As the signs grow stronger, a new bull market will take hold, propelling the blue chip indexes to record highs by late 2008 or early 2009.

Your Three-Part Action Plan for Dealing With This Tricky Transition

Make no mistake, we’re still in a grey area here. That’s why it’s vitally important to tread carefully. Here’s what I suggest investors do now:

1. Get fully invested in stocks (up to your personal limit).

Last month, I advised my Profitable Investing readers to wait for a drop in the S&P 500 to 1,310 or less before accelerating their stock purchases.

That turned out to be a good tactic, because the market fell sharply in late February and early March, holding well below 1,310 for most of the stretch from March 6 to the middle of the month.

Now that we’ve had two power days, the risk of a runaway move to the downside has diminishedmarkedly. Investors should act promptly and deliberately to wrap up your stock purchases over the next few weeks. Any daily decline of 1% or morein the S&P should spur you to do some buying.

2. Invest in mutual funds and exchange-traded funds for the immediate future.

If I’m correct that a new bull market is about to emerge (with several years of staying power) then investors have found themselves standing at that rare juncture where picking the “right” stocks is less important than just being in the market.

As in early 2003, when the stock market was in a similar position, I recommended that my Profitable Investing subscribers invest most of their new money into index funds, which cast the widest possible net.

Large-cap growth stocks have outperformed large-cap value stocks since last June, and small caps of all stripes by an even wider margin. While that leadership will eventually change, it will probably continue for at least the first six to 12 months of the next bull market.

3. Maintain adequate reserves of cash and CDs (or short-term bonds).

Balance is essential in a dangerous world. I’m an eternal optimist, but I also believe in preserving capital. Therefore, always keep enough cash on hand to protect yourself from the reckless U-turns of Mr. Market! I’m currently recommending that my Profitable Investing subscribers open an account with this Internet-based bank. It has a generous 3.87% yield, including daily compounding. Deposits of $50,000 and up earn even more. And, unlike others, it allows you to write checks against your account. You can find its name in the April issue by clicking here.

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