Getting To The Bottom Of Things

By Sharon Epperson

Is it safe to come out yet? No one really knows, but most market gurus agree that the economy is probably near the bottom even if it isn't exactly there yet. Sure, the Federal Reserve's seventh rate cut since January did little to inspire buying on Wall Street last week, but lower interest rates will eventually have a positive effect. Don't be concerned about the timing of the turn. You should be more focused on having a strategy in place to take advantage of it.

Though the Fed voiced concern about sagging corporate profits and the slowdown in capital spending, there are some encouraging signals. The index of leading economic indicators was up for the fourth month in a row in July. The country is still essentially at full employment, and manufacturing (excluding technology) is showing signs of stabilizing. Given all that, strategists such as Steve Young of Banc of America Capital Management have confidence the economy is in the "bottoming-out process." That bodes well for U.S. equities.

"Don't expect stocks to make strong double-digit or above-average returns for the next year. We could potentially have below-average returns," says Young. For long-term investors, he thinks keeping 70% of your assets in stocks and the rest in bonds is the best approach for "balanced appreciation."

After watching the markets' slide, you may not have the stomach for picking stocks. So here's a tip from Scudder Investments chief investment strategist Bob Froehlich: Beat everyone else to large multinational companies. Froehlich says that eventually individual investors are going to feel as though they've been penalized for sitting on the sidelines in money-market accounts earning 3%. "When they feel penalized, then the first stop into the equity market is the large-cap multinational company," he says. "You don't come off the sidelines and go to some small biotech company whose name you don't even know."

Diversification is never out of fashion, so continue to seek out investments that aren't highly correlated to smooth out the inevitable bumps along the bottom. That means adding small-cap and mid-cap stocks as well.

And don't say bye-bye to bonds. As investors look forward to equities rebounding, some may be thinking about abandoning bonds. But Bill Gross, chief investment officer of Pacific Investment Management Company, says it's actually a good time to buy bonds backed by the Government National Mortgage Association, known as Ginnie Mae. They're offering yields of 6% to 6.5%. The government guarantees principal and interest on Ginnie Maes, which gives them the highest credit quality.

The economy may be close to the bottom, but it's still not the time to be taking a lot of chances. So stick with some fixed-income securities, keep a balanced mix of equities--and add a dose of patience.

Sharon Epperson is a correspondent with CNBC Business News. E-mail her at sharon.epperson@nbc.com