In my last article, I discussed starting my portfolio, and a strategy for allocating assets efficiently while keeping the number of accounts and fees manageable. As I stated in that article I think it’s very important for those of us who want to eventually become more involved with individual stock investing to have only a small portion of our funds in a brokerage account. Because we’re very inexperienced, risking too much of our portfolio with individual stocks can leave us open to a lot of unnecessary risk. That’s why I advocate starting simply by learning the basics then building a foundation of a few stock and bond mutual funds, before allocating more to individual stocks.

This strategy may not be exciting, but to paraphrase Ben Graham, author of The Intelligent Investor, true investing should be boring. By learning the basics we can understand the full range of investments available and how to maximize their returns. We can then invest in relatively safe but consistently well-performing mutual funds. Not only do mutual funds provide instant diversification, but they also give us focus as we continue to learn about more advanced investing topics. As I will mention again, we have a lot to worry about when we’re just starting out. There’s no need to add risky investments to that list before we’re ready.


First, Get the Basics
There’s a lot to learn when we’re just starting out. Even seemingly simple things such as terminology and market basics can become overwhelming. In my view, before we can successfully invest in stocks, we really have to invest in and fully understand all the less risky investments. By learning the basics first, when the next bear market occurs or a sector takes a nose dive, we’ll be able to understand what we have to fall back on as we regroup. Additionally, it is important to diversify our portfolios to counterweight our domestic stock investments. Although this may reduce overall performance, it also allows for greater consistency each year and reduced likelihood of real asset loss (3% growth or less) — especially as we’re just starting out.

I think of this critical beginning stage of investing like when we begin a new diet or workout routine. We’re very motivated to get started, and we want to see results right away. So we starve ourselves and workout 3 hours a day, and after a month we’re so tired and burned out that we fall off the bandwagon. We forget that we need to first get ourselves into healthy habits such as dedicating 4 hours a week to exercise, and eating smaller portions of food, before we really can kick into full gear. Just like a car’s engine, accelerating slower always leads to a longer healthier life.

So before we invest in mutual funds we have to get the basics. I’m getting my basics from a number of books and web sites right now. Here’s a list of the best materials I’ve found…

Second, Create a Plan
Few wars were ever won without a strategy and few investors will get rich without one either. Creating a plan as to how we want to allocate our assets will help guide us throughout the years, and keep us focused on our goals. Just getting started, though, we don’t have a lot of money to throw around and fully diversify. Being smart about what our long term goals are and our investment horizon will help with that. As a younger investor, I’m looking at a mix of index funds and highly rated but more risky funds with greater overall performance. Don’t worry if your plan is very simple, we’re just starting out. A simple strategy is best for a simple portfolio. Here’s a sample portfolio strategy:

75% stock funds
10% bond funds
15% brokerage account

Within each group, I can then figure out if they should be in my tax-deferred accounts or my taxable accounts, and what kinds of funds are best suited for me. For example, in my case I want my bond funds in my tax-deferred IRA account so that I don’t whacked with taxes because of income distributions. If you have a serious nest egg (over $100,000) to start with, it may also make sense to get a second opinion on your strategy from a financial planner. Some planners offer this service without a long-term commitment for under $500.

Finally, Do Your Homework
Now that we’ve learned the basics and we know how we want our assets divided, it’s time to pick our mutual funds. I personally started with my bond mutual funds then went to stock mutual funds, but you can do it however you feel most comfortable. When selecting mutual funds, it’s important to follow the advice of experts around the web and look for highly rated funds with performance better than the benchmark, a sound investment strategy, good management, low expenses, and blessings from the analyst community. If you can earn consistent returns with a trusted company when you’re starting out, you’ll save yourself many headaches and free your time up to learn more about other things.

Finding high quality tools is also extermely important, because finding good investment ideas is hard work, and a few good tools helps lighten the load. For my non-401(k) porfolio, I selected a handful of stock and bond mutual funds by using the Morningstar’s Premium Fund Screener, and then got additional information from Reuter’s Lipper Research Center, the funds’ prospecti, and the funds’ shareholder reports from the last 4 quarters. You can find more information on how to use the Morningstar Premium Fund Screener in my two-part series on this site.

Doing your homework is the most important part of this entire process in my opinion. Investing is more than anything a research activity. Starting now to do your homework will help show you if you are destined to become a defensive investor or an enterprising investor. Those who are willing and able to put in the research time can become enterprising investors; those who do not, should stick to funds — if you think picking a few mutual funds is hard, wait till you have to pick a dozen or so underpriced companies.

Wrapping it up
Getting started is hard enough. Keeping your first investment strategy simple will help you save time to learn about more advanced topics such as individual stock investing. A simple asset allocation strategy and selecting a few high quality mutual funds seems to me to be the best strategy for the new investor. And remember, if you have questions or want to talk to someone, not only are resources available online such as user groups, but financial advisors can also help with one-time consultations to keep you on the right track.

“This strategy may not be exciting, but to paraphrase Ben Graham, author of The Intelligent Investor, true investing should be boring.”

Benjamin Graham urged you to beat the market by identifying undervalued stocks and buying them. That’s a lot less boring than buying mutual funds.

Now anyone who hasn’t read Graham’s classic book Securities Analysis isn’t qualified to be an investor, but it’s only a starting point. Graham was too conservative in his recommendations.

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Carnival of Investing

Welcome to this week’s edition of the Carnival of Investing. As a summary of each piece, I’m listing each author’s reason for submitting the post to the carnival (for those that submitted one) and/or a bit of the post itself