according to Vanguard. Rewind the same portfolio back to 1946 and it would have almost completely changed into an all-equity portfolio, at 97 percent stocks.

It is a counterintuitive strategy, since you’re basically adding money to your losing investments and selling off those that are doing well. But by sticking with it, the exercise helps take the emotion out of investing.

Of course, there are several low-cost services that can do it for you, while many online brokerages will manage your account for a fee. But here’s an informal survey of the offerings for those who want to handle it on their own, both inside and outside of retirement plans (if we missed any, you can add your own suggestions to the list on our Bucks blog):

FIDELITY The firm offers a rebalancing feature through its Portfolio Review tool, available to its 401(k) participants and to retail brokerage customers. After you set up a portfolio, it automatically sends you alerts through its “myPlan monitor” service when your portfolio drifts more than 10 percent from your goals. When you revisit the tool, it will ask you a few questions to make sure your goals remain the same and then recommend how to get back into balance. “So while it’s not automatic, there is an educational element of taking a few minutes to go through it,” said Jeffrey K. Cimini, executive vice president in Fidelity Investments’ personal investing division. Then you can “click to trade” to put everything back into balance.

T. ROWE PRICE The company offers automatic rebalancing as a standard option within the retirement plans it provides to employers. But only 25 percent of workers with access to the tool sign up for it, according to James Griffin, a senior product manager in its retirement plan services group, and that number has been declining over the last few years given the widespread adoption of target-date funds. It offers a similar option for its I.R.A. customers. After filling out a form indicating your selected mix of investments — you need to keep at least $1,000 in each fund in the portfolio — the firm will automatically rebalance your portfolio each quarter if your investments stray more than 5 percent from those goals.

VANGUARD It also offers a similar free rebalancing feature in its 401(k) plans, but employers have to choose to turn on the feature. While offering the service within a 401(k) is relatively straightforward, since there are no tax implications and rarely any related trading costs, the company said it did not currently offer the service to individual investors, though that was something it continued to consider.

SCHWAB It does not offer automatic rebalancing options to retail customers, though it has a couple of tools that illustrate whether your portfolio is off track. But its 401(k) plan participants can elect to have their portfolios rebalanced quarterly, semiannually or annually, and they receive a notice each time it has been reallocated.

TD AMERITRADE Its customers can automatically rebalance through its free Portfolio Planner tool, where you can analyze an existing portfolio or get help building a new one. While the service does not send any automatic reminders letting you know when your portfolio needs to be rebalanced, after you go through the tool, you can choose to “align your current portfolio to your target portfolio,” and it will do the math and set up and execute your trades with a few clicks. You can try to keep commission costs to a minimum by using its 100 commission-free exchange-traded funds and more than 700 mutual funds that don’t charge any transaction fees or commissions.

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Taking a Chance on the Larry Portfolio

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This turns out to be a pretty good instinct. After all, people consistently brag about their winning bets without disclosing their losers. They also tend to obsess over whatever’s happened in the markets most recently, assuming things will be that way forever.

But the one thing that we all ought to be able to agree on is this: The point of any long-term portfolio for the vast majority of investors is to earn whatever return you need to meet your goals while taking the least amount of risk.

I recalled this first principle of investing when I heard about something called the Larry Portfolio earlier this year.

Named for Larry Swedroe, the director of research and a principal at BAM, a wealth management firm in Clayton, Mo., the portfolio tracks indexes that achieved nearly the same 10 percent annual return between 1970 and 2010 as a portfolio invested entirely in the Standard & Poor’s 500-stock index. And here’s the Larry Portfolio’s trick: It did so with less than a third of its money in stocks, with the rest in one-year Treasury bills.

So how does it work? It starts with a bit of investing history. Between 1927 and 2010, small-cap value stocks outearned the S.& P. 500 by roughly four percentage points annually. This is according to an index of such stocks that two academics, Eugene Fama and Kenneth French, developed in conjunction with their research on the small-and-value phenomenon.

The reasons for this outperformance aren’t entirely clear, though plenty of theories exist.

Smaller companies may be more vulnerable if they lose a single big customer, or if a single big lender cuts them off. Value stocks, which generally have low price-to-earnings ratios, often have more debt. Then there are the many investors who choose growth stocks over value, buying them up because they tend to be more familiar names.

What these factors share is that they all have something to do with risk. For whatever reason, market participants see small and value companies as being more risky. So on average, it makes sense that investors should expect to get a little more back over the very long haul if they have the guts to take the risk and invest in them.

Mr. Swedroe, who is 60, was not the first person to build investment portfolios around these ideas. But he was particularly well suited to get the word out.

As a young adult, Mr. Swedroe, who was Bronx-born and still talks like it, worked diligently toward a night-school Ph.D. and considered becoming a professor. Instead, he found his way into the risk management field, working for CBS, the old Citicorp and Prudential Home Mortgage.

