8 smart moves to invest in the recovery
The economy is finally improving.
But it will be a slow recovery, with a more than a few bumps along the way.
So what should you do to recoup your losses and take advantage of whatever good things happen over the next few months?
Here's what some savvy investment advisers are telling their clients:
Smart move 1. Put more money in your 401(k) plan.
If you had to reduce the amount you were saving for retirement during the recession, now's the time to boost contributions to your 401(k) plan.
Russell Dunkin, a certified financial planner with McKinley Carter Wealth Services in Wheeling, W.Va., says increasing your contributions by just 1% of your pretax earnings can make a huge difference.
If you're making $50,000 a year and get paid twice a month, that's only $20 per paycheck.
"Most people can afford to forgo that amount twice a month," Dunkin says.
But that small sacrifice can add $49,000 to your retirement savings over a 30-year career, if the investments in your 401(k) earn a good, but not spectacular, average return of 7% a year.
Smart move 2. Ease back into the stock market.
If you bailed out during the bear market, you're probably sitting on a lot of cash that's earning next to nothing in CDs or money market funds.
Returning to equities, and their long-term growth potential, makes sense. But you don't want to commit all of your cash, all at once.
You'll regret it if you leap in just before the recovery suffers a setback that sends stock prices tumbling for a few weeks -- or even a few months.
That's why George Papadopoulos, a certified financial planner in Novi, Mich., says you should ease back into the market by investing a set amount every month, or quarter, over the next one to two years.
"If you are going to err," he says. "better to be on the safe side."
Smart move 3 Choose mutual funds based on low expenses not past performance.
Investing in mutual funds based on their past performance is like "driving while only looking in the rear-view mirror," says Mary Ellen McCarthy, founder of Responsible Investing of Brookline, Conn.
You're better off picking funds that won't siphon off your earnings with excessive fees. Look for expense ratios of less than 1% a year.
"It's really hard to detach yourself from performance data because the financial services industry stresses it so much, but it's essential," McCarthy adds. "The real, predictable gains come from dividends and interest income reinvested and compounded over many years."
Smart move 4. Invest in community banks.
Most community banks didn't make the irresponsible loans and risky investments that brought the big banks to the verge of collapse, says Jacob Eisen, president of Capital Insight Partners of Chicago.
Yet they've plunged in value, right along with those of the major financial institutions.
With some community banks worth only 30% of tangible book value, Eisen says investors will reap significant returns as those shares return to a more reasonable price.
"A lot of these banks are still earning money, less than in better times, but they're going to get through this," he adds. "It's really an interesting opportunity."
Smart move 5. Plan for rising interest rates.
Most economists expect the Federal Reserve will start pushing interest rates up late this year or in early 2011.
You can be ready to take advantage of that by buying short-term corporate bonds, says R. Blair Patteson, investment management consultant with Morgan Stanley Smith Barney in Knoxville, Tenn.
He recommends senior loans, a particularly safe type of corporate debt that matures in just 30, 60 or 90 days.
"Since they roll over and new paper is issued in such short time frames, each time a new loan is issued, it gets the prevailing market rate," he says. "This allows the interest rate to rise along with the market rate."
Smart move 6.. Make sure your investments are well diversified.
Spreading your money around is a good way to protect yourself during a slow, and possibly volatile, recovery.
"If you put all your eggs in one basket, and the basket falls, you've broken all your eggs," Steve Wallman, CEO of online brokerage Folio Investing. "That's a lot of risk for someone to take if you're talking about the bulk of your assets."
An easy way to diversify is through target date portfolios, Wallman says, which automatically adjust investments to maximize growth when you're young, and reduce risk as you get older.
Smart move 7. Be wary of emerging market mutual funds.
Mutual funds that invest in rapidly developing foreign markets grew quickly last year, says Rebecca Schreiber, a certified financial planner for Solid Ground Financial Planning in Silver Springs, Md.
Investors are piling into these mutual funds and exchange-traded funds, creating a bubble around them.
"You know it's a bubble when individual investors are driving growth, not the institutional investors," she says. "Wait for the bubble to deflate, then get in with the smart money."
Smart move 8. Go for stocks with solid, consistent dividends.
A full economic recovery is far from complete, says John Olson, financial consultant with LPL Financial of Charlton, Mass.
Stock values are likely to grow slowly, but you can still make money by choosing dividend-paying stocks, he says.
"The next few years may be a repeat of history where dividends made up more than 50% of your total return in stocks," Olson says.
"Focusing on companies with good dividend yields allows you to get paid while you wait [for anticipated growth]. Remember, you can't fake a dividend by clever accounting -- it's real money in your pocket."
Follow Interest.com on Twitter.