As a professional money manager, I get to spend my days studying the economy at large, the market in general, and company stocks in particular. I am often asked, “What is the future of the market? Should I invest now? If so, where should I invest?” These are good, important questions I will put a framework around so that each reader can answer these questions for their own particular circumstances. Put differently, my goal here is as much to teach you how to fish in the proverbial stock market waters as it is to point to the fish to be caught.

First, what does the stock market future hold? Ask a weatherman if it will be raining in 5 minutes and he will be able to give you an accurate prediction. Ask him about 5 days and the forecast becomes 50/50 at best. Five month predictions are all but useless. The same applies for the stock market, however the time frame is flipped on its head. What will the stock market do in the near term; the coming hours, days or weeks? No one knows (except for after the fact, when commentators will talk about how ‘obvious’ it was that the market was due for a correction, for example). If someone tells you with seeming certainty that they can foresee near term stock movements, then I have only one word of advice for you: run.

Over the medium to long-term, however, as is definitely not the case for weather, stock market movements become much more predictable. Knowing where the markethas been over the last 5 – 10 years, and how expensive the market is today (as defined by the price/earnings, or P/E ratio), will allow you to really refine your prediction. And the proper answer to the question “what does the future of the stock market hold” is actually counter-intuitive, or at least counter-emotional. After the market has run up a lot, investor confidence increases, and future stock return expectations rise. The opposite occurs after large drops. In effect, investors extrapolate from recent history and assume the future will be the same. In fact, the reverse tends to be true, namely after long periods of above average returns (think the 1990s) when P/E ratios are high, the next three to seven year return period tends to be below average.

So what does that mean for today’s investors? Despite the recent run-up from what can be characterized as panic lows in March of 2009, the market is still nearly a third below its late 2007 highs, and trading about where it was ten years ago - much lower after inflation is factored in. Further, from a P/E standpoint the market is priced quiet reasonably. To put this important point in perspective, at the market peak in 2000 the S&P 500 had a P/E ratio of about 40 versus around 15 today. The net result is that the next ten year period is likely to offer far better returns than the last ten year period where most market participants saw flat portfolios from point A to point B, even though there were wild swings up and down in the interim.

So, if now is a good time to invest for those with an appropriate time frame of three years or longer (remember, regardless of how attractive the market may seem, if you are in need of funds within three years then you should consider having money in short-term instruments like savings accounts, CD’s and money market funds – not the stock market which is subject to near-term fluctuations), where should you be investing your money? Diversification is key for the average investor. It is very difficult to pick, let alone properly monitor, individual stocks unless you do it for a living. Thus a starting point is a good, low cost mutual fund or better yet an ETF (Exchange Traded Fund) that has broad exposure to the US markets.

The S&P 500 is a good place to look for exposure to the recovering US economy. Companies within this index tend to be larger, well established, and financially sound. What about international investing? To be sure, having some money invested abroad is a good way to diversify your portfolio and take advantage of growth around the world. Large US companies these days, unlike decades past, often get half or more of their revenues and profits from outside the US, so even if you only invest in large US based companies you will still take advantage of international growth. That said, having as much as one-third of your portfolio in a well diversified international index fund is a sound approach to portfolio management. If you have the time and expertise to dive deeper into particular sectors, geographical regions, asset classes (e.g. commodities), etc, then there are myriad opportunities and vehicles available to take advantage of perceived investment prospects.

In summary, the worse the times seem, the better off you are investing if your goal is to make money from stocks in the coming years. Look at the time frame of later 2008/early 2009 when there was talk of the next Great Depression. With stock prices hitting generational lows, this was a great time to put money to work. Compare this to the end of the 1990s when it seemed like the US economy and businesses could do no wrong. This turned out to be a terrible time to be putting money into the stock market. Bottom line: listen to your gut, and then do the opposite.