With the investing world as volatile as it's been over the past couple of years, plenty of investors have basically called it a day and walked away from the battle. Unless you're independently wealthy, though, that's not a viable option -- and even worse, you could be missing out on some of the best opportunities you've ever had to invest successfully.
Hunting for the top
The stock market's roller-coaster ride since 2007's record highs has unnerved even the most experienced investors. After suffering the worst losses in a generation in 2008, stocks have seen a rally that has brought risk-seeking bottom-hunters some huge profits. Stocks like Las Vegas Sands (NYSE: LVS ) and Ford (NYSE: F ) , once given up for dead, have proven themselves to their naysayers. And they've paid off for investors who took a gamble on their questionable prospects this time last year.
Now it's a whole new ballgame. Stocks are still well below those record highs, but they certainly aren't nearly as cheap as they were a year ago. As a result, investors are being more cautious, increasingly convincing themselves that a major correction must be imminent. Yet at least so far, that big drop hasn't come, and those on the sidelines are seeing even greater profits slip away from them. The overall market could easily keep rising indefinitely, putting even more pressure on those who are sitting in cash.
To take advantage of the current situation, you need to act quickly. Here are three of the most important things to look at right now.
1. Go global
If there's a lesson we learned from the financial crisis, it's that the entire world's financial system is interconnected. Although the initial tremors of trouble may have started within the U.S., it didn't take long for problem areas like Iceland and Greece to emerge. We could easily see more troubles arise in different parts of the world as the global economy recovers.
Just as the U.S. presented investors with bargain opportunities last year, so too can you find cheap foreign stocks right now. But you have to be willing to look beyond the hottest markets. Emerging-market stocks like Baidu (Nasdaq: BIDU ) and Vale (NYSE: VALE ) have been on a tear in the past year, so it's hard to argue that they're cheaply valued right now. But as fear ripples through Europe, you might look to stocks like GlaxoSmithKline (NYSE: GSK ) and France Telecom (NYSE: FTE ) , which still trade at reasonable prices. They still have significant European exposure, so you want to make sure to do your own due diligence -- but cheap stocks are a great place to start.
2. Put tax deferral on your side
Unfortunately, it looks like the IRS is on the prowl. A return to the higher-tax environment of the late 1990s, along with new taxes linked to provisions like the new health-care law, mean that your tax bills could see a big rise in the coming years.
With the tax man coming, it's more important than ever to get money into retirement accounts like IRAs and 401(k)s. Not only do retirement accounts let you shelter some of your money from taxation, but they also provide a number of additional benefits, ranging from protection against creditors to the ease of having money automatically deducted from your paycheck to go toward investments. And with options like the Roth IRA now open to nearly everyone, you have some thinking to do. Don't hesitate!
3. Be smart about risk
No one wants to make a dumb investment. But just because something looks safe doesn't mean it's right for you. For instance, many have found bonds attractive lately because they can help protect your principal. With rates apt to move higher in the future, however, buying bonds might be exactly the wrong move right now.
Conversely, owning stocks might seem risky after the big rally we've seen, and you might feel inclined to stick with the bluest of blue chips in your stock portfolio. But over the long haul, that's not your best move. Small stocks like Medifast (NYSE: MED ) have the greatest potential for future growth, and they've historically earned better returns than their larger counterparts for those willing to take on the added risk.
Get smart before it's too late
Waiting for the other shoe to drop on a fragile recovery may seem like a smart move. But with the opportunities that are available to investors right now, you really can't afford to wait. If you take the plunge now, you'll likely find yourself rewarded in the long run.
What's behind the financial collapse? Award-winning Fool columnist Morgan Housel looks at what former Fed chairman Alan Greenspan has to say.