Investors in 2010 could be forgiven if they were tempted to bury their money in the back yard rather than invest in the stock market after the pummeling that share prices took in the previous two years.

But those who hid in that bunker missed out on a full recovery of the selloff that occurred after the collapse of Lehman Brothers in 2008 and the freefall that quickly followed.

Is it too late to jump in now? No, say wealth and estate planning experts. Do your homework (professional tutoring encouraged) and ride the rising tide of the economic recovery.

"This isn't a time to be overly defensive," says Nick Sargen, senior vice president and chief investment officer at Fort Washington Investment Advisors. "There was a lot of fear of a double-dip recession, and a lot of that fear was unfounded. The recovery slowed in the middle of last year and into fall, but part of the reason that the market is doing so well lately was the strong fourth quarter."

An already-improving economy is now forecast to move into a higher gear thanks to a very strong Christmas retail season and the legislative package of new stimulus "” especially the one-year, 2 percent reduction in payroll withholding tax and a 100 percent depreciation allowance for business equipment "” and Bush-era tax-cut extensions that President Obama signed into law in December.

As a result, Fort Washington's forecast for 2011 gross domestic product growth rose from 2-2.5 percent to 3-4 percent, Sargen says.

Optimism shared

Ellis Hummel, a vice president and investment counselor at Bahl & Gahnor Investment Counsel downtown, shares that optimism, citing the fact that 175 companies initiated or increased dividends in the first nine months of last year while only three decreased them.

It all adds up to a good time for a more aggressive investment strategy, according to Laura Raines, a senior wealth relationship advisor at First Financial Bank.

"We believe current conditions favor growth-oriented investments, such as stocks, and are less conducive to stable income investments, such as bonds," Raines says.

Sargen says the sectors to consider investing in this year include financials and natural gas, both of which performed poorly last year but appear poised for a rebound. Last year's favorite son, emerging markets, may be a sector to avoid.

"Those are looking pricey to us," Sargen says. "We see better value in domestically oriented companies because the U.S. economy is doing better than widely held."

Emerging markets

Tom Finn, Fort Washington vice president and senior portfolio manager, says emerging markets look risky because of inflation in Asia as well as a possible real estate bubble in China.

Stocks aside, "The biggest risk we see right now is terribly low interest rates," Finn says. "We've had 30 years of great bonds but now have to treat bond portfolios just like stock, and we're facing headwinds."

When interest rates rise, bond rates fall, and a growing economy makes that a likely outcome.

Finn suggests alternatives to consider, including stocks that pay dividends and Master Limited Partnerships, which are publicly traded on securities exchanges and combine the tax benefits of a limited partnership with the liquidity of publicly traded securities.

"In the short run, the economy itself is full steam ahead," Finn says. "As issues start to double up, you need to adjust allocations. It's not something set in stone. We have to be attentive to the fact that blindly rebalancing isn't the way to go."

Raines says tailoring a plan to each individual's needs is key. "We work closely with our clients to help them develop a diversified portfolio and invest in a broad variety of asset classes," she says. "We encourage them to be as diversified as possible, including stocks, bonds and alternative assets, which are often considered as a replacement to bond investments. Alternative investments include hedge commodities and global real estate."

Raines says there are opportunities in every sector of the stock market that can be captured by focusing on the fundamentals of individual companies.

Bahl & Gaynor favors dividend stocks as a good investment. "Cash is difficult to monkey around with," Hummel says. "Companies are starting to rebound and focus on dividends."

While some might consider bonds a low-risk investment, others, especially long-term investors, will be better off buying shares in well-researched companies that pay dividends.

"When you think about a safe haven, you have to consider the source of the risk," Hummel says. "When you're talking about the risk of generating income versus value on paper, if you don't intend to sell it, the value becomes almost irrelevant. We really preached throughout the downturn that the underlying value of the asset can return. We were not part of the camp saying you need to pull out of the market."

Hummel forecasts a strong year for tech companies, which are flush with cash, seeing higher revenues and stand to gain from higher business and consumer demand. Consumer discretionary companies "” hotels, auto and clothing, for example "” are poised for another good year as well.

Sectors sensitive to inflation, especially utilities, may have a more difficult year, Hummel says.

Now is also the time to begin or revise estate planning, and not just for older investors. Common pitfalls for anyone managing his or her wealth include having no estate plan, no documentation and not accounting for life insurance policies being a taxable part of estates, says Rick Krawczeski, vice president, financial planning, at Western & Southern Financial Group.

Big changes occurred in December with estate taxes and related taxation. Last year there was no estate tax. Rather than letting the tax revert to 2001 levels "” estates exceeding $1 million being taxed as high as 55 percent "” Congress passed legislation that allows the first $5 million of an estate to pass tax-free and be taxed at 35 percent above $5 million. Additionally, the estate passes tax-free to a spouse, and the couple's estate up to $10 million passes tax-free to heirs.

But a host of other changes to the generation-skipping tax, lifetime gift exemption and qualified IRA distributions to charities are also afoot, and Ohio, Kentucky and Indiana all have their own estate taxes "” and inheritance taxes for recipients in some cases. Add to that the uncertainty of what happens to all these taxes in 2013, and it's a good idea to find a professional who can help sort through the tangle.

"Let the experts help you determine the best way to create a meaningful estate plan for all the important people, organizations and causes in your life," Raines advises.

The brutal losses across virtually all sectors in 2008 and 2009 gave investors a good idea of what kind of risk they know they can or can't stomach going forward, Sargen says. "It's a good time to sit down and think through in some depth what risk tolerances you have and re-look at goals and objectives," he says.
 
 

Experts Q & A

Jeremy Moore
Vice President and Portfolio Manger
Fort Washington Wealth Management

Ellis D. Hummel, CFP
Vice President
Bahl & Gaynor Investment Counsel
Luke Wiley
First Vice President-Investments
Wiley wealth management

Q: What is the foundation of an effective investment plan?
Q: When I retire, how should I consider altering my investment approach to accommodate regular distributions from my accounts? Q: Why do you believe understanding human behavior is the most important personal skill required to be a successful investor and advisor?

There are two equally important components we emphasize. The first is to define your unique goals and to update those periodically. We develop a deep understanding of your hopes, dreams and fears of your financial future. Implicit in developing this is a thorough review of your financial condition, including balance sheet and income statement. This serves as the starting point for the second component "” effective implementation. We must be able to act on your investment plan based on the circumstances of the financial markets "” both short-term and long-term.
As an investor, you need to consider that once you retire, your assets are your sole source of spending capital, whether that spending comes from principal, income or growth on that principal. Knowing that markets can be volatile, it is essential to protect that principal from market volatility by putting in place an investment income stream that is Material, Predictable, and Growing. By maximizing your exposure to a growing dividend stream you can maintain and increase the "MPG" income generation efficiency of your assets to sustain your lifestyle and keep pace with inflation.
I attended a course at Harvard titled "Investment Decisions and Behavioral Finance: Identifying and Capitalizing on Irrational Investment Practices" to deepen my understanding of decision-making. We think that we make rational decisions, when in fact there is substantial evidence proving our emotional biases. We have a tendency to conform and follow the herd. For an investor, that can spell disaster. Investors should be aware of the potential impact of emotions and can benefit from consulting with a financial advisor.