Tips for an investing newbie

The key to building wealth isn't predicting the next hot stock, it's investing in a balanced portfolio over the long term.

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By Walter Updegrave, Money Magazine senior editor

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005)
What you need to save

NEW YORK (Money) -- Question: I'm 30 years old and have savings of about $50,000. I've never invested in stocks or mutual funds, but I would like to start. Can you recommend some resources that can help educate me about investments and give me a better understanding of how they work? --Suresh T., Jacksonville, Florida

Answer: What I love about your question is that you're not just interested in a hot stock tip or looking for the name of a mutual fund that's managed to post the biggest gain this week or asking whether to put your dough in tech, energy or gold.

It appears that you actually want to build a foundation of knowledge and approach investing as a discipline instead of a glorified guessing game.

I can't tell you how refreshing that is. I can tell you, though, how important it is to get off to a good start in investing, especially now that the worst of the financial crisis appears to be over people are becoming more eager to plow their money into stocks and funds.

Many beginners take their cues from the investment pros they see on TV finance shows or articles they read in some of the investment rags. The problem with doing that is that you can easily get the impression -- actually, it's hard to avoid getting it -- that astute investing consists of knowing when to switch into stocks and out of bonds (or vice versa) or how to move your money from growth stocks to value stocks (or vice versa) at just the right time.

But this sort of approach is a recipe for subpar performance. It's virtually impossible to predict the zigs and zags of the market and know which type of asset will outperform in the short-term. And moving in and out of different investments as if you can is more likely to enrich the brokerage industry than you.

But if you're willing to put in a bit of time and effort to understand what drives the markets and to learn how to put together a portfolio of different investments that can deliver an acceptable balance of risk and reward, you can dramatically improve your chances of building real wealth over the long term.

So where can you pick up the sort of information that can help you gain this more informed and nuanced view of investing?

Well, a good place to start is at our Money 101 section. For a quick introduction to the world of investments, you'll want to read The Basics of Investing and from there move on to the lessons on stocks, mutual funds and bonds. Once you've got a handle on how to evaluate these investments, you'll then want to read the lesson on Asset Allocation, which explains the art of combining different types of assets into a portfolio that can generate solid returns without taking outsize risks.

Of course, our site doesn't have a monopoly on this sort of material. So once you've had a chance to read and digest the lessons I've mentioned, you may also want to check out Morningstar's Investing Classroom as well as the Investor Classroom at the American Association of Individual Investors site.

You might think that with the thousands of investing books available in bookstores and online that I'd be able to quickly rattle off the titles of a dozen or so that I think investors would profit from reading.

Alas, that's not the case. Although I'm inundated with books that purport to be able to turn people into savvy investors, the vast majority of them unfortunately are much like diet books -- that is, they're mostly about fads and gimmicky strategies.

But there are some notable exceptions. Among them are Vanguard founder John Bogle's "The Little Book of Common Sense Investing,"; Money columnist William Bernstein's "The Four Pillars of Investing"; "The Intelligent Portfolio" by Financial Engines chief investment officer Christopher Jones; and, financial planner and sometime Money contributor Allan Roth's "How a Second Grader Beats Wall Street".

What makes these books worthwhile is that they show you how following a few fundamental precepts -- keeping costs down, building a balanced portfolio and avoiding Wall Street's frequent-trading game -- can help you harness the power of the financial markets and dramatically increase your chances of building long-term wealth.

As you peruse these sources and gain more confidence about investing, there's another point I urge you keep in mind -- namely, that as important as smart investing is for building long-term wealth, it still takes a back seat to regular saving.

The fact that you're 30 and already have 50 grand put away suggests that maybe you already understand this. But just in case, let me be clear: unless you save consistently, it's unlikely that even the most highly honed investing skills will provide you with true financial security.

So by all means bone up on investing so you can make that move into stocks and mutual funds. But keep saving too. To top of page

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