Investing in the new economy
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Alternative funds for investors

Next, evaluate fund managers and their track records. Many may not have track records at mutual funds, but if they were around in 2008, 2009 and 2010, that can be a good sign. If, during those years, they weren't at the helm of the mutual fund you're evaluating, check out how they did in different accounts or in hedge funds.

"You can see them running a similar strategy, not exactly the same, but similar, and how they've done over time in different kinds of market environments," Papagiannis says.

There are some caveats. Actively managed funds introduce manager risk. In addition, diversification can have diminishing returns.

"The most important diversification to equities is to add safe Treasury bonds," says Larry Swedroe, director of research at Buckingham Asset Management in St. Louis.

After adding international assets, diversifying across geography and economic and political risks, including emerging markets and then real estate, commodities and Treasury inflation-protected securities, or TIPS, "by the time you're done and you have 10 or 12 of these asset classes, the next bit of diversification gets you almost nothing," Swedroe says.

There are no guarantees that the extra diversity will buffer against volatility. In a severe market crash, such as the one in 2008, "there are only two asset classes; there are riskless assets and there are risky assets. There are government securities and then there is everything else and you have to understand that," says William Bernstein, author of "The Investor's Manifesto: Preparing for prosperity, Armageddon and everything in between."

"Yes, you should come up with a policy for allocating among your risky assets. In normal times, that is going to help you, but don't fool yourself that owning REITS and precious metals and timber and commodities -- and God knows what else -- is going to save your bacon," he says.

In 2008, all asset classes got clobbered, but most people won't be retiring based on their returns in 2008. Instead, it's the returns over a long period of time that count the most. And that is where diversification will be the most helpful: over the long term.

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