A friend had started a money management firm called Buckingham Asset Management in Missouri and was struggling to explain his investing philosophy to new clients. Seeing an opportunity to satisfy his teaching urge, Mr. Swedroe agreed to join the firm and help spread the word.

In the 15 or so years since then, Buckingham has come to be known as BAM and oversees investment strategy for other firms’ clients, too. Mr. Swedroe, the co-author of “Investment Mistakes Even Smart Investors Make and How to Avoid Them” and many other books, became enough of a cult figure that BAM’s Web site now sheepishly explains that, alas, he’s too busy to be the personal adviser for every BAM client who wants him to serve in that role.

As for the Larry Portfolio, which he prefers to refer to by more technical names, the only stocks it contains are mutual funds that hold small or value stocks (preferably both) from around the world. Everything else tends to go into very safe bonds.

For illustration purposes, he points people to the S.& P. 500 index, which returned about 10 percent annually between 1970 and 2010. If you wanted to gin up a portfolio to match closely (at 9.8 percent) that performance with much less risk, all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed. Then you’d put the other 68 percent of your money in one-year Treasury bills.

The execution is where this gets a little complicated. Mr. Swedroe, who invests this way with his own money, and BAM use small-cap value funds from, among others, Dimensional Fund Advisors, where both Mr. Fama and Mr. French are consultants and board members. Retail investors generally can’t put money into the funds unless they work with advisers who have been vetted by D.F.A. and have attended its California boot camp, which I wrote about in January. (Some 529 college savings and workplace retirement plans include D.F.A. funds too.)

Then there are the caveats. While having just 32 percent of your portfolio in stocks means you can lose only so much, that low equity allocation also keeps you from winning big when stocks are on a multiyear tear.

In fact, whenever something like the Larry Portfolio looks different from whatever the Dow or the Nasdaq are doing, there is sizable risk of regret. In 1998, for instance, the S.& P. 500 earned 28.6 percent, while that Fama/French index lost 10 percent.

Anyone watching that unfold in slow motion would be at risk of giving in and selling, thus locking in their losses. “You have to tell yourself that you are not going to have portfolio envy or listen to what Jim Cramer is saying on CNBC,” Mr. Swedroe says. “Are you willing to pay that price?” (If you are, you might also see years like 2001, where the Fama/French index gained 40.6 percent while the S.&P. 500 lost 11.9 percent.)

Education is the armor that protects you from emotions, according to Mr. Swedroe. Given who he works for, he’s a big believer in the idea of hiring an educator — an investment adviser — who protects you from the hair-trigger impulses that position your fingers over the sell button.

Lest you think this is all a ruse to get people to pay BAM’s fee — up to 1.25 percent of their invested assets annually, with additional family members benefiting from discounts — it’s worth noting that Mr. Swedroe spends about an hour on most days answering questions from people who write to him, BAM clients or not.

His challenge is that there aren’t a lot of options for people who want to have all of their stock money in the kind of inexpensive, very small and deep-value mutual funds that can most efficiently mimic the Larry Portfolio.

And much depends on how you construct that portfolio. Vanguard, using a set of indexes that serve as a foundation for its mutual funds, including an index that goes back only to 1979, couldn’t recreate the Larry Portfolio’s 4o-year performance. Mr. Swedroe countered with a different approach that would at least allow a Vanguard investor to reduce risk significantly without sacrificing returns. (Meanwhile, the future, as always, is unknowable, though all of the science would suggest that the small-and-value outperformance ought to persist.)

People should be so lucky as to have any choice among indexes in the first place. Too many investors are subject to whatever mediocre mutual fund choices their employer puts in front of them in their workplace retirement plans. If you’re not stuck in your employer’s plan, you can take a deep dive on some of the smallest and most value-oriented mutual funds that exist and take your pick. In the online version of this column, I’ve linked to a spreadsheet that Morningstar cooked up for me this week that lists more than 50 of them. Beware, as actively managed mutual funds can and do perform poorly over multiyear stretches with no warning or apology.

The Rydex S&P SmallCap 600 Pure Value exchange-traded fund is also worth a look. Its expenses are low, and it contains stocks whose market capitalization, price-to-earnings ratios and price-to-book ratios are all low — attributes to seek from the mutual funds, too.

Hand-holding may still be attractive to you, though, and there are some professionals who can put you in D.F.A. funds for well under the standard annual fee — 1 percent of assets — that many professionals charge. I particularly like AssetBuilder, where annual fees start at 0.45 percent and go down from there. You need $50,000 to get started there.

Other firms worth a look include Index Fund Advisors, Evanson Asset Management and Cardiff Park Advisors. I’ve linked to their fee information from the online version of the column.

Just keep in mind that you may not always get comprehensive tax, insurance and estate advice from more value-priced money management operations. When and if your portfolio number gets bigger and your life becomes more complicated, paying for all of that wisdom is sometimes the best investment of all.

