Tired of seeing their investments lose money, many Americans have taken their savings out of the stock market. But it just may be time to trust the market again, according to The Early Show's financial advisor Ray Martin.
To benefit from the upswing Martin provides some financial tips on Wednesday's The Early Show.
After three years of bad news, many Americans may have assumed they're going to open their 401(k) statements or other investment reports and see that they've lost money. Martin, however, says a variety of signs are pointing to an economy performing well such as consumer spending is up, consumer confidence is up, business spending is up and corporate profits are up.
Martin says the U.S. economy is sitting on the ground, but it's primed for take-off.
When looking at the market's performance year-to-date, Martin says it's impossible not to trust the gains. Looking at graphs of the Dow, S&P and Russell 2000 (which charts small companies, many of which are tech companies) is the clearest way to illustrate the health of the market. The Dow is up 15 percent this year. The S&P is up 17 percent. The Russell 2000 is up 32 percent.
Martin is not telling investors that the stock market is "safe." He says investors always take a risk in the market. But, investors do face a smaller risk of losing money now than in recent years.
If you pulled money out of the stock market and still have it somewhere "safe," you have missed some market gains. During the third quarter of the year, the economy grew a record 7.2 percent -- the fastest growth since 1984. But that doesn't mean you've missed out completely.
Martin explains America is now in a "recovery phase." Typically, recovery lasts 18 months to three years before heading into a full expansion. That means there is opportunity for continued growth and opportunity for making money in the market.
A recent article in "Kiplinger's" about tech stocks concluded with this line: "If you rode the tech wave this year, congratulations. Get ready to jump off soon." Martin agrees. Despite what the Russell index shows, technology stocks and other small companies are not the place to put your money now.
The stocks that were beaten up the most during the bear market were small, risky companies such as Internet and technology companies. As the economy begins to turn around, investors are realizing that these companies were probably devalued too much.
Now, their stock prices are rising faster than those of other companies so that the stock prices reflect the true value of the companies.
Martin believes we're not going to see much more growth from these companies. You want to invest for where the market is going to be tomorrow, he says.
Martin recommends the following for those ready to jump back into the market:
- Don't chase returns: This goes with Martin's point about not investing in small companies now. We've seen growth there lately, but we will not see continued growth. Don't look where the market has been, seek out where it's going.
- Look for dividends: Invest in large companies that pay dividends such as GE or Coca-Cola. Traditionally, these companies outperform others during an expansion, which is where the economy is headed. It's also a good idea to think of these companies as a healthier portion of your portfolio, Martin says, because they pay dividends. Thanks to new laws, which tax dividends at lower rates, expect companies to begin paying out even more dividends.
- Diversify using index funds: Diversity is always important, Martin says. While the cornerstone of your portfolio should be large company stocks, Martin says to consider investing in some mutual funds, which draw upon a variety of indexes. By putting your money in one mutual fund, you are in essence putting your money in several different companies.
- Re-invest over time: If you took a large chunk of money out of the market when prices were falling, and that money is sitting in a conservative investment vehicle, you should re-invest all of that money in the market now -- all at once. However, Martin says, if you can't convince your conservative side to make such a drastic change, divide your money into three or six equal parts and invest slowly over the course of three or six months.