Long-term savers typically invest at least half of their money in stocks or stock mutual funds, then allocate a good chunk to bonds and...

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Long-term savers typically invest at least half of their money in stocks or stock mutual funds, then allocate a good chunk to bonds and a bit to cash, for liquidity.

Over time, these portfolios have produced positive “real” returns, meaning growth that exceeds inflation.

The problem is years like this one, when volatile equities markets result in gut-wrenching ups and downs.

Investment researcher Robert Arnott says it doesn’t have to be that way. The chairman of Research Affiliates, in Pasadena, Calif., notes there are a number of asset classes that offer inflation protection.

He constructed a model portfolio equally divided among the S&P 500, the 10-year Treasury, the S&P GSCI commodity index and the Financial Times Stock Exchange NAREIT index, an index of real-estate securities.

Arnott found that between December 1976 and December 2006, the four-asset portfolio generally beat the S&P 500 alone — “and almost always with less risk.”

Annualized returns were about the same — 11.16 percent for the four-asset portfolio compared with 11.19 percent for the S&P 500. But annual volatility was 45 percent less using the combination, he says.

“The beauty is not so much that it has higher returns … but that it sharply reduces the risk with the same overall return long-term,” Arnott says.

Financial expert Jordan Goodman says the study underscores the importance of diversification. “It’s much easier to do today because of ETFs,” he says in a reference to exchange-traded funds.

Goodman notes that in addition to the assets Arnott studied, others worth considering for diversification are U.S. companies that have overseas operations, which can benefit from the weak dollar, as well as foreign companies and foreign-currency funds.