How to start investing your money

• Get the basics right first. Invest in your employer’s 401K.

• Make sure you research the funds yourself.

• Look for low-fee funds, and ones with an investment philosophy that fits your goals.

• Diversify your portfolio with a mix of U.S. and international stocks, or funds that contain these, and bonds.

• If you’re young, be sure not to invest too conservatively. Safe investments don’t produce as high a return. But if you’re going to need your money soon, the opposite is true. Consider conservative, stable investments.

• Don’t follow your friends’ hot stock tips. Just because they’ve done really well in the past doesn’t mean you will do well with the same investment. Stocks and funds have cycles up and down, and you may be buying into a high flyer just as it starts to fall into a down cycle.

LISA: I’m Lisa Birnbach for howdini.com.  Gosh, there’s so many ways  you can invest your money and so many ways you can mess up.  How do you do it? To discuss this, Carolyn Bigda, reporter from Money magazine. Hi Carolyn.  

CAROLYN: Hello.

LISA: Well, starting from scratch, you have some money, you have some savings…where do you start?

CAROLYN: When you’re putting together your portfolio, a lot people, the first place they’re going to start is their 401 K.  It’s the easiest option really because the contributions are taking directly from your paycheck and your employer sets up the number of mutual funds that you have to pick from.  So that’s a great place to start when you are putting together your portfolio.  

LISA:  When you are starting out, do you need to do a lot of homework or can you really trust your employer to do the homework?

CAROLYN: No, you definitely need to research the mutual funds that you’re investing in unfortunately.  It’s your responsibility and you want to be picking the assets or rather the investments that meet your goals.  Stocks will perform differently than bonds, you know you need to know the difference between those two and you need to find funds that have low fees and an investing style that is going to suit your portfolio. 

LISA: Do you need to diversify from the get-go? Is that a wise way to go?

CAROLYN: Yes.  One of the major mistakes that a lot of people have made over the years is they invest a lot of their money in the company stock and we don’t need to think about Enron or WorldCom, we all remember those cases, and know how risky it is to put all of your money into one stock.  So you want to diversify.  If you do hold some company’s stock, keep it to 10% or less of your portfolio.  

LISA:  Oh good to know.  And what about real estate bonds, all other forms, even art.  Do you advise that people really think in a much broader way about investments?

CAROLYN: Sure, but you want to get the basics down first.  You want to have a range of US national stocks and sprinkle in a few bonds and once your portfolio starts to grow, then you can branch out into other things like real estate and commodities.  And yes people are even investing in art these days.  

LISA:  One hears that stuff, just stuff, might be better than stocks—I mean the market is very volatile. 

CAROLYN: Sure the market is volatile, but if you’re a long-term investor, which you should be if you’re saving for retirement, over the long-term stocks return an average of about 8 percent to 10 percent and every year.  And that’s really going to make your money grow.  So, ignoring stocks completely is probably not a good idea.  

LISA:  Should you take tips from a friend who seems to have done well in the market?

CAROLYN: Probably not.  That would be one of the other big mistakes that a lot of people make and that is chasing performance.  Great for your friend if he found a wonderful fund that’s doing well, but funds and stocks and every other asset have life cycles: they have ups and they have downs. You could very well be investing right as that fund or stock is about to come down and you’d be losing a lot of money. 

LISA: Is there a virtue in placing it safe?

CAROLYN:There is a virtue if you need that money right away or soon.  But if you invest too conservatively when you’re young or you’re saving for a goal many years out, it can actually be a roadblock for you.  We looked at one portfolio, say it was a $200,000 portfolio invested 75% in bonds, which are conservative, and 25% in stocks.  Over 25 years that portfolio returned $500,000 less than if you invested more of that money into stocks and less into bonds.

LISA:  Amazing.

CAROLYN: So you don’t want to play it too safe. 

LISA: Great investment advice Carolyn.  Thank you so much.  For howdini.com I’m Lisa Birnbach.