"Thanks for enabling me to act on this aspect of  my life...
Cheers to my upcoming investment health."  - Matt
Resources
You CAN Do It Yourself.......
Most people think that investing is complicated. In fact, the more complicated people make it, the worse they seem to do. People that follow a few simple principles are getting the best returns. Those principles are:

1. Do not chase past returns. People that buy funds because they have done well in the past are doing exactly that.

2. Do not market time. Market timing is buying based on your (or your newsletter, or your TV, or neighbor's) guess about what is going to happen in the future. Even if someone knows something, you've already missed the boat. The price already reflects what you just found out.

3. Use index funds. Over time, index funds outperform actively managed funds, mostly because they do not have those high expense ratios. Some actively managed funds do beat their index, but the ones that do usually do not do so consistently. So why gamble? Use index funds. If you want to use a few actively managed funds, make sure that the costs are very low. Vanguard has some good ones.

5. Diversify. Don't put all your eggs in one basket. Own a mix of bonds, domestic equities (large, small and mid cap funds), an international fund and perhaps a REIT (Real Estate Investment Trust) and emerging market fund.  Four to six funds is all you need. Know your risk tolerance and set up an appropriate asset allocation. Rebalance as needed. 

6. Consider taxes. Use the least tax efficient funds in your tax-deferred accounts and the most tax efficient funds in your taxable accounts. Go here for an excellent general rule of thumb.

Bottom line: Set up a tax friendly, low-cost, diversified portfolio based on your risk tolerance and then, as they say, 'stay the course'. Leave it alone. If you are spending more than eight hours a year on your investments, and you haven't had a life change, that's too much time.

There are a few things to consider before you start investing. You must have a liquid emergency account that is not invested in the market. If you unexpectedly need money, you do not want to be pulling it out of your investments if the market happens to be down and/or your investments are tax-deferred (if you are under 59.5 you'll also pay a 10% penalty). Also, once you take money out, it's easier to take it out again the next time. People ruin their retirement this way. An emergency account should be three to six months of living expenses, or whatever makes you feel comfortable.

Also, consider insurance. If anyone depends on you for income, then you should have insurance. I suggest you buy term insurance and avoid annuities and insurance that is mixed with investments (VUL, for example) like the plague. (See sidebar for links to more information.)

It's important that you have a basic understanding of risk and diversification. Simply put, the most important decision you will make in your investment life is how to allocate your assets. We'll discuss that below, but an initial understanding will help.

Let's define terms:
Diversification means spreading your money, and risk, over many types of investments. If you read about me, you will know that for 27 years I invested in company stock. Almost all my retirement money was in that one stock. I was very lucky. I, by chance, left the company and took that money out of the stock right before the stock started to dump. Unintended timing saved my retirement. I never want to take that chance again. Nor do you.

If you lose a large chunk of your nestegg, it takes time and a good market to make up your loss. Consider: If a $1,500 investment lost $500, or 33 percent, it would be at $1,000; then it would have to gain $500, or 50 percent, to break even.

The other side of the coin is the risk-adverse person who refuses to invest anything in the market. My friend Larry is like this. He doesn't trust anything but a savings account. Now he's in his 60's and he has barely kept pace with inflation.

What to do?!  Define your goals. Someone with a goal 30 years in the future will have a higher risk tolerance than someone with a goal two years away because they have the time to weather the market volatility. Over time the market trends up, but it may be a bumpy ride. We'll pay attention to all this as we continue, and here's a good article that covers it (and there's more on the sidebar).

OK, let's get started!

Assuming you have researched the costs and returns of the funds you currently own, you have an idea of where you are at now. I suggest you start a financial notebook and set up a section about your current investments.

Also keep a section for your investment plans and goals. Here's an article on setting up an investment policy statement that may be helpful. Keep your personal notes, asset allocation, statements, budget, contacts, helpful links and articles and whatever else in there. If the market goes down and you panic, pull out your notebook and review your carefully considered plan. Read an article about 'staying the course'. You'll feel much better.

You need to know your risk tolerance which will help you decide how to allocate between cash, bonds and equities. This article discusses risk tolerance in detail.

I am providing links to a couple quizzes that will help you figure out your risk tolerance. THINK and be brutally honest:

Vanguard's Quiz (also has asset allocation - write it down for the next step)

MSN Money Quiz

One more

Let's regroup and think about what you have learned. If you visited the 'COSTS' page on this site, you now know what you are currently paying for your investments. If you visited the 'RETURNS' page you know how your investments are performing. You know your risk tolerance if you have taken the quizzes and you have a basic knowledge of proper investing principles.

What you don't know is your current asset allocation and you don't know yet what your future asset allocation will be. So let's work on that next. Don't start thinking about picking funds until you are happy with your asset allocation.

If you would like to figure out your current asset allocation:
Remember that when you looked at your returns, you wrote down they type of funds you have: large cap value, small cap blend, emerging markets growth, etc  (step 5).

