Five early investment ideas for 2010

By Jonathan Burton, MarketWatch

Last Update: 12:01 AM ET Oct 26, 2009

SAN FRANCISCO (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 regret lost opportunity, 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 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, 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, chief investment strategist at Oppenheimer Asset Management Inc., wrote in an early October research report. 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-stock index (SPX). Dividends add safety and pad total return.

Dividend-focused exchange-traded funds include SPDR S&P Dividend (SDY), iShares Dow Jones Select Dividend Index (DVY), Vanguard Dividend Appreciation (VIG) and the Dow Diamonds (DIA).

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

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

For consumer stocks, he favors retailers Target Corp. (TGT), Tiffany & Co. (TIF) and Staples Inc. (SPLS). In industrials and technology, his picks include 3M Co. (MMM), General Electric Co. (GE), Google Inc. (GOOG), Apple Inc. (AAPL) and Hewlett-Packard Co. (HPQ) In the basic-materials sector, he uses an ETF, Materials Select Sector SPDR (XLB). An ETF trades on an exchange like a stock.

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

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 America 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.-based 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.

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

Morningstar's favorite international funds, meanwhile, include Vanguard Total International Stock Index Fund (VGTSX), Scout International Fund (UMBWX) and Masters' Select International Fund (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 Corp. (XOM) and Brazil's Petrobras (PZE), Hodges favors drilling-related firms including top holding Transocean Ltd. (RIG) and Helmerich & Payne Inc. (HP). He's also bullish about natural gas and has stakes in producers Chesapeake Energy Corp. (CHK) and Comstock Resources Inc. (CRK)

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

4. Gold