Please ensure Javascript is enabled for purposes of website accessibility

This Way Forward

By Shannon Zimmerman - Updated Nov 11, 2016 at 4:51PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How to jump back into this volatile market.

If history is any guide, the stock market will turn up well in advance of the overall economy. If that pattern holds this time around, investors who show up to the party early -- around now, say -- stand to be nicely rewarded relative to folks who wait on the sidelines for the recession to wind down.

After all, a highly touted academic study has shown that virtually all of the market's gains occur during just roughly 1% of its trading days. You can't win it if you're not in it.

The million-dollar question
That intriguing stat, however, merely begs the question: If you have decided to take the plunge into the stock market to weather what may be left of this storm, where's the best place for your moola now?

On that front, I've written early and often about the virtues of companies that generate ample sums of free cash flow (FCF), and one truism that's actually true is that the market's biggest, high-quality firms tend to be the ones that crank out the fattest stacks of cash.

Blue-chip titans Wal-Mart (NYSE:WMT), Procter & Gamble (NYSE:PG), and Johnson & Johnson (NYSE:JNJ) have generated billions of FCF over the course of many years; household names such as AT&T (NYSE:T), Coca-Cola (NYSE:KO), Chevron (NYSE:CVX), and IBM (NYSE:IBM) have done likewise. Not coincidentally, they've delivered market-besting returns over the long haul, too, with all of the aforementioned surpassing the S&P 500's mark for the trailing 10 years.

Bottom line: If you're looking to dive back into the market's waters, making a splash with these cash cows is a smart move.

Mix it up
That said, I also think savvy investors will want to construct a calibrated portfolio mix, one that provides judicious exposure to the market's various cap ranges and its valuation spectrum as well. After all, if you want to smooth your ride to retirement bliss, doing so with a diversified portfolio is another smart play.

To be sure, ferreting out small- and mid-cap worthies isn't quite as easy as sifting among the big boys for cold, hard cash machines. They're there for the taking, though, provided that you know where -- and how -- to look. For my money, in addition to plenty of FCF, smaller firms should boast grade-A management teams who have shown a clear knack for delivering the profitability goods as gauged by such metrics as return on equity (ROE) and return on assets (ROA). Healthy levels of insider ownership are critical, too, since that indicates management's interests are closely aligned with those of their shareholders.

These measures are useful gauges for larger firms, too, of course, but they're especially important for the market's smaller fish, which are riskier propositions than its blue-chip big boys. 

Bottom line: Foolish types will want to put smaller prospects through their paces before taking the plunge.

Not coincidentally
That's precisely what we've done at Ready-Made Millionaire, the Fool service designed with busy investors in mind. Our compact lineup features a slug of carefully vetted, world-class mutual funds, a high-octane ETF and a clutch of stocks whose average market cap is less than $5 billion. Each company has a solid FCF track record and a winning profitability profile as well. We've taken our lumps out of the gates, but that means just one thing: Our lineup is an even better bargain than it was when we launched last July.

RMM will open to new members in just a few short weeks. Click here to find out more about the service, and we'll serve up an immediately downloadable copy of The 11-Minute Millionaire, a special report that provides the inside scoop on our service and the three things you need to know before investing another dime in this market.

Shannon Zimmerman doesn't own any of the securities mentioned above. Wal-Mart and Coca-Cola are Motley Fool Inside Value choices. Johnson & Johnson is an Income Investor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$132.22 (1.85%) $2.40
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.27 (1.27%) $0.23
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$134.01 (1.11%) $1.47
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$63.70 (0.76%) $0.48
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$159.85 (0.14%) $0.23
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$165.30 (-1.10%) $-1.84
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$146.67 (0.97%) $1.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.