For many retail investors, the past 12 months have been a hands-on lesson about the market's fickle ways. After all, it was only the middle of last July that the S&P 500 finally hit the end of its long bullish run, falling more than 9% by the second week in August. It promptly rallied, of course, but then fell off the track for good in October, and careened down a dizzying 18% before it hit bottom-so far, that is-in March of this year. Talk about a hard landing.

As investors' nerves frayed, typically ho-hum mutual fund classes suddenly became sexy as they calmly stayed the course, seemingly oblivious to crashing housing markets and lenders gone wild. These days clients are enthusiastic about municipal bonds and other former cocktail-party conversation-enders like, well, Treasury inflation-protected securities, or TIPS.

Asset manager AllianceBernstein recently published a report that touches on this element of investors' psyches: Myopic loss aversion, or, in English, the fact that individuals feel the pain of investment losses more acutely than they feel the pleasure of gains. For many investors, "the pain of losing $100 is roughly twice the pleasure of gaining $100," writes UCLA behavioral economist Shlomo Benartzi, author of the report.

One group of clients that's having a hard time with volatility is what Adam Bold, CEO of the The Mutual Fund Store in Overland Park, Kan., calls "the jumpy generation"-retail investors who were "emotionally affected by the bear market of 2000 to 2002 in the same way my parents were affected by the Great Depression," he says.

Tips Take Flight 

Few fund categories have gone from stodgy to cool the way inflation- protected Treasury funds did. According to Morningstar, the category has returned a nearly unheard-of 11.97% over the past year (as of June 4), with a standard deviation of about 6.4%.

As the mortgage crisis ensued, investors scurried to Treasuries, driving up TIPS prices and the returns of these otherwise sleepy bond funds. (TIPS funds have returned an annualized 4.66% for the past five years.)

But some advisors say TIPS' run may be near an end. The credit crunch is showing signs of easing, and investors are once again willing to take on the risk-reward proposition of higher-yielding-albeit less safe-paper.

"You're in the seventh or the eight inning" of TIPS' strong run, says Thomas Meyer, CEO of Meyer Capital Group in Marlton, N.J.

The data suggests that Meyer might be right. While inflation- protected funds returned a respectable 3.16% from January through May, the last three months of that period saw returns fall to -1.84%.

While TIPS may no longer be a cure-all, other staid asset classes like muni bonds and utilities continue to show how low, steady returns can keep clients from running to cash.

Calming Client Fears

After a recent 130-point thud in the market, planner Robert Hapinowicz got this call from a client: "The market went down 134 points and my account barely budged! I couldn't be happier!"

A couple of years ago, when the market was marching relentlessly upward, Hapinowicz, the principal of Hapinowicz & Associates Financial Services in Pittsburgh, counseled the client not to follow some friends into hot stocks and instead to stick with a more balanced portfolio. "I get it now," the client told his advisor.

As sensible as the safe-and-steady path looks on paper, though, advisors recite as if from a script the difficulty of convincing clients to play it cool in up markets. As David Reilly, director of portfolio strategy at Rydex Investments, chuckles: "Getting people to buy bonds is a little like getting them to take their medicine."But getting clients to swallow less-dramatic returns during bullish periods is essential to creating a steadier portfolio over time.

Active Gets Attractive

While a few advisors adhere to a passive index strategy, many are adamant that active managers-including lesser-known ones-can limit a portfolio's losses during down markets. That often requires finding the right manager before he or she gets too popular and the fund suffers from asset bloat.

Thomas Meyer of Meyer Capital says he found stability and solid returns when one of his senior analysts discovered the TFS Market Neutral Fund (TFSMX), managed by TFS Capital in Richmond, Va. The fund has a rather modest $225 million in assets, aims for low correlation to the S&P 500 and has been around only since September 2004. "It's flying under the radar," Meyer says.