Handcrawler Forum

So,

You have some money sitting around, and you don't really know what to do with it.  This guide focuses on passive investing - primarily in mutual funds.

This article will attempt to cover the basics in the most simple way possible.  Further discussion can go into more detail, but I just want to get the general best practices across to everyone.

What is a Mutual Fund?
Think of a mutual fund as a collection of stocks, bonds, and other securities.  It is managed by a "fund manager" who trades on your behalf.

Rules of choosing a good mutual fund:

No-load Index Funds
- these funds track a general market (S&P, Russell 2000, etc). 
- they carry no extra fees for the fund manager
- low expense ratios - most of these are in the 0.15% - 0.3% range.  "Loaded" funds can be as high as 1-2%.

Diversification

I like to think about funds in three divisions:  domestic vs international, large cap vs small cap, and growth vs. value funds

Domestic - US based stocks
International - Funds like total international funds, emerging market funds, etc

Large Cap - These funds contain large corporations.  Risk is less, but growth is typically smaller
Small Cap - These funds contain small corporations, carry higher risk, but growth is better

Growth funds - These funds are typically higher risk, aggressive growth type funds
Value funds - These funds look more for a bargain using indicators like PE (price vs earnings, etc)

So, how should you distribute this into your portfolio?

General Advice:

1.  If you are younger (most of you are), you should take the highest risk and go for the most return.  That means opting for more small cap funds than large cap funds.  Historically small caps have returned around 2% higher annual returns than large caps.

2.  I prefer to focus on the value funds rather than the growth funds.

3.  Diversify domestic and international funds to reduce risk.

4.  Any money you don't invest should be kept in a high-interest bearing savings account or money market account ( like HSBC, GMAC, or others ).  Interest rates on these vary between 3-5% depending on market conditions.

5.  Money should be invested in this order:  401k up to matching, ROTH IRA, the rest of your 401k, then regular mutual fund accounts.  See the next sticky for explanations on 401k's and IRA's.

How should you diversify your portfolio?

This depends on how heavy you want to be in international funds, but a good mix might look something like this:

40% domestic small-cap value index funds
10% domestic large-cap value index funds
40% international value funds
10% international emerging-market funds

This is obviously simplified, and you can certainly add in some bond funds, RE funds, and other things to diversify.

How do I get started?

It's a LOT easier than you think.  I suggest finding someone you'll want to stay with for a while, and keeping most of your investments with one company, because it makes end-of-year tax accounting much simpler.

The big names are Vanguard and Fidelity, but there are other good options out there as well.
For many people with large incomes though, it sometimes makes sense to get a financial planner.

This is perfectly acceptable, and as you get older they can help you plan your investments around life decisions.  Just be sure to insist on no-load index type funds and you'll be fine.

You can talk to an adviser / financial planner for free advice here: http://www.handcrawler.com/financial.php.  Just let them know your plans, and see if they are a right fit for you.