Investor's Guide

The powerhouse that seemed ready to propel the global economy for decades is now stuck in a period of slowing growth. Here’s what that means for your portfolio

Every so often an investment theme comes along that seems so big and compelling that you feel it can’t be ignored. This happened in the 1980s with Japanese stocks. It happened again with the Internet boom of the 1990s. You know how those ended.

Today history appears to be repeating itself in China.

Just a decade ago, China was hailed as the engine that would single-handedly drive the global economy for years to come. That seemed plausible, as a billion Chinese attempted something never before accomplished: tran­sitioning from an agrarian to an industrial to a consumer economy, all in a single generation.

Recently, however, this ride to prosperity has hit the skids. A real estate bubble threatens to crimp consumer wealth; over-investment in a wide range of industries is likely to dampen growth; and the transition to a developed economy is stuck in an awkward phase that has trapped other emerging markets.

No wonder Chinese equities—despite a strong rebound last year—are down around half from their 2007 peak.

Like the Japan and dotcom manias before it, China looks like an old story. “Do you have to be in China?” asks Henrik Strabo, head of international investments for Rainier Investment Management in Seattle. “The truth is, no.”

If you’ve bought the China story—and since 2000 hundreds of thousands of U.S. investors have plowed $176 billion into emerging-markets mutual and exchange-traded funds, which have big stakes in China—that’s a pretty bold statement.

In fact, even if you haven’t invested directly in Chinese stocks and simply hold a broad-based international equity fund, China’s Great Slowdown has an impact on how you should think about your portfolio. Here’s what you need to understand about China’s next chapter.

China Has Hit More Than a Speed Bump

After expanding at an annual clip of more than 10% a decade ago, China’s economy has slowed, growing at just over 7% in 2014. That’s expected to fall to 6.5% in the next couple of years, according to economists at UBS. And then it’s “on to 5% and below over the coming decade,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab.

Why is this worrisome when gross domestic product in the U.S. is expanding at a much slower 3%?

For starters, it represents a steep drop from prior expectations. As recently as three years ago, economists had been forecasting that China would still be growing at roughly an 8% clip by 2016.

The bigger worry is that the slowdown means that China has reached a phase that frustrates many emerging economies on the path to becoming fully “developed,” a stage some economists refer to as the middle-income trap.

On the one hand, a growing number of Chinese are approaching middle-class status, which means wages are on the rise. That sounds good, but rising labor costs chip away at China’s competitive advantage in older, industrial sectors. “You’re seeing more and more manufacturers look at other, cheaper markets like Indonesia, Vietnam, and the Philippines,” says Eric Moffett, manager of the T. Rowe Price Asia Opportunities Fund.

At the same time, the country’s new consumer-centric economy has yet to fully form. About half of China’s urban population is thought to be middle-class by that nation’s standards, but half of Chinese still live in the countryside, and the vast majority of those households are poor. Couple this with the deteriorating housing market—which accounts for the bulk of the wealth for the middle class—and you can see why China isn’t able to buy its way to prosperity just yet.

This in-between stage is when fast-growing economies typically downshift significantly. After prolonged periods of “supercharged” expansion, these economies tend to suffer through years when they regress to a more typical rate of global growth, according to a recent paper by Harvard professors Lawrence Summers and Lant Pritchett.

In some cases, like Brazil, this slowdown prevents the economy from taking that final step to advanced status. Brazil had been expanding 5.2% a year from 1967 to 1980, but that growth slowed to less than 1% annually from 1981 to 2002.

No one is saying China will be stuck in this trap for a generation, like Brazil, but China could be looking at a long-term growth rate closer to 4% to 5% than 8% to 10%.

Your best strategy: Go where the growth is—at home. A few years ago the global economy was ex­pected to expand at an annual pace of 4.2% in 2015, trouncing the U.S.  Today the forecast is down to 3.1%, pretty much the same pace as the U.S. economy, which is expected to keep accelerating through 2017.

In recent years, some market strategists and financial planners have instructed investors to keep as much as 40% to 50% of their stocks in foreign funds. But ­dropping that allocation to 20% to 30% still gives you most of the diversification benefit of owning non-U.S. stocks.

