Should You Give Up on Stocks Forever?

If you've sat out the bear market on the sidelines, you must feel like a genius by now.

As someone who still owns a fair number of stocks in my portfolio, I can only imagine what it must be like to watch all the bad news about the economy and the stock market without having to worry about what impact it's having on your own personal portfolio. It must be nice.

Still, despite the huge amount of cash that those who sat through bad times have preserved over the past year and a half, most of them want to know when stocks will stop falling just as much as any of us.

You still need stocks
It's obvious why those who still own stocks want to see the recovery begin -- they want their money back. But if you don't own shares right now, why does it matter what the stock market does? Your money's safe, so why worry about stocks at all? Why not just give up on them forever?

Here's why: No matter where you have your money invested right now, your primary concern is how to reach your financial goals. And unfortunately, even if you've dodged a bullet by staying out of stocks during 2008 and 2009, you're still probably not on track to cross the finish line simply by keeping your cash in a money market account or investing in low-yielding Treasury bonds.

Consider a simple example. In late 2007, two families had $200,000 saved for their retirement 20 years from now. They're each shooting to reach $1 million in 2029. One of them kept their money mostly in stocks, which lost half their value in the bear market. The other foresaw the crash and moved everything to cash.

Now, the first family's portfolio is only worth $100,000, meaning that they'll have to earn about a 12.2% average annual return on their investment. It's pretty clear that they're counting on a recovery in stocks, as safer investments won't get them close to the return they need.

On the other hand, the second family still has $200,000. They won't have to earn as high a return, but at 8.4%, they'll still have trouble getting there without getting back into stocks at some point.

Take your profits
So once you've decided that you can't give up on stocks forever, you have to decide when to get back in. That's the toughest thing about market timing. You have two decisions to make: one when you sell, and the other when you buy back in again. If you've been in cash for a while, you got the first one right -- and by getting back in now, you can lock in your savings and assure yourself of achieving the buy low-sell high event of a lifetime. Wait, and you risk missing out if the market rebounds.

But that doesn't mean you should just throw all your money into whatever stocks happen to catch your eye. The lucky decision you've made could have a big impact on your investing decisions going forward. Specifically:

• Stay out of high-risk stocks. Using the previous example, someone who only needs to average an 8% return doesn't need to take the same risks as someone who's trying to earn 12%. If you'd prefer to keep your results a bit less bumpy, you don't have to deal with the higher volatility of small growth plays like FLIR Systems (NASDAQ:FLIR) or Cameron International (NYSE:CAM). Or alternatively, you can make volatile investments but keep a cash cushion to soften the blow of any future declines.
  
  
• Look for great values. In contrast, now's a great time to take some shots at some relatively safe companies that have been unfairly beaten down recently. Here are just some of the many stocks that sport attractive valuations and healthy corporate investment returns, and could be poised for a rebound:

Source: Yahoo! Finance and Capital IQ, a division of Standard & Poor's. ttm = trailing 12-month.

So if you've survived the bear market unscathed, give yourself a pat on the back -- and then start thinking about the future. You have an unparalleled opportunity that few have right now. Take advantage of it.

For more on making the right investment moves now:

• Stocks to get you through the next Great Depression.
• Maximize your profits from the stimulus bill.
• This is why Warren Buffett is buying stocks.