By DAISY MAXEY And JOHN M. LEGER

Wild swings—sometimes 3% or 4% a day—have become a regular occurrence in the financial markets. But just because it’s routine doesn’t mean it’s any less unsettling.

Daisy Maxey, a special writer for Dow Jones Newswires, and John Leger, a news editor for The Wall Street Journal, discussed the volatility with four fee-only financial advisers.

The panel also discussed the outlook for 2012 and which financial sectors show the most promise—and which ones should be avoided.

The panelists:

• Karen C. Altfest, executive vice president of Altfest Personal Wealth Management, New York.

• Lauren Locker, owner of Locker Financial Services LLC, Little Falls, N.J.

• Ron A. Rhoades, owner and principal of ScholarFi Inc., Alfred, N.Y.

• Claudia Shilo, managing director of Ballentine Partners LLC in Wolfeboro, N.H.

Here are edited excerpts of the discussion:

The Overall Outlook

DAISY MAXEY:What are you expecting for the markets and the economy in 2012? Do you think the crazy volatility we’ve had this year will continue?

CLAUDIA SHILO: Volatility is going to persist because it really stems from uncertainty. And if you were to list all the things that we are uncertain about, it is mind-boggling. You could start with the European debt crisis, which is going to dominate the headlines and impact the market significantly.

F. Martin Ramin for The Wall Street Journal

The panel of advisers (from left): Karen C. Altfest, Ron A Rhoades, Claudia Shilo and Lauren Locker

Back at home, we’re entering an election cycle. And with that, we’ve got political posturing and political stalemates to increase anxiety.

We also see this big train heading at breakneck speed at all of us, which is the aging population. Along with that are social programs and entitlements and escalating health-care costs. I think all of that uncertainty spells volatility.

KAREN ALTFEST: I think we have a transition year coming up. We’re not expecting great things for the coming year, possibly due to our elections. We’re sort of at a stalemate. And that’s going to be a driving force, and we’re not expecting major changes until the election cycle is over, either the election in November, if Obama is re-elected, or January, when the new team takes office, if that’s to be the case.

And then we think that there will be a change starting in 2013 because we don’t think the country is going to continue the way it has been. We think the Democrats and Republicans will have to come to some sort of a deal. There have already been signs that they’re willing to negotiate with each other, but they’re so busy badmouthing each other it’s not going to happen until after the election.

So we’re optimistic over the medium-to-longer term.

RON RHOADES: The stock market, by my calculations, is somewhere around 10% to 20% undervalued relative to what I would regard as a normal level. And for much of the last 15, 20 years, we’ve actually been above normal.

I think if you’re a long-term investor, then you need to be in the stock market. It’s the best place to be for the long-term investor in terms of tax-adjusted, long-term rates of return.

I’ve told clients to prepare for two big things. Prepare for another big recession and prepare for a big terrorist attack, and know what you’re going to do, in terms of your portfolio, if either one of those happens.

LAUREN LOCKER: I think the next two years will be slightly more painful, and not necessarily only in the markets.

We have unemployment issues and rising costs. No one is saying the “inflation” word, although there is a lot of inflation that has been around.

I also think that investors are getting used to the volatility that we have, which is a good thing. We can ride those waves with them. But they’re not happy with it. And I feel that they’re going to continue to stay unsettled, and that unsettled feeling is going to cause them to feel more anger.

I think most people are very angry with the markets, angry with the government, angry with a lot of things.

Time to Embrace Risk?

MS. MAXEY:Some investors are now starting to take on a little more risk. I wonder if you think it is time to embrace more risk and what investments you’re recommending.

MS. ALTFEST: I don’t see any point just sitting on the sidelines. We have clients who keep waiting for the right moment. And so far, since 2008, they don’t know when that right moment is. They’re still on the sidelines. So yes, we do believe in being invested.

I do think that stocks have good valuations now. And we should be looking at them and buying into the market and not staying out of the market.

One area we particularly like are large caps. It’s a good time to return to those sound companies that we can look at and seriously understand, not like in the tech-bubble days.

MR. RHOADES: I think long-term investors should probably tilt their portfolios toward mid-cap, small-cap and value stocks. The value effect and, to some extent, the small-cap effect have been present in most long time periods—over 15 or 20 years—as a very high probability, probably in the 80% or 90% range.

The only other asset class that looks attractive at the current time is U.S. real estate. Most individual investors would probably pursue that through some type of well-run, low-leveraged REIT. I’m a big fan of direct investment in real estate, for the more sophisticated investors, especially those with experience in it.

