Investment Strategies For Young Investors

Added June 19, 2006 by Ilyce R. Glink

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Summary: Investing your money into a 401(k) is a great first step. But you also have to decide an investment strategy and know what your money is going into. Then you should monitor your investments and rebalance them as needed.

Q: How aggressive should I be with the cash I invest my 401k? Right now, I put in 6 percent each month (I only get paid once per month) and my employer matches 4 percent for a total of 10 percent of my income each month.

I am not very aggressive right now because I don't fully understand all of the terms involved with different funds. I think this is hurting my performance.

For example, during the first month of this year, my account earned $1.58. I am 30 years old and I would like to start planning now for my future as well as my two small children. What is your advice?

A: Congratulations on doing such a great job saving for your future. If you keep putting away 10 percent of your income each year, you should have a nice amount of cash when you retire.

How should you invest these funds? The answer to your question depends on how old you are and how much risk you can take on and still sleep at night.

At 30 years old, you should be fully invested in the stock market, with a nicely diversified portfolio of mutual funds. Divide your dollars between a big-cap (large companies with huge market capitalization) fund, a small cap fund (with smaller companies that tend to grow faster) and an international fund. Later on, if you have the option, you might add a real estate fund. Check out all of the mutual fund options you have at www.Morningstar.com.

This kind of diversification will help you achieve the best results possible. But given that the stock market has been so volatile, it's possible that you'll see a loss rather than a gain month-to-month. Once or twice a year, you can evaluate how your mutual funds have done against others that hold comparable stocks. You can then shift around any new money you put into your 401(k) in a process called "rebalancing."

The idea is to find the perfect blend of mutual funds that will help keep you fully invested over the next 30 to 40 years, but will not keep you awake wondering if you're doing the right thing.

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