Using that information, fill in the following:

Bonds: ________%

Domestic Equities:   ____%
    Large Cap:  ______%
    Mid Cap: ______%
    Small cap: _____%

International: ____%
    Emerging Markets: ____%
    Developed markets: ____%

REITS: ____%

Other:  ______%

You can get more detailed than this, but this gives you a general idea of what you currently have and how well it fits in with your risk tolerance.

If you want to know more details, you can go to Morningstar and enter your current portfolio. Just go here and use 'Portfolio Manager'. 

Figuring out your new asset allocation:
When I first tried to do this, I got a bad case of analysis paralysis. I went back and forth and made myself crazy. Then I read this: "The greatest enemy of a good plan is the dream of a perfect plan."  Yup.

So don't agonize over a 'perfect plan'.

And, you have free tools to help you. Here are two:

Morningstar

Vanguard

You might be able to stop right here. Since you now know your risk tolerance and your desired asset allocation, simply buy the appropriate Target Retirement Date Fund. Make sure it holds index funds and is very low cost, then forget about it for the next 5 - 40 years, until you retire. These 'funds of funds' will automatically readjust for risk as you get closer to retirement. Over time, you'll outperform the vast number of people using 'professional advice' and/or actively investing.

The problem is, many people do not have access to target date retirement funds in their 401k. In fact, many 401ks don't even have index funds.  401ks aren't excluded from the scam, although I initially thought that they were. No such luck.

Note: I have a wonderful article that explains asset allocation in detail. It was written by Jonathan Clements, financial journalist for the Wall Street Journal. Since I'm not he, and I don't want him to sue me, you'll have to email me for a copy of the article. It's worth an email and feel free to use a temporary email address you can toss after you get the article. 

You should now be able to come up with a simple asset allocation:

Bonds: ______ %
Stocks: ______%
  Domestic  _____%
  Foreign: ____%
?Cash: _______% (possibly cash if your risk tolerance is low - don't include your emergency fund in your asset allocation)

Note: Take some time to really think about your asset allocation. Do you feel good about it? Do you understand it? Do you feel like you are investing and not gambling? Do you think you can 'stay the course' and not panic if the market goes down? If not, read some articles on asset allocation (see sidebar) and reconsider your asset allocation.

You could stop here and look for your funds. This is JUST AN EXAMPLE of what a portfolio might look like:

(Assume $250,000 to invest and a medium to high risk tolerance):

Bonds: 25% ($62,500)
  15% Vanguard Total Bond Market Index Fund ($37,500)
  10% Vanguard Inflation Protected Securities Fund ($25,000)
Equity Funds: 75%
   45% Vanguard Total Stock Market Index Fund ($112,500)
   30% Vanguard Total International Stock Market Index Fund: ($75,000)

Or, to add some excitement:

Bonds: 25% ($62,500)
  10% Vanguard Total Bond Market Index Fund ($25,000)
  10% Vanguard Inflation Protected Securities Fund ($25,000)
    5% Vanguard High Yield Corporate ($12,500)
Equity Funds: 75% ($187,500)
   45% Vanguard Total Stock Market Index Fund ($112,500)
   25% Vanguard Total International Stock Market Index Fund: ($62,500)
Real Estate: 5%
    5% Vanguard REIT Index Fund: ($12,500)

The bad news is that many 401k's won't have low-cost index funds. All you can do is use the lowest cost funds you can find to fit your asset allocation and ask your employee benefits people to please get some low-cost index funds in your 401k. Show them this.

You may be interested in some feedback at this point. Here are two places you can go to get that feedback:

This is a tool that will comment on your asset allocation, costs and more.

These folks are excellent at reviewing portfolios and giving comments. Some of them have even written bestselling financial books!

It's time to put your plan into action.

First, let's regroup. By now you know about your current investments - their costs and returns. You know your risk tolerance and you have set up an asset allocation that reflects your risk tolerance, that you understand and that you feel comfortable with.

Now it's time to 'just do it'. There's no rush, so set target dates that are reasonable and work your plan. Make sure you understand any tax consequences of moving your (taxable) money. 

If you have old 401k's sitting around, it's probably a good idea to roll them over to an IRA. Here's why. Even if you are still working at the company that holds your 401k, you may be able to roll it over to an IRA. Here's some information about that. Compare costs (if you can find them) and funds within your 401k with, for example, a Vanguard IRA.

Again, taxes are important to consider when deciding what to put in taxable and non-taxable accounts.

Where should you hold your investments? As you may have guessed, I use Vanguard. That is my personal choice and here's my reasoning:

Vanguard is client owned, meaning that it isn't a publicly traded company that must satisfy stockholders. That keeps fund costs very low and eliminates conflicts of interest.

Their funds do very well and even their actively managed funds do well because of the very low cost.

They have a great investment philosophy.

They stayed out of the mutual fund scandals.

But it is your choice. There are other good firms out there. Take time to explore their websites and make a decision based on knowledge.