Someday in the future, the stock markets and exchange traded funds (ETFs), will see a steady recovery and it would be nice to ready oneself in such a way as to benefit from it as soon as possible.

Investors have become fearful, and with good cause. The markets are unsteady and volatile, and getting back in on a rebound will no doubt be an emotional experience. But investors should be readying themselves for when the time comes to get back in, because sooner or later, it has to happen.

The best way to prepare for that elusive stock rally is to equip your portfolio accordingly, remarks Gregg Wolper for Morningstar. It is necessary to update a portfolio that has been affected by collapsing stocks, tax losses, or maybe just heavy allocations in a certain stock.

It is advised to prepare a portfolio for the long term, which in all likelihood includes a recovering stock market. We follow the trends. Wolper provides some other prudent advice on how someone can prepare his or her investments for a rebound:

  • Stocks. Yes, those things you see turning red and green on Wall Street. After a steep drop in stock values, most investors probably don’t have the allocations in stocks that they once did. Perhaps, it is time to consider if it is time to put the same allocation of money back into stocks as you had prior to the crash. We think a better way to go is ETFs, though. Why buy one stock when you could buy one ETF and get access to an entire country, sector or asset class?
  • Cash in hand? If you’re in cash, having waited for the worst to be over, be sure to have it ready to pounce when a position crosses its 200-day or 50-day moving average,
  • Sensitive investments. Small caps and emerging markets have been hit the hardest, but they were also the best performers in the years prior. If you want exposure to either market then it could be time to consider it. Many of the most kicked-around-and-dragged areas of the market tend to perform best in a recovery because they have the most room for growth and improvement.
  • Time horizon. Review your time horizon. You could very well be in a different place than you were just a few years ago. Do your plans still make sense? This is also a good time to review your risk profile, too. Do some gut checks so that you know where you stand when you’re ready to buy again.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.