One of the most difficult parts of being a money manager in 2008 was the fact that some past relationbetween markets did not hold up. But there is a great chance that, regardless of economic and market conditions, you can still find the bulls out there lurking, as long as you have the right investment styles and asset classes populating your portfolio. While that may not be enough for you to make money when the market is down 20% to 40%, it may very well stave off lifestyle-changing drops in your clients' wealth and allow you to retain your status as their advisor.

Of course, because not every situation plays out exactly like it has in the past, an adaptive approach to portfolio management is invaluable. For example, in the early stage of an economic recovery you might find returns in contrarian value, long-short equity, global infrastructure or high-yield bonds, convertible securities or high ROE growth stocks. In an economy with high inflation expectations, the bulls might be in inversed fixed-income, gold, currency strategies or TIPS. The point of these few examples is to reassure you that in any market environment, there are ways to seek profits. That does not mean that your entire portfolio will make money. Remember, the goal should not be to make money every day, every week, every month or even every year.

Why not? Because that will cause you to make decisions that are too far to the bullish or bearish side of the market. If you are right, you feel like a star. If you are wrong, you get what billionaire and onetime U.S. presidential candidate Ross Perot described as "that giant sucking sound." He was referring to the potential loss of U.S. jobs to Mexico from the NAFTA bill. I am talking about the dollars coming out of your portfolio because you made a big bet instead of considering, analyzing and truly managing the balance of risk and reward in your clients' portfolios.

FORECASTING GROWTH

When I speak to groups of advisors, I often ask the question, "Where were the bull markets in 2008?" Occasionally someone will shout out "U.S. Treasury bonds," as they appreciated in value when investors hoarded Treasury securities, after it appeared for a while that nothing else was safe. Although that is correct, I don't think forecasting panic-buying scenarios can be too big a part of anyone's analysis.

I then explain that 2008's biggest bull markets were in shorting stocks-many types of stocks, in fact. Think of it this way: If you have even a modest portion of your portfolio in mutual funds or ETFs that rise when some part of the stock market falls, you would have added some positive return to your overall portfolio from that segment of it. This would likely not be sufficient to make your entire portfolio profitable in a year like 2008. However, you would have achieved a major victory in two ways: You had a portion of your portfolio that made money when gains were very hard to come by. And, by producing gains with that portion of your capital, less of your total capital was subject to the horror of the plummeting stock market in 2008.

As a result, you likely have kept your total assets at a high enough level to position yourself confidently for the next eventual upmarket cycle. Remember, successful growth of one's portfolio can be achieved in many ways. In my strong opinion, the best way to do it is by capturing your fair share of the ups (this does not mean taking on the risk of getting all of the ups), while defending yourself so that you capture only a portion of the downs.

I designed and maintain for my firm the chart you see here. We call it the "Bull Market Forecaster." It shows our current opinion (here, as of 12/31/09), of a variety of investment styles. Note that this is not simply a return forecast or guess about the next big move in each market segment shown. Rather, it is our assessment of the reward and risk tradeoff for each style over the next three years. For instance, the "Excellent" category includes both Merger Arbitrage and Global Infrastructure. The latter would be expected to produce a volatile ride, regardless of the returns it generates. The former, by contrast, typically exhibits low volatility compared with the broad stock market. So, you ask, how can we consider both styles to be "Excellent"? Very simply, both offer an excellent potential of achieving high returns over the next three years, compared with the risk/volatility they present.