Expert: Paul Henneman - 3/7/2004

Question
Hello, thank you for reading my question.  I am 28 years old, married with 2 children, ages 2 and 4.  I am enlisted in the Army and am getting ready to be commissioned as an officer next year, which will be a $1000/month pay raise.  We are currently putting $100/month for us and $50/month each for my children in Fidelity Destiny I mutual fund.  We also put about $200 away each mopnth in a 2% savings account for emergencies.  We are thinking about starting IRAs for both of us next year.  Federal employees can also put money int what's called the Thfift Savings Plan, where you can contribute up to 9% of your gross pay into 1 of 4 funds (2 bond funds and 2 index funds).  Unfortunately, the military doesn't do matching contributions, they only do it for civilian federal employees.  Anyway, my real question is if we do the Fidelity Plan, IRA, and Thrift Savings Plan, is that a good idea.  Would that leave our money too "spread out"?  Is there another avenue we could go down.  We might want to put a down payment on a house in about 5-7 years, but mostly we are looking long term.  Any enlightenment you could shed on this for me would be greatly appreciated, and I apologize for the excessive length.  Thank you so much.  

Answer
Stephen,
Thank you for your question! I'm pleased to see that you are thinking about your future so closely.
I think you are on the right track. I do not think that you are too spread out.  A diverse portfolio is a good thing, and while harder to track numerous investments, it is worth it. I do suggest that you start the IRA's that you are considering. Everything else you are doing makes alot of sense. It is a very 'conservative' portfolio, in that you do not have alot of risk (a good thing). However, over time, your portfolio will not yield as much due to the safe nature of your investments. This is ok, it just depends upon what type of person you are. With a long investment time period, you can afford to take some risk.  A riskier portoflio will do much better in some years, and much worse in others. But, in the long term over decades, should produce a great deal more returns.
My suggestion is to not totally reverse direction, but add some higher yielding investments over time. Mutual funds are a great place to start. You can invest in mutual funds through an IRA account, this is perhaps the best thing I can think of for you. Do not invest in a single fund, much better to invest in several. And choose funds that specialize in different areas, technology, energy, transportation, health care to mention a few. A great website to research mutual funds is www.morningstar.com

Purchasing a house is also a fantastic investment. The most common mistake is purchasing too much of a house. Do not seek out the biggest and best house that you can afford, this is a terrible and all to common mistake. It will severly limit your ability to continue investments in other areas, and if the slightest thing goes wrong with your income, the ability to maintain the house will be questionable. Instead, determine the size and quality of house that you need and will enjoy, and consider it an investment. You can always make improvements in the future to better your lifestyle.  Schools and quality of community are essential in choosing a house that will appreciate in value.
The overall goal should be to own your home outright when you retire, and have built up the other investments that you mention as much as possible. There are limits to how much you can invest into an IRA, so if you can afford to invest more, don't stop. Just invest in mutual funds or a small stock portfolio directly, outside of the IRA.
I hope that this helps and gives you at least some direction. Please do not hesitate to follow up with me if I can offer an additional information!

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com