Expert: Paul Henneman - 9/23/2008

Question
I have just turned 20. I have been saving in a mutual fund/trading account for a couple of years and have saved about 10k. I am a college student in Florida for finance. I pretty much do all my research and made out very well in overseas mutual funds which i sold in Jan 08. I just opened my roth ira with scottrade. I work with publix in florida which is a great employer with great benefits. I will be eligible for a 401k with them in 6months which i will do the max up to what they match. 3-6%. Plus for every $200 you make they award you with one share of their stock.My main question is about the roth that i just opened. I plan to contribute 400/month. Since i am young i would like to try for a 9-13% return. In this market this is by far impossible, but i believe now is the time to take advantage of low priced mutual funds. which 20years from know this will have just been a great buying opportunity. I have been looking at the retirement 2045, and 2050 funds with T. Rowe Price. And a few stocks i have been looking at include VSEC, PVX, and STP. i like vsec for longterm growth and PVX for the 13% divy it pays. monthly. My question is should I only invest in the mutual funds. or is a balance good to have.Pvx is trading at the bottom of its 9-13 52 week range. and i figured if i picked some up around here, i would be getting in reasonable pps while reaping the month .12 divy. I would like to build wealth and preserve it. Are there any other approaches or strategies for a roth of a 20 year old? 75% mutual funds( retirement 2045, and 2050). and a (bond fund). with 25% made of pvx, and vsec?

Answer
Matthew,
   Thank you for your question! Congratulations on thinking about investing so early in life. It is clear that you already know this, but the longer that your investments have to work, the better you will do. At your age, with the amount you plan to add to your investments each month, you are setting yourself up for a truly successful second half of your life.
   Also, congratulations on such a complete and thoughtful approach to your investing. Ultimately I have little to add to what you have summarized in your question. Yes, you should have most of your investments in mutual funds, some in stocks, and some in perfectly safe investments such as CD's.  The exact amount in each category is up to you: Stocks are certainly more risky. They can return more, but can bite back pretty hard during bad times. Mutual funds are also risky, but less so as they are typically more diversified than holding individual stocks. CD's are just about totally safe, but earn very low returns. Conventional wisdom has that since you are young, and have plenty of time to ride out down times in the market, you can take more risk.  How much however is up to you. Everyone is different in that regard.
   Feel secure in that you have clearly done your homework on this. Go with your gut, you have time on your side and you will do well. Your success is more tied to discipline to stick to it through tough times, resist temptations to spend the money you plan to invest on other things, and continue investing for the next few decades. This discipline is more important that any short term decisions on exactly what investment is best.

Best Regards,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com