Serious Money: In the medium term, the reviving markets are more likely to muddle through than go pear-shaped

The first anniversary of the end of one of the most savage equity bear markets in history has elicited much comment and one or two suggestions that the worst may not, in fact, be over. After a year in which most global stock markets have recorded very strong rises - although few have reached the heady levels seen in March 2000 - many warn that the outlook for equities is extremely poor.

An old cliché reminds us that bull markets climb a wall of worry. During every upswing there are always doom and gloom merchants willing to see problems around every corner. This time around the Cassandras see vastly overvalued equities, particularly in the US, and "imbalances", again mostly in America.

Over-priced stocks and a US economy that is accumulating far too much debt: many analysts see this as a lethal combination. They may be right. But there is a world of difference between, first, identifying a set of real problems and, second, figuring our how they might be resolved.

The US (and UK) economies are building up debt, and US equities, compared to historic averages, do look expensive. We can argue about just how big these problems are, but we can all agree they are real issues. What we don't know is how they get resolved. Fast, slow, painfully or peacefully: our spreadsheets and fancy models are mute on the precise adjustment path back to equilibrium. As investors, we have to make our minds up about this very uncertain outlook. But it is always like this. There are always things to worry about, always a future that holds a myriad of potential outcomes.

Ultimately, we have to back our judgment and intuition, fully aware of how flawed these investment tools are.

Right now, it seems investors have to choose between two potential outcomes. The first is the one that is usually least talked about because it is dull and slightly messy. This is the "muddle through" scenario, where things continue to look pretty much as they do at the moment.

Economies continue to grow, imbalances remain a source of worry and analysts continue to warn about overvalued stock (and property) markets. In this world, equities continue to rise, but not by much (as does property). Bonds and cash do not do as well as stocks but the total returns available from all these major asset classes are not vastly different.

This time next year we end up talking about the same issues but look back on another 12 months when it was best to have been invested in equities. In such an environment it often turns out that where we invest is as important as what we invest in - the currency decision can dominate investment returns.

The second scenario involves things going pear-shaped. US imbalances come home to roost, the dollar collapses, taking stocks with it, and the world economy enters another downturn. In such a world the only place for your money is bonds and cash.

Of course, things would be easy if all we had to think about were two competing scenarios. There are lots of other possibilities, lots of other things to worry about (and one or two ways that we could actually get optimistic). The two main visions of the future I describe seem to accord with most people's perception of the highest probability outcomes.

My money is with the more optimistic vision; hence, I still think that equities will dominate bonds and cash. But that view has been sorely tested over the past weeks. Many stock markets slipped to show negative year-to-date returns and bonds have done well. The pessimists are claiming vindication.

Depending on where you stand you will either view the most recent weakness in stock markets as another buying opportunity or merely confirmation of an outlook that is, at best, extremely murky.

History teaches us that the "muddle through" option is the one most likely. Such visions of the future reinforce the basic insight of most finance theories which tells us that the best investment strategies always involve building diversified portfolios. Dull, worthy and obvious, perhaps, but these insights are no less valid for not being sexy.

Over the long run, the returns from equities have utterly dominated returns from all other asset classes; but most sensible advisers nevertheless argue that bonds should form a healthy chunk of any investor's portfolio. Everyone has to sleep at night.

What should those investors who are very concerned about the outlook do with their portfolios? The obvious place for your money is cash and bonds; the downside being, of course, that returns from these investments are very low right now. There is even a growing possibility that the returns from cash in Europe might actually fall further if the ECB cuts rates again.

Irish investors worried about currency risk will not be tempted away from euro denominated deposits and bonds. But those willing to have a bet on exchange rates should look at sterling.

If you share my view that further euro rises are not as obvious as many suppose, sterling based deposits look very attractive, with some of the highest short- term rates in the world available in the UK.

Meanwhile, I will be reminding myself that stocks are a long-term investment that periodically put investors through painful times. I will have my fingers firmly crossed.