The Losers Aren’t Just in Asia

China’s rise to power lifted the fortunes of its neighboring trade partners too, so it stands to reason that a broad swath of the emerging markets is now at risk. “China is still the beating heart of Asia and the emerging markets,” says Moffett. “If it slows down, all the other countries exporting to and importing from China will see their growth prospects affected.”

The country’s biggest trading partners in the region are Hong Kong, Japan, South Korea, and Taiwan, and all are slowing down. Economists forecast that the growth rates in those four nations will slip below 3% next year.

Beyond Asia, “you have to be careful with the commodity exporters,” says Rainier’s Strabo. China’s slowdown over the past five years is a big reason commodity prices in general and oil specifically have sunk more than 50% since 2011.

China consumes about 40% of the world’s copper and 11% of its oil. As the country’s appetite for commodities wanes, natural resource producers such as Australia, Russia, and Latin America will feel the blow.

Your best strategy: Keep your emerging-markets stake to around 5% of your total portfolio. If your only foreign exposure is a total international equity fund, then you’re probably already there. If, however, you’ve tacked on an emerging-markets “tilt” to your portfolio to try to boost returns, unwind those positions, starting with funds focusing on Asia, Latin America, or Russia.

Here’s another bet that’s now played out: A popular strategy in the global slowdown was to take fliers on Western companies with the biggest exposure to China—companies such as the British spirits maker Diageo (think Johnnie Walker and Guinness) and Yum Brands (KFC and Pizza Hut)—solely because of their China reach. And for a while, that paid off.

Now, though, the stocks of Yum and Diageo have stalled, and major global companies such as Anheuser-Busch InBev and Unilever have reported disappointing results recently in part owing to subpar sales in China as well as in other emerging markets.

Demographic Problems Will Only Make Things Worse

For years, China’s sheer size was seen as a massive competitive advantage. Indeed, China has three times as many workers as the United States has people.

Yet as the country’s older workers have been retiring, China’s working-age population has been quietly shrinking in recent years. Economists say this will most likely lead to labor shortages over the coming years, putting even more pressure on wages to rise.

China’s demographic problem has been exacerbated by the country’s “one-child” policy, which has prevented an estimated 400 million births since 1979. But China isn’t the only emerging market suffering from bad demographic trends.

Birthrates are low throughout East Asia. The ratio of people 15 to 64 to those 65 and older will plummet from about 7 to 1 to 3 to 1 in the next 15 years in Taiwan, South Korea, and Hong Kong, dragging down growth.

Your best strategy: If you’re a growth-focused investor who wants more than that 5% stake in emerging markets, concentrate on developing economies with more youthful populations and more potential to expand. One fund that gives you that—with big holdings in the Philippines, Saudi Arabia, Egypt, and Colombia—is Harding Loevner Frontier Emerging Markets HARDING LOEVNER FRONT EM MKTS INV HLMOX 0.2307% . Over the past five years, the fund has gained around 7% a year, more than triple the return of the typical emerging-markets portfolio.

Another option is EGShares ­Beyond BRICs EGA EMERGING GLOBA EGSHARES BEYOND BRICS ETF BBRC 0.89% . Rather than investing in the emerging markets’ old-guard leaders—Brazil, Russia, India, and China—this ETF counts firms from more consumer-driven economies, such as Mexico and Malaysia, among its top holdings.

The Parallels Between China and 1990s Japan are Alarming

For starters, China is facing a real estate crisis similar to Japan’s, says Nariman Behravesh, chief economist at IHS. With easy access to cheap credit, developers have flooded the major cities with excess housing. Floor space per urban resident has grown to 40 square meters, compared with just 35 square meters in Japan and 33 in the U.K.

Not surprisingly, prices in 100 top Chinese cities have been sliding for seven months. Whether China’s property bubble bursts or not, falling home values chip away at household net worth; that, in turn, drags down consumer sen­timent and spending, Behravesh says.

Other unfortunate similarities between the two nations: Excess capacity plagues numerous sectors of China’s economy, ranging from steel to chemicals to an auto industry made up of 96 car­ brands.

