A lot of people believe stocks are anything but a slam dunk, even though prices fell over the past three years and we appear to be in the early stages of a recovery. Bond prices are sliding, and higher interest rates are signaling a slowdown in real estate. So where can investors expect the best returns over the next 12 months and beyond? TIME brought together a diverse group of investment experts to probe the question, and their answers may surprise you. Bonds have fallen enough to be a bargain — at least until the recovery really takes off. But beach houses to rent for income are so five years ago. For more, you'll have to read on. Our panel met in early August and was moderated by TIME senior writer DANIEL KADLEC. The experts: Seymour Lotsoff, senior managing director at hedge-fund firm Lotsoff Capital Management; Dagny Maidman, managing director of private client services at Bank of America Securities; Robert Smith, manager of the T. Rowe Price Growth Stock Fund; and Tobias Levkovich, U.S. equity strategist for Smith Barney. Their thoughts:

TIME: With all assets seemingly expensive, are we doomed to low returns?

TOBIAS LEVKOVICH: Most people are colored by the high returns in the latter part of the '90s. Annual appreciation compounded for the past 50 years, counting dividends, is about 10%. Going forward, we would argue that you're looking at something like 7% from stocks. That could move higher if companies start paying more in dividends, which is beginning.

DAGNY MAIDMAN: But that's just talking about stocks. If a client is truly diversified, I don't think we're going to have significantly lower returns than usual. A whole portfolio moves in the best of years up 10% to 15% and in the worst of years down maybe 3%. You need fixed income, equity and some alternative assets like a hedge fund. You might include some emerging-market debt. These things together, I think you can get 7% to 8%.

TIME: Not so bad, if you're right. Tobias, you're the closest thing we have here today to an economist.

LEVKOVICH: Oh, God.

TIME: Nevertheless, we're happy to have you. What's your view of this recovery? Bond yields are rising, suggesting we're firmly on the mend.

LEVKOVICH: Let's understand what's happening. In May, [Alan] Greenspan got up in front of Congress and said he will use nonconventional tools to fight deflation. Bond prices soared, and yields plunged, because that meant if worse came to worst, the Treasury would buy long-term bonds. Then in testimony in July he basically took that promise off the table, and everyone sold Treasuries.

MAIDMAN: He was even talking about the economy showing signs of recovery by then. So the low 3.11% yield of June was the anomaly, not where we are today, about 4.5%. Everybody is studying a move that's just nonsense.

TIME: So you don't think we're getting a strong signal from the bond market that the recovery is here?

LEVKOVICH: We're getting a signal that things are improving, but we're not about to see a torrent of growth.

SEYMOUR LOTSOFF: In fact, bonds are probably not a bad investment here because of this correction, which has been overdone. Low-grade corporate bonds should do well. As the economy kicks in, you'll have a problem, but you can address it at that point. If the economy doesn't take off, you can stay in these bonds longer. I'd play it through junk-bond mutual funds.

TIME: Junk bonds have been hot this year. Isn't that play about over?

LOTSOFF: No. You have another year.

MAIDMAN: Even though they've already had a pretty solid run, if nothing else you'll capture nice yields, maybe 7% to 10%. In addition, there will be more capital appreciation. As the economy recovers, balance sheets and credit ratings improve, and junk bonds rise. Now you have a price gain of maybe 10% plus your 7% yield.

TIME: We all seem to agree, though, that things are getting better.

ROBERT SMITH: Absolutely. The economy will be better in the second half and will flow overseas. Europe will be difficult initially, but that should pick up toward the back end in the fourth quarter. It's encouraging that the government has basically said it's going to do anything it can to get the economy moving and, once it begins to move, will let it run for a while. I don't think you can ask for more than that.

TIME: Yet this recovery is atypical. Stocks never came down as far as one would have expected — Tobias is shaking his head — and real estate never cracked.

LEVKOVICH: Stocks dropped more than $7.5 trillion of value.

TIME: But they shouldn't have had that value to begin with, right?

LEVKOVICH: I don't debate that. But they have come down a great deal and aren't necessarily expensive, especially if earnings continue to improve and companies keep raising dividends.

MAIDMAN: What was different is how we went into the recession, which is that usually house prices would decline going into it because usually interest rates were going up. So, of course, it's going to be sort of different in a recovery. It doesn't always work the same way. A lot of my clients have definite feelings like, Well, the economy is going to recover, so I want to put 90% of my money in stocks. I like to talk to them about, What if they're wrong?

TIME: In a low-return world, by definition indexes will have low returns. Are index funds a bad choice now?

MAIDMAN: There are so many ways to index now, including exchange-traded funds, where you can get very specific with what you own. So I don't think it's completely out with indexing. I do think there's an issue with traditional cap-weighted indexes like the S&P 500.

LEVKOVICH: I have a personal bias against it because you're basically saying you're satisfied with mediocre returns. But I've had that problem all along.

LOTSOFF: If I am right that we are in a much more challenging environment for corporate management, indexing is not going to be the best thing. You want to identify good managers who can navigate global competition, and you want to stay with them.

