Looking to hit retirement with a million dollars (or more) in tow? Good for you. Money can't buy you love, but it can afford you the freedom to pursue what you love. With that in mind, consider that:
- According to Standard & Poor's, the S&P 500 cranked out an annualized return of 10.5% between January 1926 and the close of last year.
- If the market delivers at that same pace over the next 20 years, $5,000 invested annually between now and then would be worth roughly $303,000 at the end of the period.
The upshot? You can still get the million-dollar job done, but you'll need to rev up your retirement engines to do so. For starters, strive to invest on a regular basis and to kick in more than the five grand I mentioned, preferably in tax-favored vehicles. If you max out your 401(k) each year -- to the tune of $15,500 in tax year 2007 -- and kick an additional $4,000 per year into a Roth IRA -- you'll be a millionaire within 19 years, if you earn the market's historical rate of return.
Speaking of which ...
History isn't destiny. It's entirely possible to beat the market over time by playing both a mean offense and a mean defense. Here's how.
Spank the market
Savvy investors can zero in on market-beating stocks when they're trading on the cheap. Just now, for example, the likes of Wal-Mart (NYSE:WMT), ConocoPhillips (NYSE:COP), and Capital One (NYSE:COF) are trading with price-to-earnings (P/E) ratios below the S&P 500's despite having left that benchmark in the proverbial dust for the 10 years that ended with 2006.
And if now seems like it might be a good time to think about buying those stocks while they're low in order to sell 'em later when they're high, consider this dynamic duo: Chipotle Mexican Grill (NYSE:CMG) and Amazon.com (NASDAQ:AMZN). Yes, their P/Es currently reside in the market's nosebleed section, but that's a reflection of their earnings-growth prospects. Each is expected to expand earnings at a clip of 20% or more over the next five years. That's also true of Apple Computer (NASDAQ:AAPL) and Yahoo! (NASDAQ:YHOO), companies with P/Es that are more reasonable than those of Chipotle and Amazon.com to boot.
Feather your nest egg
The thing is, investing in individual stocks can be risky business. Eye-popping returns are, well, eye-popping. But if Mr. Market throws one of his periodic mood swings and takes back those gains, you'll be right back where you began -- at the starting line on the road to retirement bliss.
That's why, in addition to investing in individual stocks, I think on-the-ball investors should build a solid financial foundation with mutual funds. They're not risk-free, of course, but compared with individual stocks, smartly managed mutual funds provide a veritable parachute for your portfolio when the market encounters turbulence.
To wit: Our batting average in Motley Fool Champion Funds -- the Fool mutual fund investing service I head up -- is currently .956. All but two of our recommendations are in the black, and taken together, our picks have outclassed the market by more than 10 percentage points.
The secret of our success ...
... Isn't a secret at all. We zero in on the cream of the industry's crop, funds with low costs (no loads, low expense ratios) and successful, long-tenured managers who know how to take advantage of up markets and down. I encourage you to zero in on those attributes in your own fund hunting.
If you're looking for a shortcut, you can snag our roadmap for free: A 30-day guest pass, which provides access to all of our newsletter issues and complete list of recommended funds, is yours for the clicking.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. At the time of publication, he didn't own any of the securities mentioned above. Wal-Mart is an Inside Value recommendation. Amazon.com and Yahoo! are Stock Advisor picks. You can check out the Fool's strict disclosure policy by clicking right here.