Also, Chinese officials face political pressure to focus on short-term growth rather than long-term fixes. This type of thinking has resulted in the rise of so-called zombie companies, much like what Japan saw in the ’90s. “These are companies that aren’t really viable but are being kept alive,” Behravesh says. Yet for the economy to get back on track, inefficiently run businesses have to be allowed to fail, market strategists say.

Your best strategy: Focus on the few major differences between the two countries. Unlike Japan, for instance, China is still a young, emerging economy. Slowdown or not, “the growth of the middle class will continue in China, and that will absorb some of the overhang in the economy, which is something Japan couldn’t count on,” says Michael Kass, manager of Baron Emerging Markets Fund.

What’s more, when Japan’s bubble burst in late 1989, stocks in that country were trading at a frothy price/earnings ratio of around 50. By contrast, Chinese shares trade at a reasonable P/E of around 10.

To be sure, not all Chinese stocks enjoy such low valuations. As competition heats up to supply China’s population with basic goods, valuations on consumer staples companies have nearly doubled over the past four years to a P/E of around 27.

At the same time, the loss of faith in the Chinese story means there are decent values in industries that cater to the established middle and upper-middle class, says Nick Niziolek, co-manager of the Calamos Evolving World Growth Fund. Health care and gaming stocks in particular suffered setbacks last year. And Chinese consumer discretionary stocks are trading at a P/E of just 12, down from 20 five years ago.

You can invest in such businesses through EGShares Emerging Markets Domestic Demand ETF EGA EMERGING GLOBA EGSHARES EMERGING MKTS DOME EMDD 0.8441% , which owns shares of companies that cater to local buyers within their home countries, rather than relying on exports. Chinese shares represent about 17% of the fund, led by names such as China Mobile.

That one of the world’s great growth stories is now best viewed as a place to pick up stocks on the cheap might seem a strange twist—until you remember your Japanese and Internet history.

The Big Three tech giants each want to be the hub of your digital life. Before you invest, learn their strategies, and see which company’s vision is most likely to prevail.

The blueprint for success in technology used to be straightforward: Develop a cutting-edge product people need; build a (near) monopoly; then reap the rewards of controlling that technology—be it the software or chips that make computers run or the switches that make the Internet possible. That was how Microsoft, Intel, and Cisco Systems ruled the ’90s.

Fifteen years after the first great tech stock boom ended, the industry’s new colossal trio of Apple, Google, and Amazon couldn’t be more different from their ancestors.

They’ve created vast arrays of products, from mobile devices to streaming services to payment systems, which they tie together in various ways to support their core revenue stream. Think not of solitary giants, but of giant ecosystems. And those systems, not the latest iPhone or Google Glass or Kindle, are “the defining characteristic of the company,” says Robert Stimpson, co-manager of the White Oak Select Growth Fund.

That means evaluating the strength of those ecosystems is what a tech stock investor has to do. To help, MONEY consulted some of the smartest analysts in the business for guidance and took a hard look at the valuations investors are placing on those systems today.

Apple: Elegant Hardware and Cash to Spare

The heart of the ecosystem: More than 90% of Apple’s $183 billion in revenue in its latest fiscal year came from hardware sales—56% from iPhone sales alone.

Fuel for growth: Hardware is what Apple sells, but it’s not what the company markets. “Apple’s main product is an experience,” says tech analyst Neil Cybart. “They look at all of their products as taking away the complicated part of technology so the users can feel like they have more control over their lives.”

Apple aims to build a world in which you’ll own Beats by Dr. Dre headphones, wear an Apple Watch, buy coffee with the Apple Pay payments system, and make hands-free phone calls via Apple CarPlay. With all those products interlinked and running on Apple’s iOS software, you’ll rely on the ecosystem for daily tasks, making it a hassle for you to buy your next phone or tablet from anyone other than Apple.

Potential threats: Apple has a hit with the iPhone 6 and 6 Plus, selling an estimated 60 million of the phones last year. Indeed, as TIME recently reported, the iPhone 6’s success has cut into Android’s smartphone market share in the U.S. for the first time since September 2013.

But the company isn’t particularly good at ­enticing the owner of one Apple product to purchase another, says Consumer Intelligence Research Partners’ ­Michael Levin.