TIME: Among the broad asset categories — stocks, bonds, cash, real estate — which should you lean toward right now?

MAIDMAN: I would overweight growth stocks. I would underweight real estate fairly significantly, and I would include alternative assets, and I would overweight by lightening up on bonds.

TIME: When you talk about alternative assets, you're talking about...

MAIDMAN: Some private equity, but more things like fixed-income arbitrage, convertible-bond arbitrage, distressed securities, emerging market — debt arbitrage. I deal with affluent investors, and these help returns without adding risk. You have to look at your time line. If you don't have 10 years, you should not be in LBOs and venture funds.

TIME: Bob, where do you think the best values are in a low-return world?

SMITH: The beginning part of the recovery has tracked what you would have thought. Aggressive-growth companies have done well: biotech, semiconductor companies, Internet companies — stocks you thought were going to go out of business. And so have big companies whose stock has come down dramatically, like EMC and Ericsson. Now it's a more level playing field, and the premium for quality companies over average companies is very small. So I think you would want to buy quality. You'd rather buy Wal-Mart, vs. J.C. Penney or Dell, vs. Hewlett-Packard.

TIME: Are there sectors you like?

SMITH: I think you would still be steering away from noneconomically sensitive companies. You would rather own a Viacom than Procter & Gamble. P&G is a great company, but as the economy starts to get better, you would rather have something that has some economic sensitivity to it. You would rather own a Merrill Lynch or a Morgan Stanley than you would a bank. Over the intermediate term, I like media stocks, like Viacom and Clear Channel, Univision. In retail, I like Target and Best Buy. Wal-Mart will be O.K. I like Citigroup a lot.

TIME: Whom are you avoiding?

SMITH: Old industrial companies. In past recessions you would look to these old companies because they have hidden assets. Now they all have hidden liabilities. The newer the company, the better shape you are in on pension and asbestos issues.

TIME: Are you moving more into dividend stocks?

SMITH: Over time that will be a good place. I don't focus as much on what the dividend is as what the potential dividend could be.

TIME: This year dividend payers have not done nearly as well as nonpayers.

LEVKOVICH: Over time they'll do better. One thing we look for is strong inside ownership. Family-controlled companies will be interested under new legislation to pay themselves.

TIME: Let's talk about your themes.

LEVKOVICH: I'll hit a couple of them. Long term, dividends are important. I think defense is another long-term theme. A Northrop Grumman is going to pop up as a beneficiary. But if I look at very specific ones, one of the very few areas where you can talk about pent-up demand is travel. Corporate travel, leisure travel have been put off by two wars, recession, a bubble bursting, SARS. The only thing that hasn't hit this industry is pestilence. There are very few new rooms coming on the market, so you have an industry that has pricing power. Here is an industry that just made money in one of the severest downturns it ever faced. Management got lean and mean. They're poised to benefit. Starwood is a good name in that area. When I look at momentum, I like Intel. When you're not building new capacity and there's still chip demand out there, you start tightening the supply; pricing goes up, and that's where the leverage in the industry is. One area that is very interesting in financials is property and casualty insurance. A lot of people see the premiums increasing. What's really interesting is what's going on on the liability side of the balance sheet. The U.S. Supreme Court's ruling on punitive damages is very positive to anybody who has to pay out claims, limiting the ratios of punitive to compensatory damages.

TIME: Let's give Sy a chance.

LOTSOFF: I have a question. Bob, you have said you wouldn't own a company if you didn't like the management. What characteristics do you look at?

SMITH: One thing you look at is how they allocate capital. [CEO Christopher] Galvin at Motorola is a horrendous allocator of capital. He wants to invent something like his grandfather; he's not running a business. The second thing is to try to get a feel for their internal systems, like General Electric and Wal-Mart.

TIME: Sy, what's cheap?

LOTSOFF: I don't think anything is particularly cheap. But I'm a buyer of junk-bond hedge funds, diversified alternative investments. In common stocks, I'm buying good-quality dividend payers. Despite all their legal problems, I have looked at pharma. I still cannot help but look at the demographics in Europe, Japan and the U.S., which says we're going to be eating many, many more pills. The growth potential there is misunderstood. I like Pfizer, Merck, GlaxoSmithKline, Bristol-Myers Squibb.

MAIDMAN: I think you've got to stay out of bonds. Investors have to start shifting money to equities. That includes the six major classes: value and growth — small, mid and large. Right now, overweight mid-cap growth. Don't go speculate on investment real estate. That is so 1999.

SMITH: Housing is going up, but there are fewer renters. It's not sustainable.

MAIDMAN: Even if you live there, if the fair market rent is less this year than last year, the fact that the price of your house is up when you get your appraisal, that's soon going to change. That divergence doesn't exist for very long.

TIME: I'd like to give Sy the last word.

LOTSOFF: The historic perspective is, periods like the '90s are rare. But if there's any message here, it's no, we're not going back to 1998, and you shouldn't be looking for the next great thing that's going to go from a penny to a thousand dollars. It ain't gonna happen.

• Dagny Maidman; Robert Smith; Tobias Levkovich; Seymour