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
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.
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.
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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.