With the S&P 500 well above 1000 and the Dow gaining on 9500, many investors are finding it difficult to hold on to cash and/or fixed income investments. While it is clear most of the growth we see are results of unsustainable factors (inventory accumulation, car production increases, just to name a few), we are caught in a "greater fool" market. Which is to say that irrational markets can seemingly always get just a bit more irrational. In this market, many of us foolishly buy overvalued stock and sell them at even more overvalued prices, on the theory that there's always a "greater fool" to buy them. Of course, the danger is in being the greatest fool of all, and be left holding too much when the bubble pops.

Long term, its excruciating clear that our economy is not out of the woods and growth will come at a painstaking slow pace. Even if the US grow by 6% during the 3rd quarter of this year, the 3-quarter growth rate will still be negative. And contrary to popular belief, having a positive growth quarter does not signal the end of the recession.

Furthermore, investments that have provided a safe haven to equity and fixed income markets in the past (such as real estate, commodities, etc) have suffered in some cases more than the equities market. Investors are stuck in a no-win situation in a world where volatility has tripled and market timing is next to impossible - many have simply decided to stay in cash and cover their eyes.

While there is no perfect solution, its become increasingly clear that a well developed asset allocation which moderates volatility and provides the best risk-adjusted return is still the way to go. With the flexibility to be nimble and to make tactical adjustments you can accomplish both capital preservation and derive relatively attractive returns.

One might ask what an asset allocation model will look like in today's world. The response is that it depends on specific risk tolerance and return goals. But in general, it will work on a core / satellite model. The core investments will be the primary driver of achieving return and/or income goals. while satellite investments will seek to moderate risk, lower volatility and generate uncorrelated returns to the core portfolio(s).

Its a traders' market. But its also a market where asset allocators can truly shine.