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Investors tiptoeing back into the stock market

by Jim Sloan

Financial analysts say the "little guy" investors are venturing back into the stock market following a two-year absence in which many saw their 401(k) balances plummet and went scurrying to the comforts of cash and bonds.

Although the Dow Jones industrial average recently has fluctuated wildly--moving as much as 100 points as the world watched to see what kind of human and financial losses were inflicted by the tsunami in Japan--the market overall has been improving.

According to the Associated Press, the Standard & Poor's 500 index has nearly doubled since March 2009--the point at which it hit a 12-year low--and in mid-March the Dow Jones industrials broke 12,000 before slipping beneath that mark following Japan's earthquake and subsequent nuclear reactor concerns.

Investors have been heartened to see their 401(k) recover some of the value lost during the recession. They are also encouraged by increasing job security and improvements in the overall economy. Although thousands of public employees are facing potential layoffs or wage cuts, private sector workers are as secure in their jobs as they've been in 14 years, AP said. Although the Dow is still 14 percent below its all-time high, it's up more than 80 percent since the 2009 low.

Taking a second look at investments and the economy

The other factors that are making American workers re-examine their investments is the current state of interest rates. Money market rates are 1 percent or less and the best CD rates are about 1.5 percent for a two-year term. Even the best savings accounts aren't paying much more than 1 percent in interest. This makes dividend-paying blue chip stocks look like a good bet because even if the stock price doesn't climb, the dividend payout is often a good hedge against the risk.

Some analysts note that there are other signs of a recovering economy. Corporations have been hording billions of dollars in cash--money that may ultimately make its way into the stock market. Big investors who have been making money with investments in China and India are also moving billions of dollars back to stable markets in the U.S. and Europe.

While many economists see the rising stock market as a further sign that the economy is recovering, others aren't so sure. Christopher Geczy of the Wealth Management Initiative at the University of Pennsylvania's Wharton School told AP that when investors surge into the stock market or away from it, that usually means the market is about the head in the opposite direction.

Others point out that world affairs are not exactly in a tranquil state. Beyond the devastation in Japan, there has been tremendous instability in the Middle East and North Africa, and oil prices have climbed 17 percent since mid-February, according to the Los Angeles Times. The export of car parts and other products from Japan has halted and this is already having ripple effects on U.S. manufacturing.

What to ask before you switch

If you are contemplating moving some of your investments into the stock Market, the Los Angeles Times suggest you ask yourself a few questions:

  • If the market makes a correction--as it did last spring when stocks fell 16 percent--can your 401(k) absorb a 10 percent loss? If you aren't willing to accept that possibility, it may be best to remain conservative. On the other hand, if stocks climb, you miss some of the rebound.
  • Are there better investments out there for you? Tax-free municipal bonds have surged in recent months and might be worth considering now.
  • Are you diversified enough? Most 401(k) plans allow for a great deal of diversity, and spreading your money around is always a good long-term investment.

In any event, now might be a good time to review your 401(k) to see if there are investments in there that you haven't tried before but that might be worth your attention.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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