Best moves for the new investor

@Money April 18, 2012: 6:29 AM ET

(Money Magazine) -- I've saved about $10,000 in a checking account that I'm now ready to invest. My dad says I should buy precious metals but I'm not sure this is a wise choice. Can you give me some advice on how to invest this money? -- Kevin, Tell City, Ind.

I'm sure your dad has your best interests at heart, but I'm going to suggest that you ignore his advice to invest your ten grand in precious metals.

Precious metals are one of the most volatile investments you can own.

Silver skyrocketed to a 75% return over the course of three months early last year, only to quickly flame out and give back nearly all those gains by year-end.

Such ups and downs are great if you believe you can profit by jumping in and out of precious metals at the right time. But consistently timing such moves isn't realistic.

And while precious metals have had a good run over the past 10 years or so as stocks have floundered, they can also stagnate for very long periods. All in all, the track record for precious metals like gold and silver over many decades isn't very compelling.

So the idea of going with precious metals as your first and only investment strikes me as risky in the extreme.

Here's a better way to make the transition from saver to investor.

First, while I understand you're eager to invest, you don't want to be forced to sell investments every time you incur an unexpected expense. If you don't have other cash set aside, carve out a piece of your $10,000 and keep it in an FDIC-insured account. It won't earn much there, but the point is to have money available for emergencies so you don't have to raid your investment accounts.

After you've taken care of that, you can move on to picking investments.

Most important, you need to diversify, and broadly. You can do that with just two mutual funds: a total stock market index fund (VTSMX) and a total bond market index fund (VBMFX).

Owning just those two funds will effectively give you shares of almost every publicly traded stock in the U.S. -- shares of firms big and small in every industry and sector -- as well as a stake in the entire taxable U.S. investment-grade bond market, including government and corporate issues.

This broad diversification won't immunize you against losses. Stock prices can and do drop steeply occasionally, as do bond prices, although not nearly as sharply. But as long as you're investing for the long term, your money should grow. That's because stock prices ultimately reflect companies' ability to generate profits over the long term, while bonds deliver regular interest payments (albeit small ones these days).

The other issue is how to divvy up your stash between stocks and bonds. Leaning toward stocks will likely produce higher long-term returns, even if they're not as lofty as they've been in the past. But you'll get hammered more when the market falls.

As a rule, the longer you plan to keep your money invested and the less likely you believe you'll be to panic and sell during downturns, the more you can afford to devote to stocks. For tips on how to create a stocks-bonds mix that makes sense for you, check out our Asset Allocator tool and our MONEY 101 lesson on asset allocation.

Once you've created this basic diversified portfolio, you could congratulate yourself on a job well done. But if you want to expand your investing horizons farther, you can do so fairly easily. Adding some foreign stock exposure with a total international stock index fund can reduce ups and downs in your portfolio without sacrificing long-term gains. So can throwing in a small dollop of real estate via a mutual fund that invests in REITs. You can find both types of funds on our MONEY 70 list.

You could also take your Dad's advice and throw in a tiny helping of gold (IAU) as a hedge against Armageddon. Frankly, though, I think you're better off keeping it simple.

But whatever your father may say, do not put all or anywhere near all of your ten thousand in gold, silver or other precious metals.

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