April 05, 2007

Diversification in Investing

Today’s topic is about investing and how simple it can be for you. I strongly recommend people under the age of 40 invest money on their own. At the very least, they need to take advantage of any retirement savings through their company.

The easiest way to invest is through Mutual Funds. I recommend no-load mutual funds and low expense funds as well (no commissions, no sales fees, and less than 1% management fee (even lower for straight index funds).

I recommend for the average person to keep the following allocation:

  • 50% Large Cap
  • 20% Small Cap
  • 20% International
  • 10% Real Estate Investment Trusts (REIT)

This will create a well-diversified portfolio, which should compete rather nicely with the market while minimize the risk to any one segment of the market. I started using this strategy in 2002 and have matched or beat the market as measured by the DOW and S&P 500 each year.

You can easily open an account with a mutual fund company and have your money invested into funds according to the allocation above.

Several good companies to invest with are:
T. Rowe Price
ING Direct

A simple way to start would be to take $1,000 and invest $250 in each type of fund mentioned above. Then add a set amount each month (say $100) according to your allocation. Each company has its own minimum investment requirements so you will need to observe those restrictions.

Once a year adjust your holdings so they are close to the desired allocations. You can do this all at once, by selling those holdings which have risen above your desired allocation and purchasing those holdings which are below your desired allocation. What I do, however, is simply adjust my future allocations by putting more money toward those holdings which are below my desired allocation level.

The complaint I hear most often is, “I don’t have $100 a month to invest!” Most people do, they just don’t realize it. Get rid of the $50 a month cell phone bill that you don’t really need and replace it with a tracfone. Then get rid of the $50 a month cable bill and get a subscription to an interesting magazine and join a library. Two slight changes to your lifestyle will get you that $100 a month.

Finally, you need to remember that this plan will probably not make you rich beyond your wildest dreams. It is a simple way to provide a retirement income for yourself.

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