For instance, only 28% of iPhone owners have an Apple computer, and less than half of them own a tablet, says CIRP. Sales for the iPad have fallen 4% over the past year, acknowledges Apple. But CEO Tim Cook, noting that the company has sold 237 million iPads over four years, told investors in October that he’s “very bullish on where we can take the iPad over time.”

Outlook: BUY

Apple enjoyed a banner year in 2014. Spurred by sales of the latest iterations of the iPhone and anticipation of the Apple Watch’s release in March, the company’s stock rose 40%.

Despite that gain, Apple’s price/earnings ratio, based on projected profits, is just 13.8. That means the stock trades at a 16% discount to the S&P 500 technology index, even though the company’s earnings are growing 33% faster than the average big tech stock’s.

Apple’s low valuation stems from factors such as investors’ doubts that a company its size can grow as fast as smaller tech firms, along with uncertainty that Apple will keep making products that are both popular and profitable.

That said, Apple is still the best company by far at creating exciting technology that people want to buy. Plus, signs point to an ever-increasing dividend from the stock, which now yields 1.8%; a larger payout can be easily covered by Apple’s $155 billion cash reserves.

Amazon.com: Sales Grow, but Earnings Are Scarce

The heart of the ecosystem: Already the world’s biggest online retailer, racking up $85 billion in annual sales, Amazon aims to catch up to the world champion, Wal-Mart, which has just under half a trillion in revenue.

To close that gap, Amazon wants to convert more customers to Amazon Prime, the two-day shipping service now priced at $99 per year. Amazon Prime members make twice as many purchases as nonmembers, and they spend 40% more per transaction, reports ComScore. Prime customers are also loyal: 92% say they’ll renew their subscriptions.

Fuel for growth: To get more people to join Amazon Prime—and buy more goods per year—Amazon has morphed into a streaming-media and mobile-device company.

In 2011 the e-tailer began offering Prime members access to instant streaming movies and television shows; the retailer now produces its own TV programs as well. To ­sweeten Prime, Amazon recently added a streaming-music service and free online photo backups. Plus, when the company launched its Fire smart­phone last year, a one-year Prime membership came bundled free with the device.

The result: There are now an estimated 30 million Prime members, up from around 5 million in 2011.

Potential threats: Amazon has spent heavily on the entertainment it’s using to lure new Prime sign-ups. The company has posted cumulative losses of more than $350 million over the past 10 quarters—vs. the $94 billion in profits Apple churned out. Amazon CEO Jeff Bezos is unapologetic; last year, he reprinted a 1997 letter to shareholders saying that “long-term market leadership” was more important than “short-term profitability.”

One hit to profitability has been the Fire phone. While 10 million iPhone 6’s were purchased the first weekend they went on sale, Amazon reportedly sold only 35,000 of its smart­phones in the first month. Late last year the company took a $170 million charge stemming from the fiasco.

Amazon is learning a hard lesson. It may be a hot retail brand—but not when it comes to cutting-edge technology. “There are people who say, ‘I’m an Apple guy,’ ” says Kevin Landis, a longtime tech investor who runs the Firsthand Technology Opportunities Fund. “I haven’t heard anyone say, ‘I’m an Amazon guy.’ ”

Outlook: SELL

Despite losing a quarter of their value last year, Amazon shares still trade at a whopping P/E of nearly 100, owing to the fact that the company is barely profitable. And even if Amazon cuts costs, problems are likely to persist.

While traditional technology companies enjoy big profit margins, retailers like Amazon don’t, notes Christopher Baggini, a portfolio manager at Turner Investments. Amazon’s operating profit margin has historically been in the low single digits, compared with 20% to 30% for Apple and Google. That means even if Amazon stops spending on losers like the Fire phone, it won’t have Apple and Google’s resources to keep building out its ecosystem.

Google: Helped and Hindered by an Open System

The heart of the ecosystem: Given Google’s driverless cars, ­Internet-connected glasses, and smartphone-linked Nest thermostat, you might think this company was all about the future.

Actually, a lot of what Google is working on is meant to reinforce the past: the company’s roots as a search engine reaping ad dollars based on what people look for online. Advertising still generates about 80% of the company’s $64 billion in annual revenues.

Fuel for growth: The Android operating system, which Google launched in 2007, is essential for protecting its search franchise.

