Invest all of your money right away? Surely that can't be the best approach to building a portfolio... can it? Would it be better to wait until just the right moment, and then jump into the market?
These can be confusing questions for investors to answer, especially if you're just getting started. Read below and I'll share different approaches for how to approach your investment strategies. At the end, I'll reveal the five companies that are the cornerstone of my retirement portfolio, as well as provide access to a report on three companies that will help you retire rich.
Why we invest for retirement
Planning and saving for retirement is one of the most often abused fiscal duties by Americans. According to recent studies, two-thirds of us have less than $50,000 saved up for our twilight years. That's not good news when we'll likely need well over $1 million to cover retirement expenses. Many investors can help bridge this gap by investing their money wisely.
If you've been able to meet the maximum contribution of $5,000 per year for your Roth IRA, congratulations! But that's just the first step -- now you've got to figure out where to put it, and how to get it there.
The Absolutist -- All at once!
In the April edition of Money magazine, a reader wrote in to ask: "Should I put all of the money I have to invest in the market now, or add it gradually?" The short answer given by the magazine might surprise you: "Chances are you'll earn more by getting into the market as quickly as possible."
Though it flies in the face of dollar-cost averaging, there's some real sense to this strategy. Historically, the market has always gone up. The longer you wait to put your money in, the more you have to lose. But, as the magazine points out, there's another problem with easing in to the market.
By deciding, say, to slowly invest your money in stocks and bonds over the course of a year, you're actually being far too conservative. If you eased your way into a 60/40 split between stocks and bonds, most of your money during the year would be in cash -- just sitting there.
Source: Money research. Assumes 12 equal investments of capital; excludes investment returns.
The Relativist -- Trying to take the market's temperature.
Many people refer to the aughts as the "Lost Decade," with the S&P 500 index falling by almost 25% between the beginning of 2000 and the end of 2009. The main culprit: ridiculously high-priced stocks surrounding the technology bubble at the beginning of the decade.
If, instead of piling into the market in 2000, you'd hung on to your money and waited until the March 2009 market lows -- and then invested it all -- you'd have doubled your money! The problem with this routine is that it involves timing the market, something that most investors are absolutely terrible at.
Market timing aside, several professionals think there are fairly reliable market indicators, like Robert Shiller's cyclically adjusted price-to-earnings ratio. As I've shown before, this metric would say that today, stocks are overvalued by almost 40%.
According to this theory, you'd be better off just sitting on your money for now.
The Fool -- Know thyself.
So how does the successful investor navigate these two truths? Surely, the market has always gone up. But at the same time, history is clear: Investing when valuations are high will kill your returns.
For most investors, taking a position somewhere between the Absolutist and the Relativist is the wisest approach. Your goal should be the ability to take these two fact-based philosophies into account, and weigh them against what you -- personally -- are comfortable doing. It usually takes some trial and error, but eventually, you can settle into a routine that will be both comforting and market-beating.
My own philosophy
After a few years of getting to know myself, I tend toward the Absolutist view -- investing what I have available in my highest conviction pick at any given time. Knowing that, here are the five companies I have the highest conviction in. Click on the links in the "Why Such Conviction?" column to get a further write-up on each company.
These are the stocks that I -- personally -- believe will be dominating for years to come. But don't take my word for it. Check out our latest special free report: "3 Stocks That Will Help You Retire Rich." I'll give you a clue and tell you that one of them is already mentioned above. But to find out which one, you'll have to get your copy of the report, absolutely free!