3 Strategies for Superior Returns

Dr. Jeremy Siegel of the Wharton School of the University of Pennsylvania has demonstrated that the stock market is the best long-term grower of wealth -- better than cash, bonds, or even gold, no matter what kind of volatility, bubbles, and crashes we endure along the way.

And that means you need to be in it. Always. Even when we're looking at the possibility of unprecedented lows.

Take advantage of it -- don't be ruled by it
Many people were surprised by the size of the drop last fall and winter, and many others have been surprised by the surge since March. If you were one of the 17 people who managed to perfectly time the drop and the bottom, congratulations. You can stop reading now.

However, if you are like the rest of us, and you wish to take advantage of the market, whether you're in today or not -- and especially if it drops anywhere near the 300s -- here are three strategies to improve your success at wealth-building.

1. Invest with an eye to the long term. Nobody can predict what the market will do in the next year or two, but over the long term, the stock prices of well-managed, steadily operating companies such as Johnson & Johnson (NYSE: JNJ) tend to rise as their performance grows. In other words, as Warren Buffett's mentor Benjamin Graham once said, in the short run the market is a voting machine, but in the long run, it's a weighing one.
2. Move slowly as you enter a position. Since none of us can time the market, entering a position in thirds helps smooth out the inevitable volatility. If you want to invest $3,000 in one position, for example, invest only $1,000 at a time, waiting for other, better opportunities before adding more. This way, if it drops 25% in a week, you can buy more at a better price. On the flip side, if it jumps 25% in a week, you'll already have a stake.
3. Stay within your circle of competence. Peter Lynch counseled, "Buy what you know." If you don't understand how a company makes money and what risks it faces, you probably shouldn't be invested in it. Buffett famously avoided technology stocks in the late 1990s, as the tech-fueled dot-com bubble was powered by the likes of Cisco Systems (Nasdaq: CSCO). He endured a lot of criticism, but when that bubble burst, he was the one who avoided getting bitten.