Having said that, not every individual investor should go out and buy a REIT. If a significant part of your net worth is tied up in your house, you probably have a pretty good amount of exposure to the real-estate sector.

MS. LOCKER: Large caps, and especially dividend-paying large caps, seem almost safer to me now than they did and will continue to do so going forward.

My fear is the bond market. I’m waiting for that crash and burn to come. It’s very difficult, because that’s about the only place you’re getting any kind of return right now. And it’s very difficult to hang in there.

MS. SHILO: We’re advising continued caution. We have many clients who are comfortable with risk, and they are taking this opportunity to snap up real estate and companies at very appealing, bargain prices.

But in terms of overall allocation, we are not advocating paring down the equity position. We’re keeping to our targets. We’re rebalancing in a judicious way as the market declines.

But on the sub-allocation level within the equities, we are making some shifts there, and we’re paring back on European stocks and exposure there. We’re looking at large-cap defensive stocks. And we’re also looking at small-cap value.

Looking Overseas

MS. MAXEY:Emerging-market growth has come into question this year, but most analysts still expect growth in those economies to surpass that of the U.S. What kind of international allocations are you recommending?

MS. LOCKER: We always keep at least anywhere from 5% to 15% in foreign or emerging markets, depending on a client’s age, time horizon and risk tolerance. In the last few years, everyone’s risk tolerance has been tested. And so when I have a client who walks in and says, oh, this sounds like a great investment, I say, how did you feel in 2008 when the market was down? Were you OK with that? And they’re, oh, no, that was horrible. OK, so let’s rethink getting into emerging markets.

If they’re willing to get their toes wet, we’ll at least do 5% or 10% in terms of allocation.

MS. ALTFEST: We have about one-third of our equity position in international, and half of that would be in emerging markets and half would be in other international, including Europe.

We are very interested right now in Asia. We’re interested in China and India. We bought at the end of 2008 when everybody thought the world was doomed and we shouldn’t be buying at all and we should be retreating to cash. We were buying Asian funds, and we did extremely well.

We have taken a lot of that off the table since then. We will buy again if they come down from where they are today by about 10% or 15%.

MS. SHILO: We still like the outlook for emerging markets. The consumer sector, we think, will become more attractive as those populations get wealthier.

We also like the valuation of emerging markets. We’re overweighting our emerging market as compared to its relative market weight.

MR. RHOADES: I’m a fan of investing internationally as a big part of an investment portfolio. I usually recommend, whatever amount is allocated to equity, up to 30% be allocated to international markets. And at that international allocation, about one-fourth in emerging markets.

JOHN LEGER: Do your clients express concern about what’s happening in Europe right now, particularly in Greece and Italy?

MS. ALTFEST: I do hear that a lot. People come in all the time, and even if they don’t have the facts, they’ve heard the news, and it doesn’t sound good to them.

How the market does in the next couple of years is really going to be dependent on how the euro zone countries do. They’re going to have to come to some kind of accommodation.

The Inflation Factor

MS. MAXEY:Inflation fears seem to have eased a little. But are you worrying about it going into 2012? Are you recommending any protection, such as Treasury Inflation-Protected Securities?

MR. RHOADES: Inflation is very much on my mind all the time. And what’s interesting is that the inflation we’ve seen over the last several years has basically been driven by commodity prices, not by demand.

So I would call it bad inflation as opposed to good inflation. And hopefully, demand will continue to come back and we’ll be seeing the good type of inflation. And hopefully, the Federal Reserve will react and keep a lid on inflation.

From the standpoint of how to position a portfolio to counter inflation, I think equities are an excellent hedge and real estate is an excellent hedge.

As to TIPS, it’s a great asset class, but it’s very hard to recommend investing in it when there’s a zero real rate of return, as there is right now. They’ve done exceptionally well over the past year. And I certainly think TIPS ought to be a part of a long-term investor’s portfolio on the fixed-income side. But it’s very hard to tell clients right now that this is the time to buy TIPS.

MS. ALTFEST: We’re not looking at inflation as being a real threat for 2012. Perhaps in another year after that, after the election we’ll have a different point of view.

MS. SHILO: Inflation is definitely on our radar. The risk of inflation seems very low right now, but it could change on a dime if the government makes a poor policy decision. So given our current environment, that risk is not negligible.

We have always hedged for the risk of inflation within our client portfolios. We’ve recommended TIPS for quite some time. They’ve performed amazingly well, which is why we’re paring those back. But we do still continue to hold that hedge in our clients’ portfolios.

We consider corporate bonds a good way to pick up some spread in tax-deferred accounts. But we’re sticking with munis. That’s the best choice for our clients who are in a high-tax bracket.

