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Wednesday, May 21, 2008

* The First Steps To Investing

I am not a licensed professional and I don't know your specific situation, so I can't tell you how to invest. However, you can listen in on the advice I will give my kids when they go out on their own.


  1. Emergency Fund: Before you invest a penny anywhere, you need to set aside a minimum of $1,000 in a high yield money market account with check writing privileges. Dad is not always going to be around when trouble strikes. Have a plan to add to this account each month until it reaches 4-6 months of your living expenses.
  2. Index Funds: After your emergency fund reaches $1,000, you can divert a portion of your savings to a good solid index fund that will serve as your foundation. I suggest the Vanguard S&P Index Fund (VFINX). This will provide you a benchmark for future investments. If you can't beat this fund over time, close out the investment and put your money in the index fund.
  3. Actively Managed Funds: Once your index fund reaches $5,000, it is time to start trying to beat its return with a couple of actively managed funds. Over the years Davis Selected American Shares (SLASX) has done this for me. More recently I dabbled in FundX Aggressive Upgrader (HOTFX) with excellent results. I would target $5,000 in this SLASX and if you choose to invest in HOTFX, I would limit it to $1,000.
  4. Asset Allocation ETF Investing: Asset allocation is the cornerstone of successful investing. As I mentioned in "Process Overview and Asset Allocation", this strategy is based on an MSN Money article by Richard Jenkins titled "A simple ETF strategy for beginning investors". Although the word "beginning" may chase some people off, I don't mind labels when something is performing well. Year-to-date this investment's return is +3.2% and since I started using this strategy (8/7/2007) its return is +6.2%. Note: Both of those returns are positive. Many investments over this time period were not positive.
  5. Dividend Income Investing: After accumulating $5,000 in 4. above, you may be ready to take on some additional risk and (hopefully) enjoy some higher rewards! Here I would suggest you use the tools provided in the Dividends4Life Toolbox, such as the D4L-Prescreen.xls model, and evaluate stocks in the the S&P 500 Dividend Aristocrats to begin with. You need to invest more slowly in this area than the previous four because up to now someone else was managing your money. You are likely to make some mistakes (I still do) and lose some money. Nurtured properly, dividend investing can ensure a bright future.
Kids, there are no guarantees in life and what happened in the past probably will not happen the same way in the future. What I have presented to you above, has worked for me over the years. If you follow this advice, it will likely work for you going forward.
Now go out and make your Dad proud!
At the time of this writing, I owned shares of VFINX, SLASX and HOTFX.
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