If you are young and haven’t saved much (if anything) for retirement yet, you will encounter some problems with the careful strategies outlined in this book. As the old saying goes, you have to spend money to make money. You can’t make any money at this point because you don’t have any to spend. To make matters worse, the good, low-cost mutual funds that you want to be invested in have minimum deposit amounts.
The managers of these funds do not want you day trading with them, so they make it cumbersome and expensive for you to do so. Part of that strategy is to have a minimum investment level. The most common among the funds that I suggest you consider is around $3000. Therefore, in order to diversify across seven funds, you will need around $21,000, and even then, your percentage allocations (a critical component of portfolio design) will be all wrong.
My strategy is to do the homework of building your “ideal” portfolio complete with which funds you will use and what percentage of you will allocate to each. It is a bit of an aside, but I also suggest that you add those funds to a watchlist so that you can watch them and get a feel for how they perform and under what conditions before you actually invest in them. Yahoo Finance, for example, lets you build such watchlists, and you can keep up with your actual holdings by putting in the number of shares you own and your cost basis. This lets you track your portfolio in addition to the things you plan to add in the future.
Think of the funds that you have zero shares of as your “wish list.” After tracking the performance for a while, you may decide that you no longer wish to own it. After this fun part is done, you need to download the prospectus for each of your choices and read it carefully. Note the minimum investment, and calculate how much money you need to have on hand to get into all of your funds at your target allocation for each.
Once all of that homework is done, you can easily identify the fund with the highest expected return for the next few years. If you have chosen a small cap value fund, which will probably be it. Here is where my suggestion gets controversial: Put 100% of your periodic allocations (most likely your payroll deduction and employer match) into just that one fund until it grows enough to buy your choice with the next highest return. Proceed this way until you have purchased all of the funds in your plan, and then adjust your allocations for future investments according to your plan.
Obviously, this is a very risky strategy. You are not at all diversified (except single stock risk), and you are putting all of your eggs in one basket. If your chosen fund takes a nosedive, you will be set back, perhaps by years. The justification for this is that you are very young, and you have your entire career ahead of you.
If things do go badly, you can just look at the decline as a buying opportunity and stick to the plan. You will only be hurt badly if you sell at the bottom. If you do happen to suffer any real losses, you can make them back over time. It is just a setback on your road to riches. The most important caveat is that you must actually be young to use this strategy, not merely “young at heart.” The risks are such that you need to have 25 years or more if things go terribly wrong.
If things do go your way, then you will have a diversified portfolio that much quicker and will have your best returns at the beginning of your investing career where the magic of compounding can do the best with them. Unlike prudent investment advisors, I (who am not a professional) believe that speculative risks when you are in your twenties are worth the potential costs.