basic-investing2

Beginner Investing part 2--
choose investments that match your goals
The information offered here is general and may not fit your personal situation. Check with a trusted financial
professional if you have questions, or to set up your own plan.

Successful investing rests partly on selecting the right "wardrobe" of funds to match
your occasion or goal. Here, we'll learn how to focus on picking investments that
correspond with your goals, and get some diversification into the mix. After all, we don't
want to wear the same outfit to all the different functions in our lives, do we?

Ready to start? Here's a financial planning truism you should know. "Risk is related
to time and temperament." This means, the risk you can take is related to the time you
have until you need your money, and your tolerance for loss. See this good example of a
timeline at Vanguard.com

Short time frames (under several years) until you need the money require low-risk
savings that focus on preservation of capital. Use bank savings and money market
accounts, Certificates of Deposit (CDs), money market mutual funds, Treasury bills or
notes, and short term bond funds. For emergency funds, focus on savings that you can
reach fast. This is called "liquidity."

Mid term time goals (4-8 years) can accept a little more risk in the pursuit of some
growth. You have time to recover from losses so you can try to get that money working
harder to earn more. Investments suited for mid term range include short to intermediate
bond mutual funds, Ginnie Mae (GNMA) bond funds, CDs, Treasury notes and short term
Treasury bonds, and mutual funds that focus on dividend income from stocks.

Long term goals (9+ years) have even more time to recover from possible losses, so that
money can be invested with more risk (see examples below) and have more opportunity to
really grow. Read more about the risk-reward relationship here. This is an important
concept for investors to understand.

If you haven't yet read Part 1 of Beginner Investing, read that next. It's all about
laying the necessary foundations so you can build a strong portfolio. You'll see the
importance of a "comfort-cash" account and reducing debt. You'll also find out why your
first real investment should be in a qualified employer plan. Once you've covered those
bases, you're ready to move to the next level.

The next level of long term investing should go into an IRA (Individual Retirement
Account). If you've already invested enough in your employer retirement plan to get the
matching funds, or you have no employer plan, IRAs can be a "girl's best friend."

An IRA is like a colorful shopping or gift bag. Uncle Sam has made rules about what,
when, and how much you can put into those IRA bags. He also dictates some rules about
when you can take those funds out and use them. In return for following the rules, you defer
or save money on taxes, which grows your IRA investment faster.

Go to our IRA page to see who qualifies. Generally, any one who has earned income from a
job can put money into an IRA, although there are various income levels for deductible
Traditional IRAs and Roth IRAs. You can contribute to a personal IRA even if you have a
SIMPLE IRA or employer plan at work, although a few restrictions may apply. For 2010,
you can put in up to $5,000 and an extra $1,000 if you're over age 50.

How should your fill your IRA bag? Long-term investments (9 plus years before you plan
to use them) should be mostly invested for growth. If that seems scary, just remember the
first place we steered you to was a comfort-cash account for safe savings. Knowing you're
covered for emergencies, hardship times and short term needs should allow you to put your
long-term investments to work. You might also feel better by taking a risk tolerance quiz on
this page to find out how much risk you're comfortable with.

Stock-based investments are still one of the best ways to get growth over time, and
no-load mutual funds or Exchange Traded Funds (ETFs) provide diversification, which
lowers risk somewhat. All your nest eggs are not with one company, but are spread out
with dozens or hundreds of companies. We recommend investing with mutual funds rather
than individual stocks if you're a beginner investor. Trying to buy a handful of individual
stocks is much more risky and requires more constant vigilance than buying a mutual fund.

Need an investment that's a wardrobe basic? Choose the equivalent of the little black
dress (or favorite jeans) with target-date funds. They are also known as life-cycle or
all-in-one mutual funds. They can be a cornerstone of any long-term investing plan and even
serve as your only retirement investment for many years. The fund manager diversifies
stock and bond holdings to match the needs for your age group, getting more conservative
as you get closer to retirement. Check here for some companies that sell target-date funds.

If you prefer to mix and match your own investment wardrobe, look at index funds.
These low-fee mutual funds follow an index such as the S&P 500, Russel 2000 or one of
many other indexes. You can assemble a basket of index funds that includes stocks as
well as bonds. (You can also choose actively managed mutual funds that you screen at
Morningstar.com. We'll cover more on that at a different time.)

If you're under age 35, you should probably aim for around 90% of retirement money to be
invested for growth through broad stock mutual funds or Exchange Traded Funds (ETFs),
including a small portion in international stock funds. Lower the overall stock percentage as
you get older, so that by age 60 you've got 50-60% invested in stock funds and the rest in
bond funds, money market cash, or alternative investments. (Again, target-date funds
adjust the holdings for you automatically.)

Some alternative investments include Real Estate Investment Trusts (REITS), precious
metals mutual funds, commodities, and collectibles. Not all of these can be held inside a
retirement account.

In summary, remember that "risk is related to time and temperament." Choose
investments that reflect your goals and the time period you have. Know your tolerance for
risk or loss. And for easy diversification, consider target-date funds for your long term
investing.
Robin Applegarth