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LearnVest, Merrill Edge and Financial Planning for the Middle Class

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Marilynn K. Yee/The New York TimesStephany Kirkpatrick, left, and Mina Black of LearnVest.

In this weekend’s Your Money column, I return to a topic that I’ve come at in various ways in recent years: The question of how the merely middle class and semi-affluent among us can get good, ethical, reasonably priced financial advice without having to watch our backs and our wallets.

Wealthy people have plenty of people clamoring to help them, and yet they need help the least. Everyone else is all too often left to work with people who say they do financial planning but are, in fact, insurance salesmen or seeking to earn big commissions from mutual fund companies.

LearnVest aims to change that, as I explain in the column, though they cannot yet help you with your investments. Merrill Lynch has its Merrill Edge program, but it’s pretty investment-centered. I was particularly intrigued by LearnVest’s fledgling efforts to help people with basic financial planning by pairing them with a real certified financial planner for a reasonable price.

If you’re tried LearnVest’s program in the time that it’s been open, please tell us about it below. Ditto for those of you who’ve had personal experience with Merrill’s call centers and its Edge program.

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Opportunities in Asia

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Q. Inflation is rising despite a weak global economy. What should Asian investors do to protect themselves?

A. There are a number of ways to hedge inflation. One can buy inflation-linked bonds such as Treasury Inflation-Indexed Securities and iBonds. The Hong Kong government issued iBonds in July of last year with a coupon linked to the consumer price index over the last six months. The performance of iBonds in the secondary market has been very good, and the Hong Kong government is going to issue a second iBond soon. And, of course, real estate remains strong as a traditional tool for Asian investors to hedge inflation.

Q. Oil prices seem to have regained their footing, and as they rise they are likely to affect many Asian economies. What does this mean for investors?

A. Asian investors have to closely monitor the recent rise in oil prices as higher oil prices still have the ability to disrupt the rally in equities. Year to date, oil prices have risen 6.27 percent, while the world MSCI equity index gained 10.8 percent.

Investors generally believe that global growth — as seen through positive data from the United States and China — and liquidity driven by quantitative easing were behind the recent rally in oil prices. However, the situation could still change for the worse if the continued rise in oil prices carries over to other key components of the C.P.I., like food prices. The model run by the American financial analyst Gary Shilling shows that the rising inflation of the late 1960s and 1970s was devastating to both stocks and bonds.

Q. Where do you advise clients to have the bulk of their assets right now?

A. We believe equities are still attractive. We expect a further upside move of around 10 percent for the equity market. This is based on our assumption of a three-percentage-point contribution from earnings, with the remainder coming from higher price-earnings ratios. In our opinion, however, higher stock prices start with events that can shift confidence and/or reduce uncertainty, or with economic factors. As such, we view the accommodative global monetary policy settings, higher growth expectations and the associated decline in risk spreads as the key catalysts for further P/E multiple and share price gains over the next six to nine months.

Q. Which equity markets do you favor in Asia, and why?

A. Our preferred markets are China, South Korea and Taiwan. Both China and South Korea are trading at single-digit price-to-earnings ratios, while Taiwan will most likely have the highest earnings-per-share growth, of 23 percent, but from a low base in 2011.

In terms of sector preference, we like information technology and consumer discretionary industries. Among major Asian export products, automobiles, smartphones and tablet devices are bright spots. The technology cycle is likely to bottom out in the next couple of quarters, presenting major investment opportunities.

Q. And on the fixed-income side?

A. We believe there are significant upside risks to bond yields. It will be hard for yields to move substantially lower from here unless the feared collapse of the euro zone becomes a reality, whereas the scope for eventual increases is much greater if the crisis fades and growth in Europe resumes.

Q. Where do you see the best investment opportunities?

A. While this would all hinge on the risk profile of individuals, our recommended asset allocation is to modestly overweight stocks and underweight bonds for a balanced profile. Our overweight stance in equities is modest in light of the fluid situation in Europe and an unusually wide divergence between the potential outcomes of the crisis.

In the currency market, we believe the U.S. dollar will strengthen against the euro but weaken against most Asian currencies, like the Singapore dollar or the Chinese renminbi. We recommend that investors have some exposure in these Asian currencies.

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Financial Advice for Those With Hummingbird Nest Eggs

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Brokerage firms have been making these sorts of moves for years, and Merrill is notorious for a leaked memo in the late 1990s that discouraged “charity work” for clients with less than $100,000 in assets — “poor people,” as the memo put it.

That patrician view is probably a minority one: if the people who run Merrill Lynch felt that way, they wouldn’t be doing what they’re doing now, which is trying like mad to figure out a way to service those smaller accounts profitably.

