Young and in love with saving
I'm 25 and already saving the max in my 401(k). Can you recommend an aggressive investing strategy?
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK ( - I'm 25 years old and have about $10,000 in my 401(k). My plan offers a number of index and actively managed funds and I contribute 6 percent of salary a year, which, combined with my employer's full match, adds another $8,500 annually. I'd like to employ an aggressive investing strategy that will make my savings grow over the next 35 years. What do you recommend?

-- John Thompson, Baltimore, Maryland

More information on Updegrave's new book.

Funny you should ask. My colleagues at MONEY and I addressed this very topic recently, just two months ago to be exact, in our Dream Retirement special. We even went so far as to set out very specific investment strategies for people at three different stages of retirement planning: those in mid-career for whom retirement is still 10 or more years away; those in the years just prior to retirement; and those lucky souls who have already called it a career and are kicking back a bit.

You're definitely younger than the people in the mid-career crowd. But in terms of investing, I believe you can take your cues for what we recommended for this group.

Aggressive saving

Basically, we suggested that mid-career types who still have more than a decade of work ahead of them still need to invest fairly aggressively if they wish to accumulate a nest egg large enough to support them for the 30 or more years they may eventually spend in retirement.

In practical terms, we believe that means investing roughly 85 percent of one's assets in stocks and the remainder in bonds. Within the stock portion, you should diversify so that in addition to a core of large-company stock funds, you include some mid-cap and small-cap funds, plus some exposure to international funds.

On the bond side, we recommend a broad bond-market index fund and a high-yield bond fund. If you click on the links above, you'll find a choice of index and actively managed funds that we recommend for each group, as well the specific percentages you should hold of each fund.

Now, given your tender age, you could make a case that you can invest even more aggressively than an 85 percent stocks to 15 percent bonds mix. After all, you're just starting your career, so you've got an even longer investing horizon than someone who's already been at it a few years. And usually the longer you intend to keep your money invested, the larger the percentage of stocks you can afford to hold in hopes of achieving higher gains.

On that basis, some advisers think that young investors should even consider putting 100 percent of their money in stocks, the theory being that over long periods stocks generate the highest returns and someone who won't be touching their nest egg for 30 or more years doesn't have to worry about short-term setbacks and market fluctuations.

Know your own feelings on risk

I find, however, that the human psyche and emotions don't always square with investing theory. Many investors who think they can handle an all-stock portfolio during up markets often find they feel differently when stocks get hammered and they see their portfolio heading south faster than college students on spring break.

So I wouldn't push it too much. I think an 85/15 mix is plenty aggressive even for a youngster like you. But if you wanted to boost your stock holdings to, say, 90 percent or so, I suppose that would be okay, as long as you're confident you'll stick to your strategy during periods of market turbulence.

If you're not comfortable choosing individual funds to pull off whatever investing strategy you've settled on, you might want to consider investing in a "target retirement" fund.

This relatively new breed of fund gives you a ready-made mix of stock and bond funds appropriate for your age and gradually becomes more conservative as you approach retirement. Although these funds, also known as life-cycle funds, are available outside retirement plans, they're all the rage in 401(k) plans because they make investing much simpler.

Because we believe this no-muss-no-fuss approach will appeal to many investors, we've also included target-fund recommendations for each of the three retirement-planning stages I mentioned above.

Remember, though, that no investing strategy alone can assure you a secure retirement. You need to save too. So keep socking that money away in your 401(k), preferably as much as your plan allows, and consider funding an IRA and taxable retirement accounts as well.

If you apply an aggressive approach early in life to both your saving and your investing, you'll have a much better chance of entering retirement with a nest egg large enough to support you in comfort for the rest of your life.


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