Well before the rise of smart­phones, Google management foresaw that the biggest threat to its business wouldn’t be a rival search engine, says Connor Browne, manager of the Thornburg Value Fund. Rather, he says, the company saw that danger lay in adoption of new hardware: As people shifted from PCs to mobile devices, manufacturers could conceivably eliminate Google’s technology from their products.

Android was the company’s defense against gatekeepers like Apple. While Google doesn’t make much money off the software, An­droid puts the company’s search technology at the fingertips—or voice control—of more than 1 billion people.

For further revenue growth, Google may have to rely on rival Apple’s stronger talents for setting technology trends. Just as Apple’s marketing efforts for the iPhone and iPad created whole new markets for smartphones and tablets, the Apple Watch, scheduled for release in March, could bring wearable devices into the mainstream. Android-based watches came on the market last year, but Apple’s introduction could spark sales industrywide.

The situation is similar for Goo­gle Wallet, the electronic-payment platform that has found less traction in its first three years than Apple Pay did in its first three months. “Google will benefit from Apple making headway in creating a walletless society,” says White Oak’s Stimpson, whose fund owns Google shares.

E-payments are actually more central to Google’s core ad business than to Apple’s success. If you’re watching a video on Google-owned YouTube, for example, companies can run messages tailored to your interests. It would be a natural step—and also seamless—for you to buy an advertised item via Google Wallet.

Potential threats: Start with Android itself. Unlike Apple’s iOS operating system, Android is open source, meaning that Google’s “partners” can tweak it. When Amazon built its Android-based Fire phone last year, it stripped out Gmail and Google Play Store. Fire phones and Kindle tablets link instead to the Amazon Appstore, which competes with Google Play and iTunes.

Similarly, Google can’t dictate which version of Android hardware makers employ. Google Wallet’s convenient “tap and pay” function, for example, requires versions of the operating system that are installed on only 34% of Android phones.

Google also faces threats from other major players. The Chinese e-commerce giant Alibaba, for one, has developed its own smartphone operating system, which could cut into Android’s 80% share of mobile devices in China.

Google executive chairman Eric Schmidt acknowledges the company faces threats known and unknown. “Someone, somewhere in a garage is gunning for us,” he said in an October speech. “I know, because not long ago we were in that garage.”

Outlook: HOLD

As Google’s earnings growth rate has declined, so too has its P/E ratio—from around 25 last year to 18. That means Google stock is 25% cheaper than the average for Internet companies in the S&P 500, even though it’s traditionally been on par.

Paul Meeks, a portfolio manager at Saturna Capital, which owns the stock, notes that there may be more rockiness ahead, as Google keeps reporting lower ad prices. Once that stabilizes, he says, the stock should start to rebound, just as you’d expect any sound ecosystem to recover from a minor disturbance.

In both cases, though, the healing takes time.

See all of the 2015 Investor’s Guide

A 10-year Treasury bond now pays less than 2%. That may make it harder to earn the returns you expect in your 401(k).

Yields on the benchmark 10-year Treasury slipped below 2% on Tuesday as bonds rallied. (Bond prices rise when yields, or interest rates, fall, and prices fall as rates rise.) Since the aftermath of the 2008 financial crisis, bond yields have bounced around near historic lows. That’s had many investors worried about what would happen to their fixed-income investments when the seemingly inevitable rise in bond interest rates finally arrives.

But in fact, today’s low yields could present a long-term challenge to retirement-oriented savers, even if interest rates stay low, and even if bonds today aren’t overpriced. And investing mostly or entirely in equities won’t immunize you from the problems of investing during a low-return era.

What happens if bond yields rise. First, let’s consider what happens if the conventional wisdom is right, and bond yields do start to rise again. If you hold bonds in a mutual fund as part of, say, a 401(k) plan, the most important thing you can do is understand your risk when bond prices fall. A plain-vanilla, intermediate-term bond fund these days has a “duration” of about 5.5. That measure of interest-rate risk roughly means that if rates rose by one percentage point, the fund would fall 5.5% in value. (Your actual loss would be lower, since you’d still be getting paid interest on the bonds in the fund.)