But Merrill’s decision to tell its brokers that they might not get paid if they persisted in working with such people reflects one of the sorriest truths of the financial services industry: Nobody has figured out a way to consistently give large numbers of people reasonably priced financial advice across all areas of their life and to do so in an ethical manner.

The case of Merrill — and its effective opposite, a start-up called LearnVest — is instructive in part because it reflects how the world of managing money has changed since Merrill Lynch first started hanging shingles on Main Streets all over the United States.

Charles E. Merrill & Company opened for business nearly 100 years ago, and the company (along with Merrill’s current owner Bank of America, interestingly enough), resolved to serve Main Street, not Wall Street. Charlie Merrill put it this way, according to the 1994 book by my colleague Joe Nocera, “A Piece of the Action.” In it, he quotes Mr. Merrill as writing the following: “A new guild has sprung up in the [investment] banking profession which does not despise the modest sums of the thrifty.”

Many brokerage firms have backed away from that sort of stance in recent years. An old saw in the industry notes that the little old lady with the diminishing balance who hounds you when her dividend checks arrive late takes up five times as much time as a 50-year-old millionaire.

Besides, you make more money serving richer people. So the big firms (and thousands of smaller operations and individuals) fight hard over the 1 percent and then siphon off a small cut of their assets each year through fees and other revenue mechanisms.

Everyone else ends up at Charles Schwab or Fidelity and pays roughly $1,500 to $3,000 if they want a full financial plan with advice on insurance and mortgages and other things beyond investments.

A few years ago, Citi took a bold step with its myFi service that aimed to provide just that sort of holistic guidance from bank branches. But it introduced the service at one of the worst economic moments since World War II, and the bank shuttered myFi when it did not succeed quickly enough for its tastes.

Nowadays, a thrifty Merrill customer with modest sums is told to use a service called Merrill Edge. And Merrill is taking its best shot at attracting and keeping them (and eventually) upgrading them to a real broker), given that it believes that there are 28 million households with $50,000 to $250,000 in assets.

The people who service them are called Financial Solutions Advisors. There are more than 500 of them in bank branches and the company will hire 500 more in 2012. There are currently about 800 F.S.A.’s working in call centers as well.

The company (to my great surprise) could not say how many of them were certified financial planners, the sort of people trained to look at a client’s whole life before making investment recommendations.

If Merrill isn’t tracking this, it’s tempting to conclude that the company doesn’t make the credential (and holistic advice) a priority and that all it wants to do is push investments. Still, Merrill does the right thing and encourages people to earn the certification by covering classes for F.S.A.’s who want to become certified financial planners.

Dean Athanasia, the executive who oversees Merrill Edge, said that any good investment advice had to be holistic by its very nature. “If you have a mortgage and debt, then you need to factor that into the consideration of your planning for the future,” he said. “You can’t just look at assets.”

The Merrill Edge investment account costs a flat $125 each year if you are working with an F.S.A., though the company will also manage a portfolio for you for 1 percent of your assets annually. As for the underlying mutual fund fees, the firm collects “the appropriate fees based on our agreement with the firm and the prospectus.”

Anyone working this way needs to ask their adviser for a plain-English explanation of how much money, if any, Merrill stands to collect in any way, shape or form now or in the future, based on the mutual funds it selects for you. And if any of you have asked an F.S.A. for a collection of low-cost Vanguard or similar funds, I’d be curious to hear what the reaction was.

On compensation, Merrill appears to be doing the right thing, meanwhile; advisers earn a salary plus incentives based on the amount of assets they gather and manage, whether it’s in bank savings accounts or in mutual funds or other investments.

The most curious thing about my conversation with Mr. Athanasia is that he didn’t once mention personal budgeting.

This article has been revised to reflect the following correction:

Correction: January 13, 2012

An earlier version of this column incorrectly referred to the customer service employees of Merrill Edge as Financial Service Advisors. 

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The Value of a Written Investment Policy Statement

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Financial planners and registered investment advisers have been using them for years with their clients; brokers less so. While the statement is time-consuming to assemble and maintain, it will serve you well, particularly in volatile markets.

The basic investment policy statement puts on paper answers to your questions about objectives, return expectations, risk tolerance, time horizon and portfolio allocation. Should you weight your holdings more toward bonds or stocks? Do you want to save for college and a second home in addition to retirement?

Why is it important to write all of this down? The statement will help keep you focused on your goals. You will not only be taking the appropriate amount of the risk, you will have some idea of how your portfolio will do in a down year.

Most important, once it’s reviewed by a fiduciary adviser you engage to take legal responsibility for drafting your retirement plan, your policy statement can show you over time if your return expectations are realistic. Keep in mind that you also need to estimate inflation, market factors and tax liability.

“What matters is after-tax wealth,” said Michael A. Dubis, a fee-only certified financial planner in Madison, Wis. “I will tell clients if their return expectations don’t make sense. Hope is not a strategy.”

