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The key to successful investing, say the chieftains of Wall Street, is to spread your cash among many different investments. The concept, known as diversification, seems as old as T. rex. Its benefits, such as reducing risk and smoothing out returns, are well publicized.

Sounds easy. The tough part is figuring out the right assets to put in your portfolio for the long haul. Investors are still reeling from the pain inflicted on them in the 2000s, a grim 10-year period -- dubbed the Lost Decade -- when U.S. stocks posted negative total returns in a decade for the first time ever.

So how do you divvy up your assets now with the hopes of making money this decade?

USA TODAY asked two respected investment firms to draw up an asset mix they believe will be profitable in the 2010s, a decade likely to be unique because it encompasses a post-bubble world and an emerging economic powerhouse in Asia.

The portfolio builders are: Richard Bernstein, the former chief investment strategist at Merrill Lynch who now heads his own New York-based firm, Richard Bernstein Capital Management, and Debra Wetherby, CEO of Wetherby Asset Management, an award-winning independent financial advisory firm based in San Francisco.

What these portfolios are not is your grandfather's plain-vanilla asset allocation. The days of the 60% stock and 40% fixed-income portfolio are as dated as the hula hoop.

The Wetherby portfolio has a global tilt with healthy helpings of alternative investments, such as hedge funds, private equity and real assets like natural resources and real estate, that tend to zig when more traditional investments like stocks zag. The portfolio uses a barbell strategy with conservative investments, such as high-quality U.S. multinational stocks and short-term bonds, on one side and higher-risk investments with greater return potential, such as emerging markets, on the other.

In contrast, Bernstein's portfolio is more domestically focused, with an emphasis on small U.S. companies and sizable helpings of U.S. Treasury bonds and municipal bonds to gain income and add diversification.

New ways of allocating

The world is changing, and that means new ways of allocating capital are entering the mainstream language of Wall Street.

Indeed, the portfolio built by Wetherby -- with help from director of alternative investments Chris Hauswirth -- forces investors to "think globally."

No longer can Americans build overly U.S.-centric portfolios, says Wetherby. "Economic power is shifting from the U.S. to Asia," she says.

Over the past 10 years, the so-called emerging markets, which were once deemed super-risky, have morphed into quality investments, Wetherby argues. Compared to the U.S., emerging economies in such places as China, India and Brazil have peppier growth rates, lower debt, less exposure to toxic assets from the financial crisis and fast-rising consumption from an emerging middle class. "They have all of the really good ingredients to drive growth," says Wetherby.

That's why Wetherby's 10-year "balanced" portfolio is overweight faster-growing emerging markets and underweight stocks in developed markets such as the U.S., Europe and Japan.

Another opinion

But on Wall Street there are always two sides of a trade, and what seems like a logical investment for one investor may not make sense for another.

For example, Bernstein is more bullish on the U.S. than emerging markets. In fact, 50% of his portfolio is devoted to U.S. stocks, vs. 10% for foreign stocks.

Bernstein's major investment theme is to put his money in assets that are currently "starved for capital." In other words, don't chase the asset classes that are currently in favor and where capital is rushing in at a rapid clip.

"My point is you can't get superior returns chasing what has been loved," says Bernstein.

And right now, in the aftermath of the credit crisis, small, value-style stocks are suffering from a dearth of capital as lending to small firms has become either very expensive or non-existent. "Small businesses are having a tough time getting loans," Bernstein says. Forty percent of Bernstein's portfolio is in small stocks, at a time when most strategists are trumpeting big U.S. stocks with global reach.

Bernstein points out that back in 2000, when investors were throwing money at tech stocks, he was championing forgotten capital-starved assets such as energy and commodities. Those sectors have been among the biggest winners the past decade.

Bernstein also has a healthy weighting in U.S. Treasuries, which most market watchers say is the next bubble, as rates have become artificially low and are likely to rise when the effect of trillions of dollars in government stimulus wear off and the nation's central bank starts raising short-term borrowing rates. But while Bernstein knows the risks short term, he likes Treasuries because their performance has been inversely correlated to most all other financial assets.

While Bernstein is low on hedge funds and private equity, Wetherby's firm has a 40% weighting. Hedge funds have the advantage of profiting when stocks fall, improving a portfolio's risk/reward profile. Says Hauswirth, "We view alternatives as one way of managing risk."

(c) Copyright 2010 USA TODAY, a division of Gannett Co. Inc.  

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