Say No to Annuities

MS. MAXEY:Everyone is still very focused on safety. I’m wondering if you’re talking with your clients about annuities and recommending them?

MS. ALTFEST: At our firm, we’re really not. We don’t generally suggest that.

Right now the rates aren’t good on annuities. And you’re locking yourself into something that will hurt if there is inflation. It won’t feel so good down the road.

MS. LOCKER: We spend most of our time getting people out of annuities or converting the annuities if they’re IRAs and rolling them over, or putting them into low-load annuities.

However, if I find that I have a client who’s very elderly or even someone who really has no skill in handling any money, an annuity could be a positive option for them. That’s because it’s locked in and they can’t blow the money, especially somebody who has inherited a large amount. It’s sort of a safety net.

Ms. Maxey is a special writer for Dow Jones Newswires in New York. She can be reached at daisy.maxey@dowjones.com. Mr. Leger is a news editor for The Wall Street Journal. He can be reached at john.leger@wsj.com. Twitter: twitter.com/johnmleger

By COLLEEN DEBAISE

Read an excerpt from THE WALL STREET JOURNAL COMPLETE SMALL BUSINESS GUIDEBOOK (Three Rivers Press).

The economic downturn has dimmed many entrepreneurs’ hopes of opening a small business, as sources of funding have dwindled or dried up completely. And while many hope 2010 will be better, the outlook continues to be bleak.

The majority of entrepreneurs use personal savings or contributions from family or friends to fund their ventures, but personal wealth, often connected to the value of stock portfolios or homes, hasn’t bounced back.

Meanwhile, banks—under scrutiny by regulators—are continuing to strengthen capital reserves, making it difficult even for entrepreneurs with track records and years of experience to qualify for loans. And professional investors, stung by the financial meltdown, are meting out fewer capital infusions.

Kenneth MacKinnon moved to Los Angeles over two years ago with plans to start a tapas wine bar, but despite a high credit rating and collateral, including a home, the Scotland native says he has been unable to secure the $300,000 he needs from banks or private investors.

“The money supply has been shut off,” says Mr. MacKinnon, who had run a successful seafood eatery for 15 years in the U.K. that he sold in 2007 before moving to the U.S.

Funding from angel investors, or high-net-worth individuals who provide capital to young companies, fell 30% to $9.1 billion in the first half of 2009 compared with the same period a year earlier. That figure is expected to remain flat for 2010, according to Jeffrey Sohl, director of University of New Hampshire’s Center for Venture Research, which tracks the data.

What is encouraging, Mr. Sohl says, is the number of deals has ticked up slightly. While angels are investing less—$370,000 per deal in 2009, versus $530,000 in 2008—about 24,500 ventures received funding during the first half of 2009, compared with 23,100 the year earlier.

“They are still doing the deals, but the deals are much cheaper now,” he says.

Venture capitalists, too, are continuing to invest, but typically in later-stage companies already in their portfolios rather than new prospects, says Mr. Sohl. The average deal size declined to $5.7 million in the first half of 2009, compared with $7.4 million to $7.8 million between 2005 and 2008.

As for Small Business Administration-guaranteed loans or conventional bank loans, the best thing about 2010 is that it won’t be 2009, says Bob Coleman, publisher of “The Coleman Report,” a La Canada, Calif., trade publication for SBA lenders. “We’re better off than where we were 12 months ago, but we are nowhere near where we were two years ago,” he says.

The SBA approved less than 45,000 loans for the 12 months ended Sept. 30, down 36% from a year earlier. Total volume for its flagship 7(a) loan was $9.3 billion, off year-ago levels by $3.4 billion.

Stimulus-related measures, however, contributed to an uptick in SBA lending in recent months. Mr. Coleman expects that trend to continue for 2010.

But SBA loans make up only about 1% of overall small-business lending, Mr. Coleman estimates. That figure may grow to 5% to 10% in 2010 as the government provides more incentives for financial institutions, especially community banks, to provide financing to small businesses, he says.

Still, getting the money may be a challenge. “Whether it’s an SBA loan or a conventional loan, you really have to be perceived as the ‘cream,’” Mr. Coleman says. Start-up entrepreneurs in particular will have to show they have a significant amount of their own savings in the venture, plus solid cash-flow projections, he says.

Maria Coyne, executive vice president and head of SBA lending at KeyBank in Clevand, agrees that start-up entrepreneurs will have to have a solid plan and assets. “They’ve got to get a good hunk of skin in the game, too,” she says.

Babson College in Wellesley, Mass., estimates that entrepreneurs need on average $65,000 to start a business, two-thirds of which comes from personal savings and the rest from “informal” investors such as relatives and friends.