Mr. Dubis sees a policy statement as part of a coordinated financial planning process. Although most advisers are generally focused on investments, they can also work with tax, estate and insurance advisers on protecting your assets and helping them grow over time.

To draft a policy statement, you need to determine your investment philosophy. What kind of investor should you be? Can you afford to be aggressive? Maybe not, if your income is tied to a volatile industry like financial services. Are you an active or passive investor? Trading is rarely a good idea when hundreds of index funds are available, offering broad exposure to nearly every market.

Advisers should include in the statement their style of money management, how much they charge, their responsibilities and a periodic review schedule. They may even include some language on what they won’t or can’t do — like estate planning or tax planning — although they often coordinate with other professionals. Even computerized Monte Carlo analyses of the probability of achieving your goals are useful.

Once you review your objectives, what you own, how you want to invest and risk and return expectations over given time periods, you can sit down with your planner to construct a portfolio that’s right for you. The amateur investment group Bogleheads provides an excellent introduction to the process.

A draft portfolio is a synthesis of the information you supply your planner. A sample might stress long-term growth in United States and international stocks, along with bonds, real estate investment trusts and inflation-protected securities.

Larry Swedroe, director of research for Buckingham Asset Management in St. Louis, said people needed to do some self-analysis and chat with family members before the final statement was in place.

“You need to separate desires from needs,” said Mr. Swedroe, who wrote “The Only Guide You’ll Ever Need for the Right Financial Plan” (Bloomberg Press 2010). “It’s critical to integrate your plan with taxes, estate planning and insurance needs. It’s a necessary condition for success, but not a sufficient one.”

Mr. Swedroe recommends that clients also do a mind map, which is like a flow chart that shows relationships among family members, assets, advisers, interests, values and goals.

While this process sounds tedious and time-consuming — it can take up to four meetings to draft and review a policy statement with your adviser — it is worthwhile because it may address needs you’ve never discussed with your family or advisers.

What do you do if the market dives just before your retirement? Can you save more? What if you have to support an aging relative? What if you sell some real estate and downsize? Your statement can be adjusted as you go along.

At the very least, your adviser should be able to tell you the worst- and best-case range of returns given your investment allocation. That way, you can insulate your portfolio from a dismal year like 2008.

A few paragraphs on how your adviser will manage your money is also essential before you actually build the portfolio. If his or her objectives differ from yours, you need to discuss it. Do you want an actively managed, aggressive growth strategy? Or are you more focused on capital preservation and income? Don’t stay with an adviser whose approach doesn’t match your needs.

Like any moving vehicle, an investment policy statement needs regular care, maintenance and rebalancing. It should be flexible to accommodate changes in your life: divorces, aging parents, inheritances. As the route of your journey changes, you may need a new road map.

John F. Wasik, co-author of “iMoney,” is a Reuters columnist.

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Debating Financial Strategies for the New Year

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Republicans and Democrats in the United States seem incapable of agreeing on anything. In Europe, the search for a solution to Greece’s debt problems has been overshadowed by questions about the continued existence of a single currency for the European Monetary Union.

Add at least a half-dozen crucial elections in 2012 — including ones in France, Greece and the United States — and a political transition in China, and pessimism about what lies ahead seems fairly rational.

Yet a year ago, the outlook for 2011 seemed the exact opposite of what the year turned out to be. Economists were raising their growth projections, consumer confidence was improving and a tax-cut compromise in Congress was putting more cash into pocketbooks. An accelerating economic recovery seemed in the offing.

Of course, that was not how the year turned out. Probably the only investors bragging about their returns are the ones who perfectly timed their purchases of United States Treasury bonds and gold — two asset classes that most analysts said were overvalued as 2011 began. (Of course with gold, the people gloating the most are the ones who sold it at its August peak.)

So how should you think about next year? Should you hide for one more year, or charge forward with some sort of plan?

For this week’s column, I asked a group of people whose opinions have impressed me to ponder this conundrum. Next week, I will share some final thoughts and 2012 predictions from the group of five strategists and investors that I have spoken to each quarter. My hope is that in mixing theory and practice, the two columns will offer investors a better sense of both how they should and will act next year.

THE ENVIRONMENT When Standard & Poor’s downgraded the credit rating of the United States in August, investors rushed to buy Treasury bonds, the very asset that had just become less creditworthy. This might seem utterly irrational, but it did not surprise Daniel Kahneman, the psychologist who won the Nobel in economic science for work that became the foundation of behavioral economics.

“Treasuries just feel safe,” he said. “When you’re worried, you go to the safe thing. It’s quite a normal reaction.”

I called Mr. Kahneman because I had been reading his new book “Thinking, Fast and Slow” (Farrar Strauss & Giroux) and was fascinated by his division of people’s thinking into two systems. System 1 is fast; it’s intuition. System 2 is slower and moderates System 1; it’s the ability to reason.

