I'll admit it: I think investing is fun. I like the sense of control when I manage my money and move funds around. I enjoy shopping for investment options and betting on my top picks. I get excited watching my cash in action -- thrilled when my investments move up, anxious when they slide down.
Does that make me a little nerdy? (It's not the only thing -- I also wear glasses, spontaneously quote Shakespeare and enjoy science fiction.) Maybe, but I'm not alone in recognizing the fun factor. According to a recent Scottrade survey, 35% of respondents ages 18 to 26 (the survey's definition of Generation Y) consider managing investments "a fun and interesting activity," up from 27% in 2008. And 17% of Gen X respondents -- ages 27 to 42, as defined by the survey -- feel the same way.
Take a more active role in managing your money and you can make more of it. For example, though I wisely decided to start investing in a 401k as soon as I could (with heavy nudging from my dad), I didn't have much interest in where my money went at first -- I randomly put all of it in a single Treasury-bond mutual fund and hardly looked at the account for the next two years. Reports say I earned less than 1% each quarter.
When my former employer was acquired by another company, our 401k options were expanded, and we received some interesting reading material to guide us in making these important financial decisions. I took a simple quiz (in the same style as the old Seventeen magazine quizzes I used to enjoy so much) to determine what my perfect portfolio might look like. Then I shopped through a catalog of fund options until I found just the right ones for me. My new portfolio of stock funds suddenly started earning about 5% a quarter during the market's peak. (Of course, the market has not been quite as kind to my investments lately, which is less fun.)
I invite you now to be more active with your investments. Just follow these five steps to get in the investing game:
1. Tally how much you have to play with
First, you need to look at your whole financial picture. After budgeting for your daily living expenses, your priorities should be paying down bad debt and building up an emergency fund with at least three to six months' worth of living expenses. Once you're set in those areas, you can divvy up what's left between saving for short-term goals and investing for long-term goals.
Don't worry if that leaves you little to get started with. As I said before, saving and investing any amount now, however small, is better than doing nothing until later.
2. Assess your risk tolerance
Determining your level of risk tolerance will help you establish the appropriate mix of assets in your portfolio. Generally, the longer your time frame, the more risk you can take in pursuit of greater long-term rewards, because you'll have more time to recover losses along the way.Still, having time on our side doesn't make us all daredevils. Some other factors to consider: how you were raised with money; your knowledge of investing (keep in mind that overconfidence is a problem for many beginner investors); and your reaction to hypothetical or historical investment performances. For help gauging your risk tolerance, see "Know your limits."
3. Shape your portfolio
Start by establishing the broad categories that will make up your portfolio -- stocks versus bonds, for instance -- and then, more specifically, large companies versus small companies and U.S. companies versus international firms. Diversity is a good thing.Over the long term, stocks offer the best returns for patient investors: Since 1926, stocks of large companies, for example, have gained 10% annualized, while small-company stocks have grown 12.5% annualized. Going forward, 8% returns are reasonable to expect on stocks.
For folks like me who have 15 years or more to reach a long-term goal such as retirement, Nicholas Yrizarry, a financial planner with offices in Reston, Va., and Newport Beach, Calif., recommends a 100% stock portfolio -- 65% in U.S. equities and the rest heading abroad, with up to 10% in risk-heavy emerging markets.
Beginners, especially, should stick to mutual funds to achieve diversification at a relatively low cost. Shopping for actively managed funds, you need to look for modest fees and consistently strong past results compared with similar funds -- plus a manager who has held the reins through that sturdy performance. The Kiplinger 25 list of top mutual funds offers some good options.
For lower costs and added simplicity, Mayabb suggests trying exchange-traded funds, which are low-cost mutual funds that are bought and sold like stocks and typically track an index. For example, the Vanguard Total Stock Market ETF (VTI, news, msgs), as the name suggests, tracks the whole stock market and charges just 0.09% in annual expenses. (Learn more in MSN Money's ETF Center.)
4. Pick a place
Most of us start investing through a retirement account: Employer-sponsored accounts, such as a 401k, typically offer a certain number of investment choices selected by the company, while individual retirement accounts open up a much broader universe of investments.You might also dare to open a separate brokerage account. Try a discount online brokerage that lets you buy individual stocks, bonds and funds.
5. Shop the market
Now you're ready: Embrace your inner investing nerd and acquire specific funds (and stocks) for your portfolio. Your brokerage or 401k administrator will send you quarterly reports of your accounts, and you can use their websites to check in more frequently.
Remember to rebalance your portfolio regularly -- quarterly or annually -- to maintain your portfolio's asset allocations, which will force you to sell winners and buy laggards. You should also reassess your portfolio every few years or anytime you experience a big life change, in case your taste for risk changes. But don't get hyperactive in managing your investments. Too much activity can cost you in trading fees and leave you more vulnerable to making money mistakes.
Published May 21, 2010
More from MSN Money and Kiplinger
- Wal-Mart vs. Target: Who'll win the recovery?
- Why you need a 401k right away
- Quiz: Do you understand investor psychology?
- Are you missing the great bull run?
- Savings strategies for Generation Y
- Is there retirement without a 401k?
