Make money in 2010: Your investments

Make money in 2010: Your investments


After this year's monster rally, smaller gains probably lie ahead.

By Janice Revell, Money Magazine senior writer
Last Updated: November 10, 2009: 9:50 AM ET





(Money Magazine) -- With the market up more than 60% since March,
you're probably feeling a lot better about your portfolio lately than
you did a year ago. The worry for 2010: Will the runup run out of steam?Even
though stocks are still well below their 2007 peak, they can no longer
be considered cheap, with the price/earnings ratio for companies in the
Standard & Poor's 500 now nearly 20% higher than its long-term
average."In order for the market to keep delivering gains in
2010, companies need to start showing some real, sustainable earnings
growth," says Tom Forester, manager of the Forester Value Fund.The
good news is that those profits will probably materialize. Analysts
look for operating earnings for S&P 500 companies to rise 27% from
recession-battered levels, fueled primarily by improving economic
growth overseas and a further weakening of the U.S. dollar (that makes
our goods cheaper abroad and boosts exports).So even if P/E
ratios fall to historic levels, stocks still have room to move modestly
higher, says Sam Stovall, chief investment strategist at Standard &
Poor's Equity Research. How modestly? Say goodbye to double digits and
get used to returns closer to 6% annually for the foreseeable future.Over
the short-term, the path to that 6% may not be smooth, given the risks
the economy still faces. But you'll be hard-pressed to do better
elsewhere. "The easy money has already been made in the bond market
too," says Carl Kaufman, manager of the Osterweis Strategic Income
fund. Most analysts now expect low- to mid-single-digit returns for
both high-quality and "junk-rated" issues in 2010, and a skimpier 2% to
3% for Treasuries at best.Wild card: To fill the void
created by the slowdown in consumer spending, U.S. companies must rely
more on exports to fuel profits. If growth stalls overseas, corporate
earnings and stock prices here will also suffer.What to watch: Keep an eye on the yield curve. A widening gap between the yields on 10-year and two-year Treasuries signals growth in the economy and corporate profits.The action plan
Stocks:
Rebalance your portfolio -- now. Sharp market moves can quickly throw
your asset allocation out of whack. That's why back in March, with
stocks down 57% in 18 months, Money advised moving swiftly to rebalance
your portfolio to its normal stock-bond mix and maybe boosting your
stock weighting by five percentage points.Given the market's
white-hot performance since, your portfolio is likely off -kilter again
-- only this time, you probably have too little in bonds. Rebalance
again now to get back to your original mix and consider raising your
bond commitment by five to 10 points. Get there by directing all new
investments into fixed-income securities or by shifting money out of
stocks and into bonds until you're at the allocation you want.Stocks:
Favor the big guns. Also weigh shifts within the stock portion of your
portfolio to reflect changes in market conditions. For instance,
small-cap stocks with little (or no) earnings have been the big winners
in this year's rally, making blue chips look cheap by comparison."As
the recovery matures, the best performers will be high-quality
companies with lots of cash, sustainable earnings, and the clout to
take market share," says David Spika, chief investment officer of
Westwood Holdings. A good option for beefing up on big-caps: FMI Large
Cap (FMIHX) on the Money 70 list of recommended funds.Stocks:
Think globally. Next year business spending is expected to hold up
better than consumer spending, especially in overseas markets. Goldman
Sachs's chief U.S. strategist David Kostin thinks energy, technology,
and materials companies should see particularly robust growth, since
they generate at least half their revenue from foreign markets. Jensen (JENSX) and T. Rowe Price New Era (PRNEX) are Money 70 funds with big bets on these sectors.Bonds:
Stay short and focused on quality. To shield yourself from the twin
risks of default and rising rates, stick with highly rated bonds that
mature in five years or less. A smart choice: FPA New Income (FPNIX),
which has a mix of top-rated corporates and munis. And don't limit your
foreign exposure to stocks; it makes sense to be looking abroad when it
comes to some of your bondholdings as well. A solid choice: Templeton
Global Bond (TPNIX).Bonds:
Hedge against inflation. Subpar growth should keep a lid on prices next
year. But inflation could reignite quickly after that, given the big
money the government is pumping into the economy. Treasury
Inflation-Protected Securities, which adjust your principal to keep up
with rising prices, protect you against this threat. Buy them via a
fund like iShares Barclays TIPS Bond (TIP).Make money in 2010: The economy

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Make money in 2010: Your home First Published: November 9, 2009: 12:32 PM ET



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