But what do we do if our System 1 thinks everything looks bleak next year and our System 2 agrees?

“My System 1 also says it is going to be a bad year,” Mr. Kahneman said.

But feeling that does not equate to shunning the market. “I’m not really sure that the situation is very different from what it usually is,” he said. “The same advice about prudence that would carry you in other years would carry you in next year.”

(His greater concern is with what the last three years have done to the general sense of optimism among the young. “That’s a profound change,” he said. “Where that will go, what shape that will take I cannot predict.”)

Practicing a prudent strategy is tougher than it sounds, particularly given the extremes of the last five years. To go from housing and stock markets that were always going up to a housing market that is bumping along the bottom and a stock market that goes up and down seemingly at random is tough to take.

Daniel Egan, head of behavioral finance for the Americas at Barclays Wealth, said that from Jan. 1 to Aug. 1 the Standard & Poor’s 500-stock index moved up or down at least 2 percent on 8 percent of trading days. From Aug. 1 to Dec. 20 that number more than tripled, with 27 percent of trading days having moves greater than 2 percent one way or the other. And 13 percent of the days in the second period had swings greater than 3 percent, compared with none in the first period.

“This is the worst kind of environment to attempt market timing in,” Mr. Egan said. “Odds are, you’ll miss the rally when one or more uncertainties — euro, U.S. fiscal policy, U.S. election — resolves itself, leaving you with the volatility but not the return you’d hoped for.”

SIZING THINGS UP One thing behavioral research has shown is that people who lose a lot of money in a particular asset class will often shun it or at least underweight it as an investment in the future.

“Individuals who got burned by T-bills in the 1970s and were burned by inflation underweighted T-bills the rest of their lives,” Mr. Egan said. “2008 being a credit crisis, people are going to have an experiential prejudice against banks for the losses they experienced.”

He added that people who believed real estate was an investment that would always go up were likely to have similar biases.

Assessing these objectively will be crucial for investors who want to make reasoned decisions. Meir Statman, professor of finance at Santa Clara University, said investors needed to step back and think about how the fear of losing even more money was directing their decisions.

“Fear makes us think the world is coming to an end; it makes us think that stocks will never go up and always go down,” he said. “This is where logic is going to have to intrude.”

One helpful tip from Michael Mauboussin, chief investment strategist at Legg Mason Capital Management and the author of “Think Twice: Harnessing the Power of Counterintuition” (Harvard Business Press), was to assess the experts providing the advice and understand the likelihood that their predictions will be right.

“In some realms, experts will predict very well,” Mr. Mauboussin said. “If you turn on the weather, you can be sure if you need an umbrella. When we’re dealing with economic, political and social areas, we cannot predict as well.”

Robert Seaberg, managing director of planning services at Morgan Stanley Smith Barney, advocates that people be a bit more realistic in their thinking about investments.

“The world now is more about risk management than about investing,” Mr. Seaberg said. “Forget the home runs. Guard against the really big losses, and go for singles and doubles. You win more games than you lose.”

ACTION OR INACTION The collective wisdom of this group is almost entirely to take the long view and stay the course next year.

“My advice to individual people is the less attention you pay to this stuff, the better you are going to be,” Mr. Mauboussin said. “You need to have a prudent strategy, a risk tolerance and a time horizon and then don’t get too caught up in it.”

Of course, the long horizon sounds great if you are at the beginning of it. If you are among the baby boomers in retirement or about to be there soon you may scoff at this. But Mr. Statman, who turns 65 this year, said the last thing people of his generation needed to do was try to find a way to get their money back. They need to live with less.

“The saddest stories I read about are of baby boomers trying to recover their losses by going into risky investments, and they end up in Ponzi schemes or very miserable positions,” he said.

As for Mr. Kahneman, he has no plans of adjusting a strategy that has served him well. “I made one big decision, which was how much I want to have in equities and how important it was for me to be protected from inflation,” he said. “Then I leave it to other people. I don’t even want to know how things are going day to day.”

If it’s good enough for a Nobel laureate, it might be good enough for you.

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A Forecast for Low Returns, and Advice for Investors

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So I was surprised to hear Jean L. P. Brunel, chief investment officer at GenSpring Family Offices, tell me that he was preparing his clients for a sustained period of low investment returns. And further, he is counseling those clients — families with hundreds of millions of dollars — that they may need to spend less or change their estate plan.

If this is his advice for the wealthy, what does it mean for people with considerably less, who may simply be saving for retirement?

Mr. Brunel argues that the classic link among the return premiums for bonds over cash and stocks over bonds still holds, but they are substantially lower because of the low interest rates set by the Federal Reserve.

Here is how it works. The return on cash is typically the expected rate of inflation plus some real interest rate that is derived from the rate a central bank sets to promote growth. The return on bonds is cash plus some additional amount to account for the duration of the bond. The return on equities is the bond returns plus some premium for the risk associated with stocks.

