3 Strategies for higher returns
I'm 22 years old and I want to earn high returns. The Expert has some suggestions.
NEW YORK (CNNMoney.com) - I'm 22 years old and I want to invest aggressively to earn high returns. Can you recommend some mutual funds for me?
- Gregory Brown, Richmond, Virginia
I'm always happy to help a young investor looking to find his way in the investment world. So, sure, I'll lay some fund recommendations on you.
But I'll also go one better. I'll give you a simple three-pronged investment strategy that will not only help you put those fund recommendations to use today, but will improve your chances of building wealth throughout the rest of your life.
1. Think portfolio, not funds
Before you start picking individual funds, get a plan. Basically, you want to build a portfolio that includes a variety of different types of stock funds - ones that invest in large stocks, small stocks, growth and value, international shares - and bond funds. (Yes, even young investors should hedge their bets by keeping a small portion of their money in bonds.)
The idea is to create a diverse group of investments that don't all move exactly in synch with one another. This way, when one part of your portfolio is getting clobbered, another part can be racking up gains - or at least holding its own. The stocks-to-bonds mix you choose should be based on factors such as your age, your investing goals and your tolerance for risk. Generally, though, the younger you are, the more of your money you'll want in stocks.
For guidance on how to create a portfolio that makes sense for you, I suggest you read our MONEY 101 lesson on Asset Allocation and then check out our Asset Allocation tool. Once you've got your portfolio mix down, you can find all the specific fund picks you'll need by checking out our MONEY 65 list of recommended funds.
If you find all this portfolio-building too much work, you may want to consider a "target retirement" fund, a type of fund that automatically creates a diversified portfolio. For more on that option, click here and here.
2. Rebalance your portfolio
Not every investment you own is going to earn the same return year in and year out. That means that over time your portfolio will deviate from the original mix you set, or, to put it technical terms, "get out of whack." To bring your portfolio back to its original mix, you should rebalance it every year. There are two ways to do this.
If the proportions are only slightly off balance - for example, your stock position has risen to 85 percent from 80 percent - you can try restoring balance by funneling new cash into the asset class that's fallen behind, or bonds in this example. This way, you don't have to sell assets and possibly incur taxes on gains.
But if the various slices of your portfolio have changed so much that it would take more than a year's worth of new investments to get back to your original mix, you can sell shares in the asset class that's gotten bloated and plow the proceeds into investments you're light on.
From time to time, you may also want to fine-tune your strategy, adding real estate funds to give you more of a hedge against inflation, or throwing in some foreign stock funds so your portfolio's prospects aren't dependent solely on the fortunes of domestic shares. Just be sure that you don't let occasional fine tuning turn into speculation and chasing the latest fad.
3. Keep shoveling in new cash
Many people have the mistaken notion that great investing is what builds wealth. Well, that helps, but the smartest investing moves in the world won't amount to much if you're investing only small sums of money.
To get an idea of just how much boosting the amount you invest can increase your wealth, I suggest you take a look at a recent column I did for MONEY Magazine that looked at how much money "Average Joe," a hypothetical 401(k) investor, would have in his account after 15 years by contributing more to his plan vs. picking top funds. As you'll see, adding more money has a much bigger impact than superior investing.
So be sure to keep saving and investing as much as you can, whether it's in retirement savings plans like 401(k)s and IRAs or in taxable accounts outside such plans.
Are there more "sophisticated" strategies you can employ? Sure there are. And who knows, maybe they'll even improve your investing results and increase the balance of your investing accounts.
But you know what? If you do nothing else but follow this straightforward three-pronged plan, I'm confident that you'll not only do just fine, you'll likely do better than the vast majority of investors out there, including the "sophisticates."
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