Dear Mike: I'm loving the speed at which the markets have been recovering, but I keep hearing opinions on whether this is a true recovery or just a bounce before another drop. What should I do?

Margery in Victoria

So far investors have seen it all in 2009.

During the first few months of the year, the economy sputtered and the financial markets struggled. But now, we're seeing signs that the recession may have ended -- and since March the stock market has surged.

As an individual investor, should you trust the recovery and the rising markets? Or should you adopt a "wait-and-see" attitude?

On one hand, some experts and institutions, including the Bank of Canada, have declared the recession over. This group is supported by the rise in the index of leading economic indicators in July -- the first advance in 11 months -- followed by a 1.1 per cent increase in August, the largest jump since April of 2002.

An upturn in this index suggests a healthy and growing economy. On the other hand, even as the economy recovers, we'll likely see some detours along the way.

Yet you may not want to let any bumps in the road deter you from investing.

If the recession is ending, it bodes well for the financial markets. In fact, the average increase in the S&P/TSX Composite Index (the primary gauge for Toronto Stock Exchange-listed companies) has been 14 per cent during the year following the end of earlier recessions.

So, although past performance can't predict future results, if you are sitting on the investment sidelines in the months ahead, you are betting against the lessons of history.

Furthermore, despite the recent rising markets, stocks are still attractively priced, based on dividend yields, a measure of stock valuations. In plain English, this means that stocks may still have some room to grow, which is good news for investors.

So, given these factors, now may be a good time to invest in quality stocks and equity mutual funds.

But what other moves should you make? Consider the following:

- Put your cash to work. With short-term interest rates low, your cash and cash equivalent investments may be earning very little for you.

While you should keep some assets in cash to help stabilize your portfolio and provide a much-needed emergency fund, you may not want too much cash on hand -- you could be robbing yourself of some growth potential you will need to help achieve your financial goals, such as a comfortable retirement. So if you have a sufficient cash cushion, consider putting any excess to work for you in long-term investments.

- Diversify. Although the environment for stocks may be favourable, we will always see price fluctuations. That's why you need to diversify your portfolio through individual bonds and bond funds.

Stock and bond prices often move in different directions, so if the stock market heads south, your bonds can help steady your portfolio. You can also benefit by diversifying within your bond holdings. For example, you could own an array of bonds that have different durations and are issued by a variety of corporations and governmental agencies.

Also, you might want to avoid owning bonds that are issued by the same companies whose stocks you own. Keep in mind that diversification, by itself, cannot guarantee profits or protect against loss. However, it can help reduce the effects of volatility on your holdings.

As an investor, you will always run into challenging times and periods of opportunity.

But if you continue investing and follow proven strategies, such as purchasing quality investments and diversifying your holdings, you can give yourself a good chance to achieve your important financial objectives.

Mike Watkins, CFP, FMA, FCSI, Ch.P.

Watkins is a financial adviser with Edward Jones and author of the financial planning guide It's Only Money. To ask a question, call 250-418-0114 or e-mail michael.watkins@edwardjones.com