He noted that cash typically had a return of 4 percent, putting bonds at 6 percent and stocks at 8 to 9 percent. With cash now yielding zero, that has lowered bonds’ return to 2 to 2.5 percent and stocks to 5 percent. The problem, as he sees it, is that too many people are stuck on the old numbers.

“I don’t want you to read into this that we have precise information on real returns,” he said. “I could be wrong. It wouldn’t be the first time. But whichever way you cut it, the environment is radically different.”

Sure, the stock market is off to a nice start this year. But 2011 also started strong — until the tsunami in Japan and the uprisings throughout the Arab world touched off a downward spiral. For the year, the Standard & Poor’s 500-stock index finished flat, unless you include dividends, which put it up 2.1 percent.

We’ll find out if Mr. Brunel’s gloomy take is right. But in the meantime, his forecast of low returns is worth thinking through.

LOWER EXPECTATIONS The consensus among other analysts I spoke with is that most people should plan for single-digit investment returns for a while. That time horizon ran from five to as many as 20 years, in the case of Jim Russell, regional investment director at U.S. Bank Wealth Management.

“If we’re able to generate returns above that, that’s a good problem to have,” he said. “Most clients think the worst is over, but most professional investors think the black swan event is possible.” (A black swan, a term popularized by the economist Nassim Nicholas Taleb, is the unlikely event that too few people plan for.)

Darrell Cronk, chief investment officer for the Northeast at Wells Fargo Private Bank, said the issue for many clients was the effect of negative real interest rates on their portfolios. This is often a hidden problem because, for example, a 10-year United States Treasury bond was paying 2.295 percent on Friday, but core inflation is around 3 percent. In other words, owning government bonds costs investors money.

“Over the past decade or two, we’ve had positive real rates of return,” Mr. Cronk said. “We talk about purchasing power risk, scarcity of income for portfolios and duration risk, but a negative real interest rate is a challenge for the bond market.”

Maria Elena Lagomasino, chief executive of GenSpring, said clients were not pleased with the implications when she talked to them about Mr. Brunel’s calculations. “The clients get mad when you say what we thought was true in the past may not be true in the future,” she said. “Maybe it won’t happen. But what if it does?”

HOW IT ENDS Mr. Brunel’s forecast is bleakest in how he believes the environment of low investment returns will end: global hyperinflation to reduce government debt burdens.

Given this gloomy time, he may well be overly pessimistic — the flip side of being overly optimistic when it seems that markets can only go up. (Mr. Brunel said that even his son was rooting against his end-game prediction.)

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As the Market Lurches, New Options to Avoid Getting Seasick

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WHEN it came to stock market volatility, 2011 was pretty close to the mother of all roller-coaster rides.

The Standard & Poor’s 500-stock index had several daily swings of 2 percent or more in August alone. The Dow Jones industrial average seesawed more than 400 points for four straight days that month. With the sturm und drang of European and American debt woes continuing, we may see more bipolar market oscillations.

The investment climate — even among wealthy investors — has cooled toward stocks that have full exposure to the market’s ups and downs. A recent survey by the Spectrem Group found that “while somewhat more moderate in risk tolerance than in 2009, investors remain more interested in protecting principal than growing their assets.”

So it comes as no surprise that Wall Street has hatched a new generation of products that cater to those who hate market volatility. Not only can you reduce your exposure to the most spasmodic stocks, you can also bet against wild price swings, although neither strategy is a flawless safeguard against market risk.

This new generation of “low-volatility,” exchange-traded funds focuses on established companies with consistent earnings flow and dividends.

You can now find a low-volatility fund for nearly every corner of the global stock market. The PowerShares S.& P. 500 low-volatility fund invests in 100 companies from the index that “exhibited the lowest sensitivity to market movement, or beta, over the past 12 months.”

Skittish about emerging-market stocks? The iShares MSCI Emerging Markets Minimum Volatility Index Fund could be worth a look. Tilting more toward small companies in the United States? The Russell 2000 Low Volatility fund focuses on small- and micro-cap stocks with strong growth prospects.

What if you want to bet squarely against the downward volatility of the S.& P. 500 index? Then you might consider the iPath S.& P. 500 Short-Term VIX fund, a complex exchange-traded fund based on futures contracts that track the implied volatility of the index.

For an even broader approach, Lance Gunkel — a fee-only certified financial planner with Sherpa Investment Management in West Des Moines, Iowa — uses the SEI Managed Volatility Fund, which covers a low-volatility index representing 3,000 stocks that may also invest in futures and options. The fund’s load-adjusted return was nearly 10 percent compared with a nearly flat performance for the S.& P. 500 Index last year.

The companies in the low-volatility funds he chooses for his clients tend to be “cash-flow rich with low price/earnings ratios, dividend paying with a value tilt,” Mr. Gunkel said.