A decline in the value of a fund that’s the safe part of your retirement portfolio could come as a shock, and for money you may need soon, a shorter-duration bond fund makes sense. But keep short-run bond fund losses in perspective: Over the longer run, a shift up in rates can also help make up for what you lost, and the current yield on bonds gives you a strong clue about what to expect.

Say you own a diversified bond fund. Assume the yield is about 2% when you buy it, and the fund’s average bond matures in seven years. According to numbers from Vanguard, a sudden two-point jump in rates—a huge spike—would cause the fund to lose about 8% in total. As its bonds paid out higher yields, however, your annualized return after seven years would still be likely to level off to just about 2%.

What happens if yields stay low. The real risk with bonds today, however, may not be losses in the short run. It’s that the returns will stay frustratingly low for a long time.

Ben Inker, co-head of asset allocation at GMO, a Boston fund manager, lays out two scenarios, one he calls “purgatory” and the other “hell.” In purgatory, rates are headed for a spike. Bond prices will fall, and stocks might too. But after that you pick up better yield and better returns.

In hell, interest rates stay low. Part of the reason it’s hell is why interest rates stay low: The economy never gets back to its pre-2008 strength. With low growth prospects, there’s less demand for capital, and many investors around the world are content to accept relatively low returns on cash and bonds.

Part of the reason yields have recently fallen below 2% is that bond investors still see some risk of this “secular stagnation” scenario.

Ironically, in hell, your bond investments don’t lose money, since there’s no big rate spike. And today’s stock prices, oddly, might make sense too. Here’s why: When the price of stocks is high relative to long-run past earnings, future returns tend to be lower. Today the P/E ratio for stocks is expensive at 27. (The average is 17.) So stock returns may be on the low side. You still may be willing to take that deal, however, if you are earning only 2% on your bonds.

That may help explain why stocks have recently shot up. But if so, that’s a one-time adjustment. Hell is not just a low-bond-yield world. It’s a low-total-return world.

That would be bad news for savers, especially younger ones who will be putting much of their money into the market in the future. In the hell scenario, a typical portfolio earns 3.4% after inflation instead of the 4.7% Inker assumes you’d have gotten in the past. “Let’s say you turned 25 in 2009 and started saving,” he says. “You end up accumulating 25% less by retirement.”

Inker stresses he doesn’t know which scenario we’re headed for. The one constant is that in neither are there lots of opportunities to make money with low risk. “This is a frustrating environment for us as investors,” admits Inker. “It is less clear what the right thing to do is than throughout almost the rest of history.” The trouble with bonds, it turns out, is bigger than unpalatable yields. And it’s the trouble with an economy that is taking a long time to find its true normal.

This story is adapted from “How 2% Explains the World,” in the 2015 Investor’s Guide in the January-Feburary issue of MONEY.

Racking up big investing victories over the past six years was easy. Now, though, the going looks to be getting tougher. These three strategies will help you stay on the path to your goals.

There’s nothing like an extended bull market to make you feel like a winner — and that’s probably just how you felt coming into the start of this year.

Sure, the recent wild swings in the stock market may have you feeling a bit more cautious. Still, even now, the Standard & Poor’s 500 stock index has returned more than 200% since the March 2009 market bottom, while and bonds have posted a respectable 34% gain.

The question is, will the winning streak continue?

Should it persist through the current bout of volatility, the stock market rally will be entering its seventh year, making it one of the longest ever; at some point a bear will stop the party. Meanwhile, the Federal Reserve is signaling the end to its program of holding down interest rates and thus encouraging risk taking. And there’s zero chance that Congress will add further fiscal stimulus. In short, the post-crisis investing era—when market performance was largely driven by Washington policy and Fed ­intervention—is over. “As the global risks have receded,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab, “the focus is going back to earnings and other fundamentals.”

The stage is set for a reversion to “normal,” but as you’ll see, it’s a normal that lacks support for high future returns. For you, that means a balancing act. If you don’t want to take on more risk, you’ll have to accept the probability of lower returns. Following these three guidelines will help you maintain the right risk/reward balance and choose the right investments for the “new” normal.

1) Keep U.S. Stocks As Your Core Holding…

Stocks are expensive. The average stock in the S&P 500 is trading at a price of 16 times this year’s estimated earnings, about 30% higher than the long-run average. A more conservative valuation gauge developed by Yale finance professor Robert Shiller that compares prices with longer-term earnings shows that stocks are trading at more than 50% above their average.

