AB- I just wanted to share that we’re basically at the same place. (I’m 25) I’ve been contributing to my ROTH in addition to 401K. I started with a target fund. It was just really convinent because there’s so many funds inside of just one… which makes it well diversified if nothing else! (You also only have to worry about 1 fund’s minimum balance.) I’m contributing to different funds now, but I have 2 years worth of contributions in the target fund.

I would get a target fund this year, to get started. Once the overwhelmed feeling has passed, you can think about trying to change next year’s allocation… or you might be happy that you went with the easy one! :o)

Heads up- I like Fidelity, but I noticed that Vanguard’s minimums are much lower for their index funds…

Cheers to another kid reading CNN Money!

ENTER STAGFLATION!

Most writers here say that bonds are a lousy investment for young people. A greater issue even than holding bonds is for young investors to be overly invested in American stocks or stock funds. That’s going to be even more damaging than holding bonds. America is now on a money-printing binge. The dollar has become so devalued that even the Rupee is overtaking it!

Any long term strategy for a young investor should include at least 30% in foreign investments that are not dollar-centered. We are now printing more American money to try to build the economy during an election year. This opens the door to stagflation.

The most important thing a young investor can do (beside saving and investing regularly) is to avoid venues that are at risk for stagflation. We are “there” and “there is us.”

Foreign investments will keep that risk down. Maybe I’ll go on a tightrope and predict the future: Next year Walter Updegrave will recommend that investors hold no more than 50% American-based investments!

Sanjosemike

I want to echo what DL pointed out that Walter didn’t — that it doesn’t make a lot of sense to spread $200 around a mix of, say 5 index funds to get broad diversification. (And my guess is that if AB is leery of cookie cutter target date funds, a simple collection of index funds might not be what’s populating the 401K and might not be the alternative to a target-date, although it should be.)

The target-date fund gets you everything all at once. I suppose it’s less of an issue in a Roth IRA account than in a regular taxable account, but there could well be minimum additional investments that render it impossible to spread that $200 around the way AB would want to. With only a single fund to buy, there’s no worry about minimum additional investment amounts - that’s a trick I’ve used in my taxable accounts, opting for a Vanguard LifeStrategy fund (a fund of funds) rather than trying to make the same mix myself.

Like DL said, once there’s a larger balance and minimum account balance charges won’t be eating away at your return and perhaps additional income is available to boost the monthly investment amount, it might make more sense to have a collection of funds. By then AB may be so happy with the low-maintenance target-date approach to keep it.

No way should a youngster out of college have 10 or 15% in bonds, way to conservative. Time and history of the market say all stock for someone that young.

Putting 10% or so in bonds at his age isn’t a terrible idea, but I don’t think it’s a good idea. When you have 30 years or more to retirement, there’s no real reason to put 10% in bonds, at least in my opinion. It just reduces your overall return over the decades. Except for emergency funds, I was 100% in equities over the entire period of my accumulation phase. I’m retired now, so I have around 30% in fixed assets, but my portfolio would be much smaller today if I had carried the most dead weight of bonds over the decades of accumulation. Just my opinion, though.

A.B. sounds sophisticated and disciplined for such a young person just starting out. As such, being leery of target-date funds is appropriate. The reason is that you have no control over what is in your target-date fund. Target-date funds are good options for those who don’t have an interest in building their own portfolio. If at age 24 A.B. has already discerned her indicated allottments, she does not need an auto-pilot portfolio. My observation and experience has been that “slicing and dicing” a portfolio in a customized construction yields a bit more return than an all-in-one.

The current volatile and downward-trending market is Lesson #1 in the function of bonds in a portfolio. Choose a bond fund that does not rise and fall in correllation with stocks.

I noticed that Walter put in a plug for financial advisors . It is ridiculous and unnecessary to even plant a suggestion about an advisor, much less that it may be possible to get “a better portfolio” thru an advisor. Any statement about advisors should always be qualified with, “make certain the advisor is a fee-ONLY advisor.”

Well, I believe in bonds, but if you take into the account Ron Paul’s observation, that the Fed continues to print money, devaluing the dollar, the true, “safe” growth of US bonds may be really nil. So I’m invested in Eurobonds and global bonds. Same fund category, but now you’re not 100% invested in US currency. Given the current political direction of Washington, more money printing, and more devaluation of the dollar seems inevitable.

Bonds can be reneged on, bonds certainly will NOT keep up with inflation (currently running 8 to 10 percent annually despite US Govt data manipulation). If you are not making over that, you are losing money. Bad advice from this columnist. Unfortunately, it’s par for the course even from major financial advisors these days (Keynesians! Ugh…

Maybe you should put over 50% of your portfolio in foreign funds. America has a nil savings rate so how can Americans afford to invest when they are living on debt.

Keep the international exposure. There will be decades of growth in Emerging Markets what US had for decades. Take a look at VEIEX. Fantastic returns for the past few years. That trend will continue to grow. You are not tied to single country.

At such a young age I don’t see why bonds are needed for this investor, but even if this investor wanted to make this change wouldn’t it make more sense to rebalance from the 50% invested in Large Cap stocks. Growth potential is this young investors friend and small and mid cap funds provide more growth potential.

WU recommended that A.B. shaving her equity funds and placing that portion into bonds. Would it be better to place the portion in to a high yield savings account like Emigrant Direct, which currently pays 4% APY, rather than placing it in bonds? There would be both the benefit of earning a comparable return and the convenience of emergency access.

In other words, would it be better to substitue the 10-15% of your financial portfolio in savings rather than in bonds?

One other point regarding the Roth IRA… Even if you want to choose your own funds and don’t want to go with a target fund, if you are starting off with $200 per month, it is probably better to throw it into a target fund until you have enough saved to buy enough of each of the other funds in your potential mix - so you don’t have to worry about getting hit with fees from each one for being below the minimum. Once you’ve saved enough to go into separate funds - without extra fees, you can decide if you want to manage the portfolio yourself or go with the target.

Well said, WU - I think you covered every base.