While there is an appeal to tamping down portfolio extremes, the low-volatility strategy is no substitute for a comprehensive reduction of market risk. While many low-volatility funds track stocks that have had fewer price swings on average over the last year, that may not be the most prudent way to avoid future volatility.

If low-volatility funds were concentrated in “safer” stocks like dividend-rich utilities and major energy producers in 2011, unless they shifted gears to match market sentiment for this year’s favored sectors, they might fall victim to “sector rotation,” as professional money managers shift into other industries and sell the favored stocks of the previous year. Last year’s darlings may be this year’s goats.

Also keep in mind that most of these funds have been started within the last few years. Few, if any, have been battle-tested in a 2008-style collapse, which is when you would need them to offer real protection. (And they are not to be confused with balanced funds that have a mix of bonds or cash, or more exotic “inverse” funds that move in the opposite direction of stocks.)

Lee Munson, the author of “Rigged Money” and a financial planner and registered adviser with Portfolio, in Albuquerque, said he was “offended by the gentle marketing lie” of low-volatility funds because they did not address the larger need to reduce market risk in times of market crisis. Every low-volatility fund is still exposed to the market. And still looming is “event risk,” like the threat of a European country defaulting on its debt.

A lot of investors, Mr. Munson maintained, mistakenly “confuse low volatility with low risk,” adding: “You can’t call a Lexus a Mercedes. People think that when the market goes down, I won’t get hurt in these funds. They’re all stocks.”

Mr. Munson suggested a more enlightened view that looks at “risk budgeting,” or gauging how much risk you can take, and design a portfolio that tracks your tolerance — or intolerance — for stock market exposure.

It is also possible to reallocate easily to include more bonds to offset equity holdings. Real diversification includes investments that do not move in lock step when the market turns south.

A qualified investment adviser or certified financial planner can also help you hedge risk in other ways, like buying options on specific stocks or indexes you may own. The goal, as always, is to developthe portfolio that best provides for your needs in the least stressful way.

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What to Look For in an Active Investment Manager

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Yet investors regularly ask for a mutual fund’s track record over one, three, five years or more before putting their money in. Sure, the fund may keep going up, and the past performance is an indicator. But what happens if the fund starts to drop? Should the investor sell, or hang on because the fund did well in the past?

A report released this week from Barclays Wealth and Investment Management, “The Science and Art of Manager Selection,” aims to lay out the risks of trying to read past performance into future returns when selecting active managers — as opposed to passive management of your money through index and exchange-traded funds.

Investors are asking the wrong question when they argue whether active or index funds are better, said Aaron Gurwitz, chief investment officer at Barclays and one of the authors of the report. “The question is, Can you identify managers who are going to perform well in the future?” he said. “If you can’t, you should be in an index fund. If you can, then you should select managers the way we do.”

The report highlights a basic problem in investing — that the obsession with recent returns hurts long-term performance. Psychologists and behavioral economists call the phenomenon the recency bias, and it is not confined to investing.

“We’re like pattern-finding machines,” said Terrance Odean, professor of finance at the Haas School of Business at the University of California, Berkeley. “If lightning strikes and something falls off the table, we think the lightning caused it. Or worse, the book falls and lightning strikes and you think the book caused it.”

But searching for patterns does not add up to a good investing policy. “The investor who is in the market and is constantly seeing patterns better have a good day job,” Mr. Odean said.

In a paper in 2008, “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors,” Mr. Odean and a co-author, Brad M. Barber, a finance professor at the Graduate School of Management at the University of California, Davis, found that individual investors were more likely to buy a stock if they saw something about it in the news or if it had a high one-day return. The two professors attributed this to how difficult it was to do detailed analysis on thousands of stocks before buying one.

But how can investors be broken of their habit? The Barclays paper advocates a mix of what its authors call the art and science of picking active managers.

The art refers to the idea that the ability of most mutual fund and hedge fund managers to outperform their indexes peaks and then declines as more money comes into the funds. (Private equity managers have better luck because they are essentially repeating the same strategy with different companies.)

David Romhilt, the head of manager research and selection at Barclays and the lead author of the report, said active managers went through four phases: start-up, growth, maturity and decline. He sought to identify those managers in the second phase, growth, because that is when they have had enough success with their strategy but not so much success that money has poured in and changed how they invest.

One example of this life cycle is Bill Miller, the chairman and chief investment officer of Legg Mason Capital Management. He outperformed the Standard & Poor’s 500-stock index from 1991 to 2005 with his Value Trust fund. Then, for five of the next six years he either underperformed or significantly underperformed the benchmark.

The Barclays report does not address individual managers, but its authors say the decline should not be shocking. As assets grow, managers have to take enormous stakes in single companies or diversify into too many different securities. The fund loses the nimbleness it once had.

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