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With times as tough as they are, it's more important than ever to make the right decisions about saving and investing for your retirement. Yet many people are either avoiding stocks entirely or picking flashy, high-risk stocks that could crash and burn at any moment. Unless they change their ways soon, both groups will cause irreversible damage to their financial future.
It's no surprise that after all the problems in the financial markets over the past two years, investors still feel shellshocked about their investments right now. Looking back to late 2007, it hardly seemed possible that major stock indexes like the S&P 500 could lose well over half their value within 18 months. Regardless of warnings about the risks of owning stocks, few investors really grasped the possibility until it actually happened.
Now, it seems as though many investors have taken their toys and gone home, dumping their stocks and sticking with bonds and cash. Meanwhile, others look at the rally and wonder if they shouldn't be greedy and get while the getting is good. Unfortunately, either misstep could lead to financial disaster. The right answer is somewhere in the middle.
This one's too safe
Confronted with huge losses in the stock market during 2008, you may have asked one simple question: is anything going up? At the time, there was pretty much one answer: Treasury bonds.
In response, investors loaded up on bonds and bond mutual funds during 2009. In particular, bond funds set a record for net inflows, with nearly $400 billion moving into fixed-income funds and ETFs last year.
There's no denying that bonds give investors more certainty than stocks. With bonds, you know when and how much you'll get in interest every year and how much you'll get repaid when the bond matures. With stocks, you can never be certain you'll get anything back, let alone how much.
If you're already close to or in retirement and have more than enough money squirreled away in savings, then you might be able to afford to move most of your money into bonds. But what high-quality bonds won't do is help your money grow. So if you're like the vast majority of investors who still need at least some growth in their portfolios, bonds won't cut it. You can't afford to give up on stocks.
This one's too risky
That said, gambling on the wrong stocks isn't the right move either. But given the way things turned out last year, you may think otherwise. Those who were willing to put their entire investment at risk in bankruptcy-threatened stocks like Sirius XM Radio (Nasdaq: SIRI ) and Ford Motor (NYSE: F ) were richly rewarded, as predictions of financial armageddon didn't come to pass.
I'm not saying that all of those high-risk stocks are bad investments right now. But you won't see the same performance from them in the future, if for no other reason than that they've already seen such huge gains. For Ford to go from $1 to over $10 per share is one thing, but you can't realistically expect to see its shares at $100 anytime soon. The easy money has been made, and so those who expect to duplicate those returns year in and year out are deluding themselves.
5 stocks that are just right
That's why more conservative stocks might be the right play right now. Blue-chip companies like Procter & Gamble (NYSE: PG ) and Wal-Mart (NYSE: WMT ) , both of which held up reasonably well during the worst of the financial meltdown, have failed to keep up with the overall market in the current rally. Similarly, many steady dividend-paying stocks, like PepsiCo (NYSE: PEP ) , AT&T (NYSE: T ) , and Waste Management (NYSE: WM ) , have also lagged behind the S&P's gains over the past year -- and they also offer attractive yields to investors.
Sure, a conservative approach may not seem exciting right now. You probably won't see your stocks double or triple in the next year, as many investors saw with riskier stocks last year. But conversely, you also probably won't lose your shirt if stocks start to fall again -- and with all the uncertainty in the market right now, there's every reason to think a correction may come sooner than later.
As tough as things are right now, though, make sure to take a measured approach to investing. Don't let uncertainty scare you out of the market, but don't let a false sense of security persuaded you to take big risks that you can't really afford.
Believe it or not, ordinary investors did a lot better during the past decade than you might think. Find out how they did it -- and how you can too -- by clicking here.