Mutual funds roundup: That bear's still there

With a drop in oil and commodity prices, inflationary risks have eased and bonds look more attractive, Mr. Michas says. He believes that high quality growth stocks in such sectors as healthcare, consumer staples, and technology can weather a recession better than retailers or other consumer discretionary stocks.

Roller-coaster markets often dissuade investors from sticking with a disciplined asset allocation plan. Yet a large body of academic studies shows that investors who maintain their asset allocations and investment strategies fare better over the longer term than those who pull back in times of trouble.

Often that may require having a cool-headed adviser at your side. "Investors who have access to registered investment advisers are apt to fare better during volatile markets than self-directed investors," says Robert Huebscher, president of Advisor Perspectives in Lexington, Mass. "They help clients avoid acting on emotional impulses or making short-sighted decisions."

His firm tracks how financial advisers allocate the assets of high-net-worth individuals. Its latest data shows that they have 61 percent of their portfolios in equities, 12 percent in cash, and 27 percent in bonds. About one-fifth of the equity portion is devoted to non-US markets. Although cash holdings have risen over the past year, Mr. Huebscher says, "we've seen no dramatic shifts by advisers onto the sidelines in recent weeks."

Still, some advisers have sharply trimmed their stock allocations in recent months. "Capital preservation is the key goal now," says Dean Barber, president of Barber Financial Group in Lenexa, Kan. His "conservative growth" portfolios, geared toward retirees, currently hold 35 percent in bonds, 22 percent in US stocks, 7 percent in commodities, 5 percent in foreign stocks, and 31 percent in cash equivalents (mainly money-market funds backed by large financial institutions and short-term government bond funds). A portfolio so defensively tilted, he says, has lost less than 3 percent of its value in the past month.

One of the sturdiest performers has been San Francisco-based Permanent Portfolio fund, which holds precious metals, Treasury securities, and stable foreign currencies such as the Swiss franc. "It's a kind of one-stop shop for hedging against a resurgence of inflation," Barber says.

Will the November's presidential election have an impact on the market?

From a historical standpoint, which party wins the election doesn't really matter all that much, says Eric Bjorgen, senior analyst at the Leuthold Group in Minneapolis. Measured over the entire term of each presidency from 1944 to date, the Dow Jones Industrial Average rose at an annual compound rate of 6.7 percent under five Democratic presidents and 7.5 percent under six Republican presidents. "What really counts are secular forces of the market cycle, the economy, and the longer-term effects of policies put in place by prior administrations.

"If Obama wins, the prospect of a higher capital-gains levy would put an additional damper on the market," says Mr. Barber.

Although Mr. Ezrati agrees that a capital-gains boost could induce a "one-time sell-off" before the end of 2009, the troubled economy may cause a Democratic administration to "backpedal on tax hikes until things improve."

Regardless of who is president, bear markets usually end in one of two ways, capitulation or exhaustion, says Maureen Busby Oster, chief investment officer of MBOCleary Advisors. "Capitulation is short, severe, and dramatic, like [after the] October 1987 [crash]. Exhaustion is more prolonged with an end that is difficult to discern, such as 1973-74 and 2000-2002," she says.

Bear markets of the past 50 years, defined as a 20 percent drop from a prior high, have been as short as four months and as long as 41 months. Because the process of financial deleveraging and bank balance sheet rebuilding will drag on well into next year while the economy languishes, "this bear market could last for some time," she says.

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