You're Missing This Key to Wealth

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 (NAS: 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 (NYS: 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 (NYS: 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 (NYS: 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 (NYS: 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.

At the time thisarticle was published 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 serviceshave 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 servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.