How To Cash In On the Economic Recovery

It’s time for gunshy consumers to start taking more risks.

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A year ago, the economic recovery turned out to be a false dawn. This time, however, it's looking like things could keep getting brighter.

The economy has been adding jobs for 17 months in a row, with the pace of hiring accelerating so far this year. Layoffs are abating, the stock market is rising and Europe seems to be patching up its financial problems. There are countervailing trends, to be sure, such as continued gloom in the housing market and incoherent policymaking in Washington. But with every passing month, the damage from a painful downturn heals.

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Consumers are slowly growing more confident, but many remain gunshy after a shocking loss of household wealth and premature declarations of a recovery in 2010 and 2011. "People aren't acting in a way that's congruent with an improving economic climate," says Mark Luschini, chief investment strategist for Janney Montgomery Scott. "We're acting as if things are bad and likely to get worse."

It's hard to fault consumers for an enduring bunker mentality. Seismic shifts in the economy are making it harder to get ahead, and more wrenching change may be on the way. But playing it safe can be risky, too, especially if the economy is in a sustained phase of expansion. Missing out on opportunities can be just as punishing as getting blindsided by a recession, with people comfortable taking modest risks vaulting ahead of those armored against every gloomy scenario.

Shocks could still occur, but economists and investing professionals increasingly think that the worst is behind. If you agree, here are a few ways to make sure you're poised to cash in on the recovery:

Be more aggressive in your investing. Since the stock market bottomed out in 2009, it's been on a historic tear, with stock values more than doubling over the last three years. But that's been amidst a tepid recovery, one reason stocks could still have more room to run. Investment bank UBS, for instance, recently predicted that the S&P 500 index will end the year at 1475, which would be 7.5 percent higher than it is now.

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Many small investors, however, have pulled their money out of stocks, fearful of another freefall like the one that occurred in 2008 and 2009. It may finally be time to overcome such fears. "If you really want to be ahead of the curve, get out of cash," advises economist Jeffrey Rosen of Briefing Research. "If the economy rebounds, equity prices will go up and profits will go up." As bullish sentiment begins to spread, that alone could boost stock prices, since a lot of money that's sitting on the sidelines would flood into the market, raising demand for stocks.

Luschini advises his clients to abide by the traditional rules of prudent investing: Get into stocks only if you've got a time horizon of five years or longer, buy high-quality shares that pay dividends, and focus on market sectors that have strong growth potential. But he also urges investors to view any recent losses as sunk costs, and to reassure themselves by taking a historical perspective. "We've had oil embargoes, world wars, assassinations," he points out. "The stock market has always found its legs and moved higher."

Stop waiting to buy real estate. Home affordability is the best on record, thanks to falling prices and the Federal Reserve's aggressive efforts to push interest rates down. Yet home sales are tepid, with many buyers spooked by the turmoil of the last five years. That mismatch may represent one of the best buying opportunities of modern times.

Clearly, some people who want to buy a home can't get financing. But others are simply waiting it out, worried that prices may fall further. That makes sense, but a housing bottom isn't going to announce itself in real time. It will only be apparent after the fact, and there are many reasons to believe we may be very close to the bottom right now.

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Average home prices have already fallen by more than 30 percent. An improving job market will increase demand for housing, while easing the type of financial pressure that leads to foreclosures. The formation of new households, which is usually a constant when the population is growing, has essentially stalled for four years. "We should see the end of the downturn in housing by end of the year, if not the beginning of next year," says Rosen. "If you're risk-averse today, you're going to be kicking yourself down the road."

Buyers trying to time the bottom and buy at the lowest possible price may be focusing on pennies while missing the big picture. If interest rates go up, for instance, that could negate a few thousand dollars you might save on the purchase price of a home. And for anybody buying a house for the right reason—to live in for several years, if not decades—it will make little difference in the future if you buy near the bottom or at the bottom.

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Reinvigorate your career. For the last few years, a lot of workers have focused mainly on holding onto their jobs, while putting aside plans to try something entrepreneurial or bust a risky career move. But it might be time to dust off your dreams and think big once again.

Data from the Labor Dept. shows that more people are quitting their jobs, a sign that workers are becoming more confident about new opportunities and finding better work. Executive recruiter Susan Goldberg of New York says that anybody who's been in the same job for three years or longer without gaining any new responsibility ought to start freshening their skills and looking for ways to move up, or move out. A few years ago, needless to say, nobody was hiring. But lately, more opportunities have opened up, and some workers who leave their firms are even startled to get a counteroffer inducing them to stay.

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It may also be a safer time for people disenchanted with corporate life to take a chance on an upstart firm. "There's not as much stability in big firms as there used to be," says Goldberg. "Small companies can be more adaptable and more flexible, and make people feel like they're valued more." Now there's a quaint idea: A company that cherishes its workers. If that catches on, good times truly will have returned.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success, to be published in May. Follow him on Twitter: @rickjnewman