NEW YORK (Money) -- I'm 19 and have hopes of lying on the beach drinking margaritas for the most part of my life. But I'd also like to begin investing the small amount of money I have. How do I get started? -- Peter N., Los Angeles, Calif.
If you spend most of your life on the beach slurping margaritas (or mojitos, piña coladas or Bahama mamas), you'll probably never have more than a small amount to invest -- and never end up with much money no matter how wisely you invest.
That said, I'm going to take the first part of your question with a grain of salt. (Or should I say a rim of salt?) The fact that you're interested in investing at all makes me doubt that lolling in the sand cocktail in hand is how you really envision spending your life.
And even if it is, I think you'll find that the combination of sun, alcohol and too much free time can get boring fast. So I fully expect that at some point you'll settle on a more challenging and rewarding pursuit.
But since you're enamored of this fantasy, why not use it to your advantage? Toward that end I'm going to recommend a way to get started that is so simple that it makes investing almost as easy as a day at the beach.
Even more important, the strategy that I'm going to suggest is so effective that if you actually follow it, you should have enough dough to spend ample time on the beach enjoying umbrella drinks.
So what's the recipe for this strategy I'm talking about? Basically, it involves four simple ingredients:
* One asset mix
* Two index mutual funds
* Periodic rebalancing
* Generous dollops of savings
Start by setting your asset mix or, as it's better known in investment circles, your asset allocation (which is just a fancy term for how you will divvy up your money between different types of investments).
Any money you're going to need within three or so years -- for emergencies or a reserve fund -- should stay in a bank savings account, money market fund or other highly secure stash. You don't want to put this dough at risk.
Money you'll be investing for long-term goals like retirement or overall financial security, however, you want to invest primarily in stock mutual funds. So if you're figuring on keeping this money invested 10 or more years, you might have anywhere from 70% to 90% in stock funds.
Yes, stocks can take short-term hits to their value, as we saw in 2008. But over the long run they still have the potential for the highest returns. For more on how to divide your money between stocks and bonds, click here and here.
Next, mix in the two index mutual funds. Why index funds? They're cheap (other types of funds often charge 10 times or more in annual management expenses), and they give you broad diversification, up to several thousand stocks or bonds in a single fund.
For the basic version of this recipe, you can get by with just two funds: a total stock market index fund and a total bond market index fund, each of which gives you the entire U.S. stock or bond market respectively in a single fund.
Do not shake or stir! Leave your blend of stocks and bonds alone except to rebalance once a year or so. The idea behind rebalancing is that it forces you to sell off part of the portfolio that has performed better over the past year and put the proceeds into the part of your portfolio that has lagged.
Thus, you'll be doing what investors always say they want to do but rarely have the discipline to do: sell high and buy low. And now for the part of the recipe that really gives this strategy its punch: savings.
Throw in as much additional money as you can as often as you can, preferably on a regular schedule like every week or every month. One of the biggest myths floating around the investing world is that savvy investing is the most certain way to wealth.
But, saving on a regular basis is a much surer path to financial security and eventual riches. I've given you the basic version here. You can get fancier by adding more ingredients. Mixing in a splash of foreign stock index fund will add an international flavor and possibly enhance your portfolio's performance.
Stirring in some real estate or natural resources funds can provide a hedge against inflation. Or you could substitute ETFs for index funds. You'll find all the ingredients you need on our MONEY 70 list of recommended funds and ETFs. But I'm a big believer in keeping things simple.
So I recommend that you stick to the basic recipe, at least until you've become more familiar with the investing world. Since you don't have a lot to invest, you'll also have to be mindful of the initial minimum investment some funds require.
For example, you must be able to invest at least $3,000 initially for many of the index funds on our MONEY 70 list. If that's an issue, you can opt for ETFs instead, as several investment firms, including Vanguard, Schwab and Fidelity offer commission-free trades on ETFs.
Before signing up, however, check for possible minimum account requirements and to see whether you must pay account fees apart from the ETFs' underlying management fee.
A relatively new investment service called Betterment requires no minimum balance and allows you to invest in a blend of stock ETFs and Treasury bonds with the fee you pay linked to the size of your account balance.
One final note. To come up with enough of that key ingredient for success I mentioned earlier -- regular savings -- you'll eventually have to get off the beach and get a job.
If that prospect seems like a bit of a drag now, think of it this way: the sooner you start working, the more you can save and invest and the more likely you'll be able to laze on the beach, tropical drink in hand, on vacations and in retirement.
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