'The hype and expectation of an improvement at the beginning of the year was not delivered . . . it added to the risk sensitivity for retail investors.'

That said, conservatively positioned investors did relatively well this year, with the 255 fixed-income funds registered with the Securities and Futures Commission bringing in average returns of 11.88 per cent between January 1 and December 13, according to the latest figures available from Standard & Poor's Fund Services.

North American equity funds, of which there are 23, fell an average 24.12 per cent, against a 20.04 per cent decline in European equity funds (70). Hong Kong equity funds (24) did much better by comparison, down 7.51 per cent, while Asia-Pacific equities, excluding Japan (61), dropped 4.73 per cent.

JF Asset Management investment services manager Geoff Lewis said that in these uncertain times investors needed to get back to basics and pay attention to portfolio diversification and individual stock selection rather than broad sector plays.

JF remains cautious and disinclined to make major asset allocation bets until better economic performance feeds into stronger equity returns in the second half of next year.

It is not expecting a double-dip recession in the US but foresees below-trend growth in the next couple of quarters, and further valuation adjustments for US equities. The fund house remains overweight on Europe and underweight on Japan. It has recently returned to an overweight stance on Hong Kong, thanks to strong China trade figures and the fact that it believes the market is now under-owned.

'In our global portfolios we would be underweight cash, overweight equities and neutral still on bonds,' Mr Lewis said.

'Bonds have paid their weight 10 times over in portfolios in the last couple of years and we would not be throwing them out now. In terms of equities, we are overweight Asia ex-Japan. We think it has a degree of protection, in terms of the global economy being weaker than expected, because of the China growth factor.'

Mr Lewis is not alone in predicting that Asia-Pacific equities markets will outperform in the year ahead as debt reduction and balance sheet restructuring since the 1997-98 crisis has left companies better positioned than their US and European counterparts.

Online broker Charles Schwab, which offers local investors Internet trading in US markets, is also singing the praises of building a diversified portfolio.

'Many investors this year have been sitting on the sidelines waiting for what they feel is the right time to enter the market . . . In particular, Hong Kong investors should be ready for an upturn, but trying to time the markets is a mistake, and diversification is the key to long-term success,' Charles Schwab senior US investment specialist Margaret Mak said.

'Investors who invest solely in the Hong Kong market are not spreading their risk, or making the best of the opportunities.'

For next year, Charles Schwab analysts are recommending a slightly overweight stance on equities in a long-term portfolio in view of improved earnings prospects, with a preference for large-cap stocks and sectors such as consumer staples and basic materials. They prefer corporate bonds to treasuries as recent demand has brought treasury yields to record lows.

Christopher Beale, associate director at financial planning firm Towry Law, said investors with regular savings plans should continue to put money into equities, despite the uncertain short-term outlook, as low prices meant they could pick up more units at better value. But lump-sum investments were a much trickier call.

Cautious investors should consider with-profit bonds, he said, which were unlikely to bring spectacular returns but were solid and consistent. Those with a slightly bigger risk appetite - scared of equities but not satisfied with low returns on bank deposits and guaranteed products - could consider hedge funds, which have the capacity to make money when stock markets are falling as well as rising.

The Securities and Futures Commission last month approved three hedge funds for sale to the retail public. According to an HKIFA survey this year, the greatest attraction to potential investors was the possible diversification benefit these products bring as they have a low correlation with traditional investments.

For the moment, Mr Konyn said retail investors were faced with opposing ends of the risk spectrum.

'[At present] there is no way of stepping out of the low risk and moving towards high risk. As soon as you step outside a guaranteed fund or bank account, you are immediately in a very risky environment,' he said.

He predicts conservative strategies will dominate at the start of the year, with fixed income bringing in about 4 per cent in the next 12 months and guaranteed products continuing to dominate. But after a choppy first quarter, confidence should slowly come back to equities as rising interest rates limit fixed income returns and the prospect of locking up money for years in a guaranteed vehicle loses appeal.

After three years of back-to-back losses on equity markets, some predict that investors will eventually step back into the fray, even if there is no clear sign of an end to the bear market.

'This is the very worst time to be moving out of risk assets into cash, it is far too late in the day,' Mr Lewis said. 'This is already the longest bear market on record in the post-war period . . . Time itself is a healer and people will eventually become tired of being pessimistic. Then we could see an autonomous increase in risk appetite.'