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No. 1 Reason You Should Stay Invested in Stocks

Stocks in this article: CMI UNP

(Adds today's rise in the S&P 500.)

NEW YORK ( TheStreet) -- The stock market's erratic moves this year haven't been for the faint at heart. Still, investors shouldn't be so concerned.

Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, says stock-price volatility for traders is different than it is for the average American. Traders take a short-term view because they live and breathe by daily moves in the market. Investors like us are in it for the long haul and are less affected.

But we've all been spooked by record volatility this year. After seesawing stocks gave us anxiety all year, the benchmark S&P 500 Index is little changed for 2011. And now a study by Paulsen shows that long-term investor risk is in-line with levels seen throughout the post-war era, suggesting we should stay in equities instead of moving to perceived safe havens such as bonds and cash.

Many investors with long horizons may be "mistakenly" lowering their exposure to riskier assets, such as stocks, due to elevated short-term volatility, Paulsen says.

The frequency and depth of market moves have increased over the past year. At this point, it's probably expected by traders. News on the European debt crisis, and U.S. economics and politics have been quick to move markets in a big way. Wednesday of last week was a good example: Stocks were up nearly 500 points on a successful Italian bond offering and eurozone progress on a bailout plan.

Lack of confidence by traders and investors is producing severe market volatility. When the European debt debacle is resolved and unemployment falls in the U.S., investors will have faith that companies will make money and volatility will diminish. As a result, stocks should rise.

Paulson recommends investors remain diversified by stock sector and asset class in this environment. He currently suggests investing in emerging markets, which will benefit from lower borrowing costs over the next year. In the U.S., he likes manufacturing stocks that are undervalued. Manufacturing and car sales have been better than expected.

Stocks to consider are industrial manufacturer Cummins (CMI) and railroad company Union Pacific (UNP).

The S&P 500 today rose more than 1%, extending last week's 7.4% gain. The benchmark index is now up 0.5% for the year.

-- Written by Lindsey Bell in New York.

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