One million dollars is still a lot of money. If you handle it well, it's enough to let you retire right now to a modest lifestyle. Or, if you still have a couple of decades of work left in you, it's one heck of a foundation on which to build some serious wealth.
However, $1 million is not enough to let you get away with throwing your money away on bad investments. For your money to either last you the rest of your life, or grow into a spectacular nest egg, you need to shepherd it carefully and invest it well. In essence, you'd need to treat $1 million the same way you'd want to treat the first $10,000 you ever invested.
Spread your risk intelligently
A critical part of protecting your money is to properly diversify your investments. That doesn't mean buying everything willy-nilly. That sort of diworsification guarantees you mediocre long-run results, since you'll be buying obviously troubled companies along with your successes. Instead, it means buying companies with great long-run prospects across a variety of industries.
For instance, Intel (Nasdaq: INTC ) and Advanced Micro Devices (NYSE: AMD ) compete with each other in the microprocessor business. Intel completely dominates that industry -- to the point where Europe has fined it under antitrust rules, and AMD hasn't posted a full year's profit since 2006. While AMD may recover, Intel is obviously the stronger of the two.
The "buy everything" philosophy of diversification would have you own both companies. But that would simply tie up more of your limited capital without getting you any real long-run diversification benefits. Buying strong companies across industries, however, would enable you to put some money in Intel, and other money in a company like Wal-Mart Stores (NYSE: WMT ) -- also the undisputed leader in its unrelated industry. That's a much better way to diversify.
Pay attention to valuation
That said, just because a company happens to dominate its industry doesn't make it an automatic buy. A decade ago, information technology and computer networking were riding high, thanks to a combination of Y2K spending and wide-scale adoption of the Internet. Cisco Systems (Nasdaq: CSCO ) and Sun Microsystems (Nasdaq: JAVA ) were among the must-have stocks of the era. Unfortunately, that must-have status blinded investors to their sky-high prices.
Cisco now trades at around a third of where it once did, and Sun is facing an expected takeover from Oracle (Nasdaq: ORCL ) at a small fraction of its all-time high. While the technologies Cisco and Sun created were absolutely disruptive, and both companies were clear leaders in what they did, their stocks were priced based on impossibly high growth levels.
That their stock prices were high was obvious for anyone paying attention during the bubble. But the market as a whole didn't awaken to that fact until after Y2K spending wound down and the two companies' growth began stalling out. As an investor, understanding that a company's price can get out of whack with its true value is a critical part of protecting your own financial well-being. After all, even a great company can be a bad investment, if you pay too much for your shares.
Have it both ways
When you find a leading company trading at a decent valuation, you've found a potential investment worth investigating. Take food-service distribution giant SYSCO (NYSE: SYY ) , for instance. The largest company in its industry, it nonetheless trades at a reasonable 15 times trailing and 14 times expected forward earnings.
Thanks to the strength afforded to it by its leadership position, SYSCO has done a heck of a job riding out this economic storm. Thanks to its decent valuation, it's worth owning as part of an intelligently diversified portfolio. In fact, the advisors at Motley Fool Million Dollar Portfolio think so highly of SYSCO that they've invested the Fool's own money in its stock, after they made it a recommendation for their members.
Invest like a millionaire
You see, at Million Dollar Portfolio, there's real money on the line behind every pick the service makes, invested out of $1 million of seed capital from the Fool's own pocket. Having real cash involved helps to ensure that MDP those critical principles of buying leading companies across multiple industries at reasonable valuations.
The same principles that serve the Fool's money well can also benefit the cash you plan to invest. If you're interested in learning more about the service and how it invests, just enter your email address in the box below. There's no obligation.