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If you think the economy is on the mend, put some money where your mind is: This time next year, you might be happy you did.

As I said in the video above, while certainly not out of the woods, our economy is definitely showing signs that it’s on the mend.

And that’s not just my opinion. Here’s an excerpt from the Federal Reserve’s survey of economic conditions, published last week…

Reports from the twelve Federal Reserve Districts suggest that economic activity continued to expand moderately from November through December. Conditions were said to be improving in the Boston, New York, Philadelphia, and Richmond Districts. Activity increased modestly to moderately in the Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and Dallas Districts. The economy of the Minneapolis District “continued its moderate recovery,” while that of the San Francisco District “firmed further” in the reporting period leading up to the close of 2010. Conditions were generally said to be better in Districts’ manufacturing, retail, and nonfinancial services sectors than in financial services or real estate.

So according to the Fed, our economy is improving. They also said in the same report that hiring is picking up, retailers are doing better, factories are increasing production, and the fear of a double-dip recession was decreasing among businesses. There are still some troublesome parts of our economy, however, particularly employment and housing.

If you picture our economy as a the face of a clock, with 12 marking the top and 6 the bottom, the hour hand now is probably at about 9: well-past bust and on the way, ever so slowly, to boom.  Which means it’s time for some investments and time to avoid others.

Where should you put your savings now?

Before we explore the options, let’s be clear about the money we’re talking about – long-term savings that you absolutely, positively won’t be needing for at least five years.  If you’ll need your money before that, you’ll need to keep it safe, which means in an insured bank account.

Also not available for investment elsewhere: money you’re putting away in your retirement plan at work. You’re getting a tax break for those contributions, and you might even be getting a match – the only truly free money you’ll ever be offered. So we never fool with that either, although we may make decisions about how to invest that money based on the economic cycle as well.

Stocks

Now that the warnings are out of the way, one proper investment for this part of the economic cycle is the stock market. Why? Because as the economy improves, companies make more money, and those increased profits typically show up as higher stock prices.

While this is a decent place in the economic cycle to consider stocks, it isn’t the perfect place. That was when the economic cycle was at it’s scariest: in 2008, at the depths of the recession. Back then, the stock market was half of what it is today.

To see what would have happened had you invested near the bottom of the economic cycle, just take a look at my personal stock portfolio.

But we can’t go back in time and buy – are stocks still a buy today? Yes. But rather than buy individual stocks like I do, you might want to go for something simpler, like Vanguard’s S&P 500 Index fund or ETF. These will give you the market’s overall return without the hassle or risk of picking individual stocks.

And remember my rule of thumb for investing in risky stuff – take your age from 100. That’s the percentage you might consider for your long-term savings. So if you’re 30, up to 70 percent. But if you’re 70 – no more than 30 percent.  Because the last thing you need is to be too heavily invested, then get freaked out during a pullback – and trust me, we’ll have some.

Real estate

I’m not going to write much about why I think real estate is a good idea because I already have several times – for example, see Why You Should Buy Stocks and Houses Now. The bottom line is that because the housing market is so horrible, not enough houses are being built to satisfy the need. That could ultimately lead to a shortage, which in turn could lead to higher prices. But I’m talking years, not months.

If you’ve never owned a house, now’s a good time to take the leap – provided you have the time and money to do it right, and you live in a growing area. Ditto if you already own a house and have considered rental property.

The right investment any time

Paying down debt is a great investment in any economic environment. As I said in my news story, paying off a 15 percent debt is like earning 15 percent with no risk and tax free. My advice: a mortgage? Sure. But I’d pay off every other debt I had before I invested in any stocks, bonds, or anything else.

There you have it – three investment ideas to consider for this part of the economic cycle. But there are also investments you should avoid. I’ll talk about those in my next post.

Stacy Johnson

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