Right and Wrong Way to invest $20,000

One of the most common mistakes first-time investors make is buying too few investments. With $20,000 15 individual stocks or about 6-7 mutual fund names are about right.

Why so many? Because with that amount you'll be well diversified and you won't be tempted to speculate.

If you get in with too few investments, you're likely to bail. What if you buy just four stocks and two of them promptly drop 20%? This happens more often than you might think.

Worse yet, what if one of those names that dropped 20% is up 60% two and a half years from now? Only you already dumped it.

When you spread your money about between funds, individual names, dividend stocks, small-cap stocks, and more, the odds of one name wiping out half your portfolio drops dramatically. Conversely, having to many investments does not serve you well and typically shows a lot of sector or style duplication. Finding a balance is key.

So how should you invest that $10,000? Well here are a few suggestions to get you going:

• Start by socking away money in a Roth IRA – You can contribute up to $4,000 a year, you won't owe Uncle Sam a dime on withdrawals after age 59, and there are no taxes or penalties on your principal for early withdrawals.
• Skip being heavy in individual issues and stick with mutual funds. The extra time, expense, and risk of individual stocks is not worth the potential extra return. Keep it simple silly.
• Go passive. Look at investing in low-cost, broad-based index funds that tend to outpace their asset-class peers and don’t waste money on selling and marketing their funds.
• Balance out growth and value. Historically they have been about the same. Better to have some of each rather than guess which will be in favor and when.
• Don’t forget international even if it seems risky or is underperforming the U.S. The added benefit of diversification and the opportunities abroad will smooth out the overall returns and fluctuations of your portfolio.
• Don’t ignore bonds. Bonds may not be that exciting and you think they may be reserved for our elders, but bonds offer stability and yield that almost every portfolio can enjoy.
• Stop moving. Don’t be the guy who keeps switching lanes rapidly only to arrive (harmed or unharmed) the same time as those who stayed the course. It’s about time in the markets, not timing the markets.

Investing does not need to be overwhelming and complex. If you adhere to simple, time-tested strategies such as these, you will be well on your way to reaching all your financial goals.

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