3 Best Ways to Invest for Retirement

Every investor works toward being in a position to leave the workforce and live with financial security. That leaves time to volunteer, pursue hobbies, or travel without the stress and worry related to financial responsibilities. 

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There are any number of investing strategies to pursue that goal, and some will only add to people’s stress levels as they play out. Here is a three-pronged approach that can help you achieve your financial goals while limiting the anxiety along the way. 

Build a foundation

Owning a diverse group of foundational stocks is key to long-term investing success. Those should be companies that have established and successfully growing businesses. Think names like Amazon (NASDAQ: AMZN), Apple, or Microsoft in the technology sector, as well as popular names in other sectors like Johnson & Johnson, Proctor & Gamble, or Home Depot

Another way to obtain that type of diverse mix is owning a conglomerate like Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), or using an exchange-traded fund (ETF) or mutual fund. Index tracking funds can match the risk level of the overall market, or an investor can seek additional capital appreciation with a mutual fund like Fidelity’s Contrafund. That more than 50-year-old fund has been run by Will Danoff since 1990 and has far outpaced the S&P 500 index in that time by holding many well-known large-cap growth stocks, including some mentioned above. 

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Chart showing Fidelity Contrafund’s total return beating the S&P 500’s since the mid-1990s.

FCNTX Total Return Level data by YCharts

While all investments should be routinely monitored, these well-established foundational stocks can allow an investor to participate in long-term gains without the work of constant oversight. But they don’t provide exposure to the entire market, and there are other areas that should be included in a diverse portfolio. 

Starting small

Small-cap stocks are defined as companies with market caps between about $300 million and $2 billion. By investing in companies of that size, investors can have a foot in the door of what one hopes will become a much larger business. But not every small company will become big, and there are added risks with small-cap investing

Yet small-cap stocks should play a role in a future-focused portfolio — and so should other types of stocks. Real estate investment trusts (REITs), for example, offer exposure to that important sector and provide income that can be reinvested or used for expenses later in life. If investors aren’t inclined to follow smaller companies or niche real estate stocks, ETFs or mutual funds can also be used to add this diversity.

Speculate a little

Of course, investors hope a small-cap stock becomes a large one over time. That takes making some risky bets. No one knew if Amazon would be successful, and it was still a small-cap stock in 1998 more than a year after it went public. Buying it at that time would have been considered speculation. 

That speculation paid off spectacularly, as have early investments in Tesla (which was close to bankruptcy at one point, according to CEO Elon Musk). Risky bets should play a role when investing for retirement — with proper allocation. 

That means ramifications from a total loss of capital should be considered before making that investment. But even a small allocation could be all that is needed for meaningful gains if those businesses succeed over the long term. 

A diverse mix of foundational stocks, higher-risk small-caps and REITs, and a small allocation to speculative bets can set an investor up with a well-rounded portfolio. One doesn’t have to swing for the fences with every stock pick by any means. While that mix can still provide a meaningful nest egg, its balance can help investors reduce anxiety during market downturns. It’s most important to stay in the market for the long term, and lowering stress levels can help achieve that underlying goal. 


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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Howard Smith has positions in Amazon.com, Apple, Berkshire Hathaway, Home Depot, Johnson & Johnson, Microsoft, Contrafund, and Tesla. The Motley Fool has positions in and recommends Amazon.com, Apple, Berkshire Hathaway, Home Depot, Microsoft, and Tesla. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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