It's certainly starting to feel like things are getting better out there in the U.S. economy. Job creation has picked up in recent months, and more of the long-term unemployed are slowly trickling back into the workforce.
Of course, the fact that the stock market is up almost 10% year-to-date has also had a positive effect on investors' psyches. And while initial signs are indicating that investors are finally moving back into stocks and stock-oriented mutual funds after hiding out in bonds and cash for the past several years, it may be a little too late for these folks to capitalize on the 100% return opportunity that they missed while sitting on the sidelines.
Staying in the game
If you're a stock investor, you're probably always on the lookout for the next multibagger. You may pass over those less-exciting companies that generate small but consistent returns each year in favor of the superstar stock that will double, triple, or quadruple your money in short order. And while you can certainly leave plenty of room in your portfolio to pursue these red-hot opportunities, if you pass up the steady, unexciting investments, you're missing out on a lot.
That investment I mentioned earlier with the 100% gain? That would be the plain old S&P 500 index, measured from the bottom of the bear market in March 2009. Doubling your money in three years? I think that's a proposition a lot of investors could get behind.
While buy-and-hold investing certainly hasn't gotten a lot of love in recent years, it still represents one of the best ways to profit from long-term market growth -- assuming you have the discipline to actually stick with your investments during the inevitable downturns. Fidelity Investments ran some numbers and found that the S&P 500 posted an average annual return of 8% in price appreciation alone (not including dividends) in the 30-year period that ended last June. However, investors who tried to time the market and missed just the five best trading days within that time span had an average return of just 6.4%. Those unlucky folks who missed the 20 best days had a mere 3.7% showing. So investing in the broad stock market can be a winning proposition over the long run, but you need to stay invested to reap those benefits.
Vehicles to get you there
While mutual fund inflows are signaling that investors are finally dipping more than their toes back into the stock market, not everyone is gung-ho about putting their money at risk if another recession or market rout materializes. If you're one of these skittish types, there's one investment that I would recommend for getting back into the game: inexpensive exchange-traded funds. These funds will give you broad exposure to various segments of the market at a low price -- that will keep risk low and fees to a minimum, two factors that should calm the mind of any reluctant investor.
For the broadest exposure to the domestic U.S. stock market, consider a wide-ranging fund like Vanguard Total Stock Market ETF (NYSE: VTI) or the Schwab U.S. Broad Market ETF (NYSE: SCHB), which come with annual expenses of 0.07% and 0.06%, respectively, and offer exposure to U.S. stocks of all sizes. For a global mandate that includes exposure to both domestic and foreign stocks, Vanguard Total World Stock ETF (NYSE: VT) is a complete one-stop shop with a reasonable 0.22% price tag.
Looking a little more narrowly, if you want to home in on some of the more attractively priced areas of the market, consider a fund that invests in high-quality, dividend-yielding large-cap stocks. Two of the better options in this space are Vanguard Dividend Appreciation ETF (NYSE: VIG) and the SPDR S&P Dividend ETF (NYSE: SDY).
P/Es on large-cap stocks are significantly discounted compared to those of smaller companies, so it makes sense to focus on the corner of the market with more appreciation potential. And why not get a little income with your investments by looking to dividend payers? The bottom line is, there are many quick, cheap, and low-risk ways for you to get back in the game before another fantastic return opportunity passes you by.
What to do now
Of course, odds are pretty good that investors who get back into the market now won't see their money double again three years from now. That's the benefit that comes from staying in the market even during the darkest days. But looking ahead, stocks are very likely to outperform bonds in the next few years, so you don't want to be sitting on the sidelines. And if the economy continues to improve, there could be even more room for equities to appreciate. So if you've been an equity onlooker in recent years, get ready to start flexing those investing muscles once again.
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