Although the stock market is starting to recover, housing values remain weak. Two years ago, relatives were more willing to invest because “they might have seen they had a couple hundred thousand dollars in equity in their house,” says Babson entrepreneurship professor Andrew Zacharakis. “Today, that’s a scarier proposition.”

Lack of access to capital will also likely hamper entrepreneurs interested in buying a franchise, says Matt Shay, president of the International Franchise Association in Washington. The group estimates 2% growth in franchises for 2010 to over 901,000 establishments. That’s better than zero growth in 2009, but off the average 5.6% growth per year from 2001 to 2005.

In the past, potential franchisees could finance a purchase if they could put 15% to 20% down. Now, banks require large down payments of between 40% and 50%, Mr. Shay says.

Babson’s Prof. Zacharakis says he’s seeing companies doing more with less, including asking friends and family to work for free. “Instead of capital infusions, there might be a lot more exchanges of services or trading favors,” he says.

In Los Angeles, Mr. MacKinnon says he’s considering taking on partners so he can open his long-planned bar. Instead of starting from scratch, he might invest in a failed restaurant.

University of New Hampshire’s Mr. Sohl says he believes “we’re done with the downdraft,” though he remains cautious for 2010. “People aren’t ready to bet the farm,” he says.

Write to Colleen DeBaise at colleen.debaise@wsj.com

By ANGUS LOTEN

Angel investors—wealthy individuals who provide capital to start-ups with the potential for fast growth—are an increasingly important source of capital to early stage companies, including in Europe, one recent report says.

The report by the Organization of Economic Cooperation and Development is among the first to gauge angel investing activity around the world.

Angus Loten/The Wall Street Journal

Katherine O’Neill of the JumpStart New Jersey Angel Network (foreground left) and Aaron Holiday of BR Venture Fund (background on O’Neill’s right) field pitches for start-up funding from entrepreneurs at a networking event in New York in December.

Calculations by the Paris-based think tank suggest that the total amount of capital raised from angel investors in the U.S. was $17.7 billion in 2009, compared to $18.7 billion for venture capital. The bulk of the venture capital money went to companies that were at later stages in their growth cycles, the report notes.

In Europe, the angel market in 2009 reached $5.5 billion, surpassing all venture capital funding by some $250 million, according to the report, which is based on interviews with roughly 100 investors, entrepreneurs and business leaders in 32 countries.

With banks reining in all but the safest loans since the recession, and venture capital firms now targeting less risky late-stage business startups, angel investors are nearly alone in backing young, fast-growth companies, the report says.

The VCs tend to target high-tech hubs, like Silicon Valley.

But angels are more prone to support entrepreneurs in their own back yards, with typical funding rounds ranging from $25,000 to $500,000, the report says. At the same time, they’re less sensitive to ups and downs in the economy and tend to invest in a “much wider range of innovation” than VC investment firms, the OECD report concludes.

In the U.S., angel investors are now putting more cash into biotechnology and health-related ventures, rather than IT, which was an investor magnet for decades, for instance. That’s partly due to the rise of angel investing groups over the past decade. By pooling smaller sums together into big funding rounds, these groups are able to spread the risk of betting on promising ventures in less hot sectors.

As a result, angel investing itself is becoming a more formalized process – complete with more rigorous due diligence.

Beyond cash, angels play an often overlooked but crucial mentoring role for new business owners as successful entrepreneurs themselves, offering hands-on experience and a network of valuable contacts, the report notes.

But policy makers have tended to focus efforts on the higher profile venture capital market, however. To better drive the global economic recovery, the OECD recommends tax incentives for angels and angel groups, co-investment programs, or even public funding for national angel associations.

Many fast-growth, entrepreneurial ventures that attract angels are the same start-ups that create jobs. Led by start-ups, small firms have generated 65% of net new jobs over the past 17 years, according to the Small Business Administration.

Still, some critics say wealthy investors shouldn’t need costly tax incentives to back promising ventures, especially as many countries enact tough austerity measures aimed at balancing national budgets in the wake of the financial market crisis.

Others worry tax breaks will draw in institutional investors. Institutional investors may not provide start-ups with the business-management expertise or potentially valuable contacts as the typical individual angel investors might provide.

Of the $8.9 billion in total investments by angels in the first half of 2011, 39% went into seed and start-up ventures, up from 26% of $8.5 billion in total investments over the same period in 2010, according to data from the University of New Hampshire’s Center for Venture Research. It hasn’t yet released data for 2011′s second half.

Write to Angus Loten at angus.loten@wsj.com