Recs

12

You're Missing This Key to Wealth

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

What's the key to building a secure future?

I'd say there are several keys. "Spend less than you earn" is probably the biggest one, followed by "save at least a little bit every time you get paid."

But nowadays, it's pretty easy to have both of those covered: If you contribute to your 401(k) or 403(b) at work, and you're careful with credit cards, you're probably in good shape on those fronts.

It's the next one -- "invest wisely" -- that trips up a lot of folks, even folks who are good at picking great stocks.

Fortunately, that's not too hard to fix.

Stay with me, this is important
A lot of folks I've talked to approach retirement investing like this: They put their workplace savings into a couple of big-name index funds, and then hold a few stocks they know and like in their IRA.

That's not the worst thing in the world. The index funds give them some diversification, and the individual stocks give them a chance to beat the market. If they've chosen well, they'll do OK over time.

But even though they're "diversified," thanks to the hundreds of stocks in those index funds, they're not always effectively diversified. If you were to sit down and plot their portfolios on one of those Morningstar "style" maps, you'd see a strong bias toward large-cap stocks most of the time.

There's nothing wrong with large-caps, except...
The reason for that is pretty simple: index funds? Most are full of large caps, especially the S&P 500 index funds that are mainstays in typical retirement plans. The big-name stocks most people know and like? They're large caps as well.

Now there's nothing wrong with investing in large caps. One of the largest of them all, Apple (Nasdaq: AAPL  ) , just posted an incredible quarter that set all kinds of records, thanks to its innovative and wildly popular products and almost cult following among consumers. And a company I follow closely for the Fool, Ford (NYSE: F  ) , is wrapping up a turnaround that will be taught in business schools for the next hundred years -- and with its lean cost structure and top-notch product portfolio, it's poised for further profit growth as the world's economies improve.

You could do a lot worse than to hold either of those stocks in coming years. But to really be diversified, to get effective asset allocation that will give your portfolio the best chance of profiting in all market conditions, you need some small caps too.

Many investors are wary of small caps, the stocks of small companies, because they tend to be volatile -- and for a lot of these companies, good information can be hard to come by. But good small-cap stocks can be a great addition to your retirement portfolio -- if you approach them wisely.

The non-scary way to approach small caps
In the new issue of the Fool's Rule Your Retirement, available online at 4 p.m. EST today, Fool analysts and advisors serve up a complete how-to guide to buying small caps for your retirement portfolio -- sensibly.

As Foolish analyst Rich Greifner points out, investing in small caps doesn't have to be a risky proposition, as long as you know how to find companies with the right qualities.

For instance, Movado Group (NYSE: MOV  ) is a well-run maker of watches sold under several strong brands. Not just the trademark Movado "museum watches" you've seen advertised on TV, but watches in price brackets from mass-market to the mid-range Movados to the higher-end Ebel and Concord brands. Watch-making might sound like a dead-end business in an era when lots of people just seem to look at their iPhones instead, but it's not: As folks in emerging markets (read: China) have become wealthier, demand for Western-style luxuries (like fine watches) has boomed. The takeaway: a solid company with a great growth opportunity at a reasonable price.

Or take Winnebago Industries (NYSE: WGO  ) -- yeah, that Winnebago! It's a brand everybody knows, the standard-bearer of a profitable little industry. So what? Look a little closer, and you'll find a company with a debt-free balance sheet, steady (and extremely knowledgeable) veteran managers, great products -- and a stock that has been beaten up by the credit crunch and high gas prices. The takeway: a beaten-up stock, but a good solid company -- a turnaround opportunity.

Or National Presto (NYSE: NPK  ) , an unusual mini-conglomerate with three very different lines of business: military ammunition, value-based home appliances (including the "Fry Daddy" line), and -- yes, I'm serious -- diapers. Laugh it up, but National Presto is run well (by a CEO who owns a big chunk of the company) and it has paid shareholders a fat special dividend every year for the last five. The takeway: an overlooked performer with good steady profits.

Note that none of these are high-tech companies. While many of us associate "small caps" with "high-tech," fast-growing tech firms are often operating in business niches that are hard for folks who aren't experts to evaluate. They also tend to be super-volatile, and not necessarily in profitable ways. The lesson here is that you can get small-cap exposure (and small-cap profits) with well-run businesses that are relatively easy to understand.

Want more lessons on small-cap investing -- and a guide to the best small-cap mutual funds, so that you can add some exposure to your 401(k) too? It's all ready and waiting for you -- check out the new issue of Rule Your Retirement for the full scoop.

Not a subscriber? Not a problem! You can get full access to all of this month's great content, including a whole bunch of small-cap recommendations, with a no-hassle 30-day free trial. There's absolutely no obligation to subscribe, and signup takes just seconds -- click here to get started now.

Fool contributor John Rosevear owns shares of Apple and Ford, but he holds no other position in any company mentioned. The Motley Fool owns shares of Ford, Apple, Movado, National Presto, and Winnebago. Motley Fool newsletter services have recommended buying shares of Ford and Apple, as well as creating a synthetic long position in Ford and a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1771867, ~/Articles/ArticleHandler.aspx, 9/16/2014 9:45:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Rosevear
TMFMarlowe

John Rosevear is the senior auto specialist for Fool.com. John has been writing about the auto business and investing for over 20 years, and for The Motley Fool since 2007.

Today's Market

updated 29 minutes ago Sponsored by:
DOW 17,131.97 100.83 0.59%
S&P 500 1,998.98 14.85 0.75%
NASD 4,552.76 33.86 0.75%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/16/2014 4:00 PM
AAPL $100.86 Down -0.77 -0.76%
Apple CAPS Rating: ****
F $16.52 Up +0.05 +0.30%
Ford CAPS Rating: ****
MOV $35.90 Down -0.40 -1.10%
Movado Group CAPS Rating: ***
NPK $63.54 Up +0.13 +0.21%
National Presto In… CAPS Rating: ****
WGO $25.18 Up +0.58 +2.36%
Winnebago Industri… CAPS Rating: ***

Advertisement