“Given current high valuations, the returns for stocks are likely to be lower over the next 10 years,” says Vanguard senior economist Roger Aliaga-Díaz. He expects annual gains to average between 5% and 8%, compared with the historical average of 10%. Shiller’s numbers suggest even lower returns over the next decade.

That doesn’t mean you should give up on U.S. stocks. They remain your best shot at staying ahead of inflation, especially today, when what you can expect from a bond portfolio is, well, not much. “Stock returns may be lower,” says Aliaga-Díaz, “but bond returns will be much less, so the relative advantage of stocks will be the same.” And the U.S. economy, though far from peak performance, is the healthiest big player on the global field.

Your best strategy: Now is a particularly important time to make sure your stock allocation is matched to your time horizon. “The worst outcome for older investors would be a bear market just as you move into retirement,” says William Bernstein, an adviser and author of The Investor’s Manifesto. A traditional asset mix for someone in his fifties is the classic 60% stock/40% bond split, with a shift to 50%/50% by retirement. If your allocation was set for a 35-year-old and you’re 52, update it before the market does.

On the other hand, if you’re in your twenties and thirties, you should be far less worried about today’s prices. Hold 70% to 80% of your portfolio in equities. The power of compounding a dollar invested over 30 to 40 years is hard to overstate. And you’ll ride through many market cycles during your career, which will give you chances to buy stocks when they’re inexpensive.

2) …But Spread Your Money Widely

With many overseas economies barely out of recession or dragged down by geopolitical crises, international equity markets have been trading at low valuations. And some market watchers are expecting a rebound over the next few years. “Central banks in Europe, China, and Japan are making fiscal policy changes that are likely to boost global growth,” says Schwab’s Klein­- top. Oil prices, which have fallen 40% in recent months, may boost some markets as consumers spend less on fuel and step up discretionary buying.

But foreign stocks aren’t uniformly bargains. The slowdown in China’s economic growth threatens the economies of the countries that supply it with natural resources. Japan’s stimulus program to date has had mixed success, and the reason to expect stimulus in Europe is that policymakers are again worried about deflation.

Your best strategy: Spread your money widely. The typical investor should hold 20% to 30% of his stock allocation in foreign equities, including 5% in emerging markets, says Bernstein. Many core overseas stock funds, such as those in your 401(k), invest mainly in developed markets, so you may need to opt for a separate emerging-markets offering—you can find excellent choices on our ­MONEY 50 list of recommended mutual and exchange-traded funds. For an all-in-one fund, you could opt for Vanguard Total International Stock Index VANGUARD TOTAL INTL STOCK INDEX FD VGTSX 0.3927% , which invests 20% of its assets in emerging markets.

3) Hold Bonds for Safety, Not for Income

Fixed-income investors have few options right now. Today’s rock-bottom interest rates are expected to move a bit higher, which may ding bond fund returns. (Bond rates and prices move in opposite directions.) Yet over the long run, intermediate-term rates are likely to remain below their historical average of 5%. If you want higher income, your only alternative is to venture into riskier investments.

Your best strategy: If you don’t want to take risks outside your stock portfolio, then accept that the role of your bond funds is to provide safety, not spending money. “After years of relative calm, you can expect volatility to return to the stock market—and higher-quality bonds offer your best hedge against stock losses,” says Russ Koesterich, chief investment strategist at BlackRock. Stick with mutual funds and ETFs that hold either investment-grade, or the highest-rated junk bonds. Don’t rely solely on government issues. Corporate bonds will give you a little more yield.

You may be tempted to hunker down in a short-term bond fund, which in theory will hold up best if interest rates rise. But this is one corner of the market that hasn’t returned to normal. Short-term bonds are sensitive to moves by the Federal Reserve to push up rates. The Fed has less ability to set long-term rates, and demand for long-term Treasuries is strong, which will keep downward pressure on the rates those bonds pay. So an intermediate-term bond fund that today yields about 2.25% is a reasonable compromise. Sometimes in investing, winning means not losing.

