While it is true that 2005 got off to a somewhat fragile start – January not having been a particularly inspiring month for investors – as the days have been lengthening, more confidence appears to be returning. Aside from the FTSE 100 moving into new high ground for 2004/05, the mid-cap 250 index actually hit an all-time high last week. For those doubters who consider the recovery since March 2003 as simply a bear market rally, it is clear that bull market conditions truly exist in many areas.Of course, not all the news is supportive of the equity market. Unemployment in Germany has topped five million for the first time since the Second World War. Interest rates are continuing to rise in the US, with yet another quarter-point raise from the Fed, bringing the rate to 2.5 per cent. In addition, concerns persist that funding the ambitious spending programme put in place by the Labour Government will demand yet more tax increases. We would do well to remember that markets do not move in a straight line. Perhaps the most interesting play in the domestic market over the rest of the year will be that of small and medium-sized companies against the FTSE 100. The 250 and smaller companies indices have trounced the headline benchmark over the past two years and delivered spectacular gains to investors overall. However, there are indications that this may not continue. For a start, the economic outlook is less certain than it has been for a little while. Smaller companies tend to be more domestically focused, so any slowdown will impinge on their activity more so than for the global FTSE 100 members. Comparing valuations gives reason to believe that bigger-capitalisation stocks can now play catch-up. However, it is the global economic picture which looks most at risk at present. The slowdown in China is hindering Japanese economic recovery and worries continue over what may take place in the US. Of course, governments co-operate these days to try to limit the effect of any shockwaves but, even so, a return to the pace of growth which characterised the late 1990s does not seem in prospect yet. All in all, there does seem to be a picture of contradictions at present. We know consumer spending has been reined in but the housing market appears to have rebounded, at least in so far as lending is concerned. Figures for December showed a pick-up in both borrowing secured on homes and in the level of consumer credit. True, the figure is still down on a year ago but, with the number of loans approved for house purchases rising, it seems that fears are overdone in this department. What should a poor investor do? The watchword continues to be diversification. Reading various pieces of investment advice over the past week or so, I am struck by the wide variety being proposed. One well known and highly regarded economic commentator was suggesting that we should be putting all our money into long-dated Government securities. While he has always been a pessimist, he is clearly now worried about a more dramatic slowdown in this country compared with what most others consider likely. It is this confusing picture which is clearly deterring private investors. Following on from the figures for Isa sales, which we learned from the Investment Management Association recently, net sales of unit trusts and open-ended investment companies have been disappointing. Why do I find this encouraging? Perhaps it is because private investors have a tendency to follow the market and get it wrong. The fact that share prices have only picked up fairly recently may have disguised what Joe Public is really doing at the present time. With such diversity of opinion – and diversity of performance, for that matter – the run up to the year-end gives a clear opportunity to conduct some creative investment planning. The time has come to bite the bullet on those investments you have retained in hope for clients and to take a critical look at the overall portfolio balance. Risk remains crucial these days and is best contained through portfolio diversification. That this diversification increasingly incorporates property is clear. With A-Day only little over a year away, the impetus to invest in property looks set to continue. Perhaps this is why the residential housing market is avoiding a wholesale setback. For whatever reason, I can see an increasing number of column inches being devoted to property as the year unfolds.