In the gritty world of bull riding, bone-crushing injuries are part of the game. As rodeo legend Jim Shoulders famously said, "You can't stop something like an injury from hurting, but you can damn well not let it bother you."
Bull riders have reduced this hardened philosophy to, simply, "Cowboy up." In other words: Suck it up, get back in the saddle, and go after that two-ton beast again.
While investing might not break your bones (if it does, you really need to be more careful), the pain you feel from the losers in your portfolio is no less real. Just ask shareholders of Great Wolf Resorts
The market's twists and turns might make you feel as if you're in a rodeo of your own. The spills you take may even make you hesitant to get back in the saddle again and invest that hard-earned cash. But stock investing need not be as dangerous as a bucking bronc, and stuffing your greenbacks in the mattress is not the surest way to wealth creation.
The 2% solution: Invest in small caps
Small-cap stocks -- those with a market valuation of less than $2 billion -- should have a place in your portfolio. According to an Ibbotson Associates study done a few years back, small companies have outperformed large caps by an average of 2% a year since 1926. While two percentage points might not seem like much, over time it can substantially boost your returns. Investing $1,000 at 8% interest would yield $46,900 at the end of 50 years. At 10% that same starting sum would be $117,390. And the differences are more dramatic for longer periods of time or larger amounts of money.
Fool co-founder Tom Gardner recommends two small-cap stocks every month in his Motley Fool Hidden Gems newsletter advisory service. Using some 70 criteria to sift through the vast universe of companies, Tom has been able to ride tall in the saddle by selecting companies such as CNS
Diversity is the spice of life
By investing in small-cap stocks, and by adding to the mix a component that can juice your returns, you're also adding diversity. Small caps and large caps tend to move in opposite cycles, with corporate behemoths at one end of the cycle. The largest of the large companies tend to outperform without much in the way of volatility. At the other end of the cycle are the smallest companies, and spotting a few small-cap winners can turbocharge your portfolio. Including both in your portfolio stabilizes your returns and can jolt your performance.
There are no longer any true "widows and orphans" stocks. AT&T
Consistency has potency
Earmarking a few dollars every month for investing is one definitive method for building your retirement nest egg. But consistency is key. I realize that not everyone has an extra $500 lying around every month. Even if it's just $50, it's important that you save every month. How much you're saving isn't as important as whether or not you actually are saving.
Obviously, the more you can put away, the better. But just as in a real rodeo, you can't start riding the biggest bulls until you've ridden some of the smaller ones. Regular investments in the common stock of high-quality companies -- even if it's a company you already own -- is a winning strategy. Confounding the experts, Tom has recommended Buffalo Wild Wings
Knowledge is power
Every now and then, you'll get thrown from the saddle. Keep in mind that no one has a perfect record, not even investing masters such as Warren Buffett or Peter Lynch. Tom's certainly had a clunker or two. Talk America
One way to reduce your risks is to hunger for knowledge. Abandoning your reliance on tip sheets, rumors, or the corner hustler's "hot stock" will save you far more money than you'll lose on one or two stocks of your own choosing that go awry.
Want to add some small-cap spice to your portfolio? Every month, Hidden Gems recommends two stocks and imparts investing lessons that you can apply on your own. Hidden Gems recommendations are up 37% on average, vs. about 12% for the S&P 500. If you're interested, Tom is offering a30-day free trial. There's no obligation to subscribe and, as always, the Fool's money-back guarantee stands behind the offer.Click hereto learn more.