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Funds for your 20s and 30s
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First in a three part series in CNNfn.com May 22, 1999: 9:29 a.m. ET
Having trouble putting together a portfolio? Investing pros offer their advice
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NEW YORK (CNNfn) - You're fresh out of college, a diploma in hand, starting your first job. Or perhaps you're newly married and itching to nest.
Either way, you see yourself as chasing dreams and carving out a new life. But a financial pro sees a mutual-fund investor in his 20s or 30s who is standing on top of a Dow 11,000 mountain that will inevitably get larger.
"They're young people and they're sitting out there saying, 'Where do I want to go with my money?' " said Larry Johnson, president of Sterling Financial Advisory Services outside of Chicago. "In the investment world, time heals all wounds …I can almost assure you the mountain will get bigger in the future."
Young investors have the luxury of time, but the challenge -- in most cases -- of not having much money to put away. But industry pros say there are ways to build a mutual fund portfolio that will help your assets grow for short- and long-term goals.
Johnson thinks young people should start by opening up a money market fund account before they invest. An emergency account with two to three months' living expenses will be a cushion if they lose their jobs or have unexpected bills.
"Before you start investing, you have to make sure you can afford to put money away for a long time," Johnson said.
Fidelity and Vanguard have money market accounts with low minimums and fees and monthly contribution programs, Johnson said. The important thing is to find a fund that offers unlimited access, he said.
Next, decide how much of your money you need for short- and long-term goals, said Scott Kahan, president of Financial Asset Management Corp. in New York. Short-term goals include saving for a house or a car, while the obvious long-term goal is retirement.
A (401)k or an IRA is for money you don't need until you're 59-1/2, while an investment account would be for money you won't need for about five years.
"Young people are always afraid to commit money long-term," Kahan said.
If you're saving for a down payment on a house in two to three years, stay clear of stock funds in favor of a money market fund, experts say. Even if the S&P 500 is delivering record annual returns, there's no guarantee it will continue to soar, Johnson said.
"This market will fluctuate -- it won't be straight up," Johnson said.
Your first step in investing should be your company-sponsored retirement plan. In many cases, the company will match your contributions to a 401(k) plan, and financial planners say you should put aside enough so you'll get the maximum match from your boss. If you don't, you're throwing free money away.
And where should you put those retirement dollars? Stocks, stocks and stocks.
While you might be limited in your choices in your company's plan, Kahan recommends a 401(k) portfolio with 25 percent international stock funds and 75 percent domestic stock funds. Of the domestic portion, he thinks 3/4 should be in large cap funds and the rest in small cap funds.
Kahan said people shouldn't put a big chunk of their employer's stock in 401(k)s, because their income and retirement will both be tied into the company.
The Roth IRA is another great retirement tool for people within certain income guidelines. (For singles, the guideline is an adjusted gross income of $95,000, phased out at $110,000). While you can't deduct the contributions as with a traditional IRA, the money is tax-free when you withdraw it years from now.
"Anyone under 50 should contribute to a Roth IRA," said Lou Stanasalovich, president of Legend Financial Advisors in Pittsburgh. "And when you're structuring your portfolio, you should look at your 401(k), your IRA, and personal investing accounts as one entity."
Another bonus with the Roth IRA is you can withdraw up to $10,000 after five years if it's to purchase a first home, Johnson said.
The number of funds you buy depends on how much money you're starting with, investing pros said. If you have limited cash, a good place to start is with an S&P 500 Index Fund, Stanasalovich said.
Many fund companies will even forego the minimum initial investment requirement ($3,000 at many funds; $1,000 for an IRA) if you start an automatic monthly investment plan of as little as $25.
Another option to the S&P Index Fund is a total stock market fund, which includes large and small caps.
"I would prefer a total stock market fund if it's going to be their only investment, but if it's the first of many funds I'd go with the S&P 500 Index Fund," said Gary Ambrose, senior financial consultant at Personal Capital Management Inc. in New York.
Graf agreed. "A total stock market fund doesn't give you the same returns as the S&P 500, but your downside would be cushioned."
Once you reach the minimum requirement, you can branch off into other funds. The more money you have, the more you need to think about diversifying.
Stanasolovich thinks investors should start with the S&P 500 fund and, if they can, a small cap growth fund and a small cap value fund. He likes the Brazos Microcap Growth Fund, the Skyline Special Equities Fund (now closed) and the Oakmark Small Cap Fund.
From there, Stanasolovich would add an international fund such as Artisan International Fund and Harbor International Growth Fund. The next step would be the real estate sector. He prefers Cohen & Steers Realty Fund, Columbia Real Estate Equity Fund and the more aggressive CGM Realty Fund.
While Johnson thinks index funds are a great place to start, he said investors shouldn't forget about some top actively-managed funds. He recommends Janus Fund, the large-cap, flagship fund at Janus. Jim Craig has managed the fund since 1986.
Johnson also likes the New Perspective Fund, an offering of American Funds. While the fund is a load fund, meaning you'll pay a sales commission and other fees, the fund has a track record dating back to 1973. New Perspective is a global fund, so the team of managers decide whether to invest in U.S. or global markets.
"You've got to love a fund that's been through bad markets," Johnson said. "Young people have never seen bad markets, but it's nice to see some funds that have weathered bad times."
For the same reason, Johnson likes Fidelity Select Technology Fund, which has been around since 1981 -- "Before technology was in vogue."
Graf would go from an S&P index fund to an international fund before branching off into small caps. If you want to keep it simple, you could even stick to a total market index fund and then add an international index fund.
While Graf is also a fan of index funds, he recommends value-oriented managed funds such as Haven Fund, Clipper Fund and Longleaf Partners Fund, which is closing June 1.
Many financial planners think you don't have to worry about buying a lot of funds. After all, one mutual fund can include hundreds of stocks and give you broad exposure to the market.
"The paperwork alone will drive you crazy," if you buy many funds, Johnson said.
For young people lucky enough to start with a big chunk of money -- an inheritance or money from your wedding for example -- experts recommend more diversification.
You might divvy up $10,000 into a portfolio of five to seven funds, Graf said, including large cap growth and value funds; small cap growth and value funds; an international fund, and a bond fund.
But the important thing isn't so much where you put your money as it is to get in the habit of saving every month, Graf said.
"The habit of saving and investing is the most important thing." 
-- by staff writer Martine Costello
Next on CNNfn.com on May 29: Investing in mutual funds for your 40s and 50s.
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