5 early investing ideas for 2010

By MarketWatch

Stocks have been sailing swiftly this year, but many investors missed the boat by clinging to defensive positions set in the depths of the downturn.

Rather than spending it regretting lost opportunity, though, now is the time to make sure your portfolio is ready for 2010. That will likely mean putting money in places that already have enjoyed tremendous returns. Sure, many experts caution that the global economy is anemic at best and that top-performing markets have come too far, too fast. Maybe these sprinters are due for a breather, but you can't ignore them.

"Don't be afraid of a weak recovery; that's not going to be a shock to anyone," said Alec Young, an equity market strategist at Standard & Poor's. "Don't be afraid of a weak consumer. Things that everyone's talking about don't move markets."

Here are five places to consider putting your money now to set you up for a happy new year:

1. Large cap U.S. stocks

Talk about a wall of worry. As stocks headed up, individual investors got out. In the five weeks through Oct. 16 alone, investors pulled $15 billion from U.S.- and international-stock mutual funds -- and pumped almost $60 billion into less-risky bond funds.

Investors are "missing the forest for the trees," Brian Belski, the chief investment strategist at Oppenheimer Asset Management, wrote in a research report in early October. While stocks' potential returns "compared to earlier this year will not be as violently positive over the intermediate term, they remain positive."

In the coming year, look to shares of large cap U.S. companies with global reach and market leadership. Ideally, choose value-style stocks that offer a dividend greater than the roughly 2% yield on the Standard & Poor's 500 Index ($INX). Dividends add safety and pad total return.

Dividend-focused exchange-traded funds include SPDR S&P Dividend (SDY, news, msgs), iShares Dow Jones Select Dividend Index (DVY, news, msgs), Vanguard Dividend Appreciation (VIG, news, msgs) and Dow Diamonds Trust (DIA, news, msgs). ETFs are similar to mutual funds but trade like stocks.

Mutual funds with a dividend bent include T. Rowe Price Equity Income (PRFDX) and Vanguard Dividend Growth (VDIGX), both of which are rated Analyst Picks by investment researcher Morningstar.

Money manager Hugh Johnson of Johnson Illington Advisors in Albany, N.Y., recommends four key sectors.

For consumer stocks, he favors retailers Target (TGT, news, msgs), Tiffany (TIF, news, msgs) and Staples (SPLS, news, msgs). In industrials and technology, his picks include 3M (MMM, news, msgs), General Electric (GE, news, msgs), Google (GOOG, news, msgs), Apple (AAPL, news, msgs) and Hewlett-Packard (HPQ, news, msgs). In the basic-materials sector, he uses an ETF, Materials Select Sector SPDR (XLB, news, msgs).

ETFs covering the consumer sector to consider include Consumer Discretionary Select Sector SPDR (XLY, news, msgs) and Vanguard Consumer Discretionary (VCR, news, msgs). In industrials, research iShares S&P Global Industrials (EXI, news, msgs) and Vanguard Industrials (VIS, news, msgs). And two technology-sector ETFs are worth noting: Technology Select Sector SPDR (XLK, news, msgs) and Vanguard Information Technology (VGT, news, msgs).

Said Johnson: "We've moved past the easy-money stage of the bull market into a more challenging stage. Buy stocks where investors believe that prospects are improving and those are stocks that are beating the S&P 500."

2. International stocks

Both developed and emerging international markets have rebounded even faster than the U.S. Latin American funds, for example, are up more than 100% on average so far this year.

Multinational companies in the S&P 500 offer plenty of international exposure, but foreign-market ETFs and mutual funds provide important global diversification. And lately U.S. investors have enjoyed a big boost from the weak U.S. dollar, which is worth more when overseas returns are translated into U.S. currency.

Paul Nolte, director of investments at Hinsdale Associates in Hinsdale, Ill., keeps more than half of his clients' portfolios invested outside of the U.S. "Opportunities are still better internationally," he said.

Video: Can emerging markets roll on?

Nolte uses two ETFs: iShares MSCI EAFE Index (EFA, news, msgs) and iShares MSCI Emerging Markets Index (EEM, news, msgs).

Morningstar's favorite international funds, meanwhile, include Vanguard Total International Stock Index (VGTSX), Scout International (UMBWX) and Masters' Select International (MSILX).

3. Energy stocks

"Long term, energy looks fantastic," said Craig Hodges, co-manager of Hodges Fund (HDPMX). "We still haven't solved our problems from two summers ago when oil spiked to the $150 (per barrel) level. The next stop from here is probably $100."

A weak dollar and higher oil prices benefit big U.S. stocks with foreign sales and exposure to commodities. In addition to oil giants Exxon Mobil (XOM, news, msgs) and Brazil's Petrobras (PBR, news, msgs), Hodges favors drilling-related firms, including top holding Transocean (RIG, news, msgs) and Helmerich & Payne (HP, news, msgs). He's also bullish about natural gas and has stakes in producers Chesapeake Energy (CHK, news, msgs) and Comstock Resources (CRK, news, msgs).

Said Hodges: "The future for those industries for the next few years looks pretty good."

4. Gold

The dollar's weakness is driving much of the surge in gold prices. Gold also is a hedge against inflation and a good portfolio diversifier.

"Based on our expectation for increased production and a further rise in the gold price for 2010, we look for another increase in sales and earnings for the group," said Leo Larkin, an S&P equity analyst.

S&P recommends several funds with substantial stakes in gold miners and producers: Franklin Gold & Precious Metals (FKRCX), First Eagle Gold (FEGIX), Tocqueville Gold (TGLDX) and Oppenheimer Gold & Special Minerals (OPGSX).

Money manager Tom Lydon of Global Trends Investments in Newport Beach, Calif., uses an ETF, SPDR Gold Shares (GLD, news, msgs). Another option: iShares Comex Gold Trust (IAU, news, msgs). Lydon is beefing up exposure to commodities in general, to 10% of model portfolios. "This is the new normal," he said.

5. Capital-preservation funds

Volatility in stocks and bonds is low right now, and market foundations are stronger. If that changes, however, you'd do well to have some money in mutual funds whose managers aim to provide returns while preserving their shareholders' principal.

Kurt Brouwer, a financial adviser with Brouwer & Janachowski in Tiburon, Calif., recommends several capital-preservation-minded offerings: Hussman Strategic Total Return Fund (HSTRX) and sibling Hussman Strategic Growth (HSGFX), Leuthold Core Investment (LCORX) and Permanent Portfolio (PRPFX).

"These are funds that really do look at valuations and are concerned about buying the right asset at the right price," he said.

Morningstar's favorite go-anywhere vehicles include FPA Crescent (FPACX), Hussman Strategic Growth and Gateway (GATEX).

Such funds make sense "for someone who is skittish about the risk of the market," said Dan Culloton, a Morningstar associate director of fund analysis. He noted that these portfolios have managers who are adamant about protecting gains and are "extremely risk-conscious."

This article was reported by Jonathan Burton for MarketWatch.