Market Mediocrity Whets Appetite for Risk

Updated from 7:36 a.m. EST

Postelection rally aside, U.S. equity markets have disappointed this year.

After many ups and downs, the three major markets are near where they were 10 months ago, despite a hot start in January. For the year through Nov. 4, the Dow is down about 0.6%, the S&P 500 is up almost 5%, and the Nasdaq is 1.7% above where it started the year. That's nothing compared to the enormous gains of 2003, the first in years.

To boost returns during the severe market downturn that started in 2000, professional money managers have been casting their nets wider and deeper for alternative investments: emerging markets, oil and gas partnerships and even hedge funds.

All offer the potential for greater rewards -- and greater risks. Should the individual investor try these at home?

Only with care, advisers say.

Individual investors tend to pile on after, rather than before, an investment sector begins to soar. (TSC looks at that tendency in this related story.) Today's hot commodity mutual fund could soon become as cold as a basket of 2001 Internet stocks.

"There's more interest in these alternate assets classes, because they've done very well," says Dan McNeela, senior analyst with the Chicago research firm Morningstar. "But investors should treat them as 'supporting roles' in a portfolio."

Heeding that advice could become much easier as the stock market rallies after the presidential election, as some financial forecasters have predicted.

Look to Emerging Markets

Given the limp performance of U.S. stocks for most of this year, however, it's only natural that investors should become frustrated.

John Krey is a senior advisor with Standard & Poor's Investment Advisory Services LLC, a division of McGraw-Hill, who provides investment advice to banks, insurance companies and other financial institutions.

The U.S. economy has been "going nowhere" this year, he says. And equity markets have been dampened by interest rate hikes, fear of terrorism and uncertainty leading up to the presidential election.