7 ways your money is changing

By Kiplinger's Personal Finance Magazine

There's a whiff of economic recovery in the air, and investors have been feeling frisky as of late. Just another bout of irrational exuberance, you ask, to be followed by another bust?

One thing that's certain, however, is that the Great Recession, the credit crisis and the past year's meltdown in financial markets will change how you handle your finances. In many ways, your money will never be the same.

1. Investments: Less risk

In the old days -- before 2008, that is -- an aggressive portfolio had 80% or more of its assets in stocks. No matter how well you're doing now or how well you or others think stocks will do in the years ahead, investors are so shellshocked from their bear market losses that it will be a long time before they will be confident enough to justify that high a proportion of stocks within their total portfolio.

The new normal for an aggressive investor, for example, may be just 60% or 70% in stocks, and someone who accepts only moderate risks may be comfortable with no more than 40% or 50%. That may not be the right way to go; barring a catastrophe, we think stocks will outpace bonds -- and handily at times -- over the next 10 to 20 years. But that's the reality when a generation of investors takes such a shellacking.

2. Markets: Greater volatility

Daily, hourly and even minute-by-minute swings will continue to be wild and sometimes vicious. Experts blame the heightened volatility on the ceaseless flow of information, or misinformation, which encourages frenetic trading.

One blatant example: On April 19, a crank posted a Web "newscast" claiming that he had possession of a leaked government report saying that 16 of the country's top 19 banks would be exposed as dead when the Treasury Department released the results of its stress tests a few days later. The Standard & Poor's 500 Index ($INX) fell 4.3% the next day, even though the Treasury discredited both the post and the source.

Enormous volumes in trading-oriented products, particularly exchange-traded funds, exacerbate the volatility. That's especially true early and late in the trading day.

How to cope? Keep your eye on the long-term prize and don't get caught up in day-to-day or minute-to-minute nuttiness. Plus, "don't trade in the first or the last hour, or you'll get whipsawed," says Tim Kober of Cedar Financial Advisors in Portland, Ore.

• Keep tabs on the market with MSN Money's Market Dispatches

3. Diversification: More choices

The recent market unpleasantness tarnished the concept of diversification; nothing worked well save cash and Treasury securities. So much for the traditional advice to keep fairly equal holdings in various stock categories -- such as growth and value, small-company and large-company, foreign and domestic -- and to own different kinds of bonds, including supersafe Treasurys, municipals, corporates and so on.

The new plan is to add a variety of investments, some of which might be considered highly risky, that really have a chance to zig when the ordinary stuff zags.

That could mean putting a greater amount of your money into such things as gold, foreign currencies, real estate, energy and other commodities. "Defense is not just diversification by allocation. It also means keeping defensive funds in the mix," says investment adviser Dennis Stearns of Greensboro, N.C.

For instance, you may want to look into a fund such as Pimco Unconstrained Bond (PUBDX, news, msgs). Launched in June, the fund invests in any part of the bond market, without sector limitation. Year to date through June 30, the fund gained 3.1%.

In the same vein, you'll see a push to introduce new products aimed at immunizing you from wrongheaded forecasting or missed trading signals. The new buzzword will be "buckets," or places where you store built-up savings to shield them from untimely losses. Some examples:

• Annuities and insurance policies designed to lock in gains.

• Easy-to-purchase packages of laddered certificates of deposit.

• More-passive types of investments with guaranteed floors and plenty of liquidity.

Continued: No guarantees on dividends

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