Read next:
How 2% Yields Explain the World—and Why Rates Have Stayed So Low for So Long

The economist who wrote about irrational exuberance in stocks and real estate says bonds don't look like a classic bubble. But they're no bargain.

This month, Yale economist Robert Shiller, who shared the Nobel Prize in economics in 2013, is publishing the third edition of his classic book Irrational Exuberance. Some might take this as an ominous sign. The first version came out in 2000, and it made the case that stock valuations looked awfully high, and that people seemed too optimistic about tech stocks. You know what happened next.

The second edition, published in 2005, had a new chapter about the unusually high price of real estate. You know what happened that time, too.

Now Shiller has added a new chapter on another asset class that has become historically expensive: bonds. Should we be freaking out?

Bond prices rise when yields fall, and on Tuesday the benchmark Treasury yield slid below 2% for the first time since October. The long-term average for longer-term bond interest rates is 4.6%. Rates have been low ever since the 2008 financials crisis—and since at least 2009, some market observers have called the bond market a bubble.

Shiller, however, resists applying the B-word to bonds. “It doesn’t clearly fit my definition of ‘bubble,’” he says. “It doesn’t seem to be enthusiastic. It doesn’t seem to be built on expectations of rapid increases in bond prices.” (Shiller spoke with Money in December.) In the unlikely event you meet anyone at the proverbial cocktail party talking about bond funds, he’s probably complaining about the lousy yields, not talking about the killing he expects to make.

Still … Shiller does point to one similarity between today’s low yields and past bubbly episodes. Bubbles are a result of a psychological feedback loop: As asset prices go up, people come up with stories to explain why, which helps push prices higher, reinforcing the story, and so on. In the tech boom the story was of a new era of dotcom-fueled growth. The rationalizations about housing prices centered on cheap mortgages and financial “innovations.”

With bonds, too, says Shiller, “there are theories that have been amplified by the price performance.”

The low-rate story driving bond prices, however, is a gloomy one. Investors seek the relative safety of bonds—especially sure-to-pay-back Treasuries—when they feel pessimistic about the economy and comfortable that inflation will be low.

Professional bond managers today can tick off a host of factors weighing down rates and propping up fixed-income prices. There’s inequality, which may be holding back spending. The risk of deflation (falling prices) in Europe and Asia. Bad demographic trends in developed economies. You can even add robots, says Shiller. “There’s a suggestion that computers are going to create a more unequal world, and that this is inhibiting people’s spending plans,” says Shiller. Instead consumers try to save more, bidding up the prices of assets.

The idea of an economy that never quite gets back to prosperity has been labeled “secular stagnation” and the “new normal”—the latter term popularized by Bill Gross, before he made his surprising turn away from Treasuries. (Gross recently left Pimco for Janus. Here is a 2010 interview with Money in which he discussed his “new normal” view. )

The “new normal” story is at least partly built into today’s bond prices. That means even if yields stay low, the strong return on bonds in recent years are unlikely to repeat. (As a rule of thumb, the current yield on a 10-year Treasury is also the total return you can expect over the next decade. So that suggests a slim 2% return.)

Shiller also points out that his research with Wharton economist Jeremy Siegel has shown that bond investors are pretty bad at anticipating inflation. Forget fever dreams of ′70s-style price hikes—a return to 3% inflation would render Treasuries a money loser in real terms. (Inflation is currently below 2%.) That doesn’t seem like such a high bar to clear. It’s what some economists think a healthy economy would look like.

That said, the slow-growth, mild-inflation scenario remains compelling. The last long period when rates were this low, before World War II, was followed by a long climb upward—but that coincided with postwar expansion, Cold War defense spending, and the baby boom. Maybe that was the anomaly. (If secular stagnation turns out to be real, here’s what that might mean for investors.)

Low rates have probably been even more important, says Shiller, in driving up stock prices. With yields on bonds so meager, investors may have shifted money into stocks in hopes of getting a better return. In early versions of his new edition of Irrational Exuberance, Shiller described today’s bull market as the “post-subprime boom.”

“But I changed it at the last minute,” he says. Now Shiller calls this era “the new normal boom.”

This story is adapted from “How 2% Explains the World,” in the 2015 Investor’s Guide in the January-Feburary issue of MONEY.