This week's answer comes from:

Steve Merkel

Steve Merkel is a Chartered Financial Consultant and is the Operations and Compliance Officer for Investor Solutions, Inc. He earned his Bachelors in Finance at the Shippensburg State University of Pennsylvania and has ten years of experience in the Financial Services & Corporate Finance industry. Before joining Investor Solutions, Steve was a Financial Services Advisor with MetLife Financial Services and registered representative with the NASD. Steve held Series 7, 6, and 63 Licenses with the NASD and licenses with the Florida Department of Insurance to transact Life, Health, and Fixed & Variable Annuities. Steve served as a U.S. Army Officer in the Air Defense Artillery Corps with 11 years of distinguished service. You can contact Steve at steve@investorsolutions.com.

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How can I get a good start in mutual funds using monthly investments?

from Michael

Q: I have just made the choice to start investing into mutual funds. All I hear in the news lately is that basically everyone is loosing money in the market at the current time. This has caused me to hesitate me slightly, but I still want to start investing. Today, I visited MFI for the first time. To be honest, I was overwhelmed by information that I can not really comprehend. That is why I am writing.

I am a 24 year old male, married, with 2 daughters (ages 6 and 1). I work in Tokyo, Japan, for the US Army. I want to start investing $300.00/month into mutual funds. This is money I do want to touch for at least 15 years. The reason I have chosen mutual funds is that I want it to grow faster than the 3% my savings account offers. I do not want to lose it to high-risk funds, but maybe place it in the mid-risk range. I want to be able to check how my investment is doing and understand what I am investing in, but to have a professional making the real decisions.

Also, I would like to invest an additional $100.00/month into something that is more in the category of high risk. I would like to be able to control this investment, and make decisions on where it goes. Now. don't get me wrong I have no idea where to place it or when or where to move it, but I want to learn.

I hope that you maybe able to assist me in determining if my plan is crazy, which if it is I want to know, or if it is feasible. Thank you for your time and assistance.

A: Thanks for the great question! As a former US Army Officer myself, it's great to see young soldiers like yourself taking such a sincere interest in their finances.

Since I do not know your goals for saving (i.e. retirement, college funding, house purchase), I will touch on all three.

Retirement:

One of the best options out there is the Roth IRA. For year 2002, you can contribute up to $3000 per person in a Roth Account (this will increase over future years). All earnings in a Roth Account are tax-free. Let's assume- you invest $10K over the next 5 years, at age 60 your account is worth $150K all this is your money tax-free.

College Saving:

529 Plans - these are State-Sponsored College Savings accounts. These plans also allow you tax-free growth as long as the funds are used by someone in your family line for higher education.

Other (i.e. house fund, car, boat, etc.):

Taxable Brokerage Account - these accounts will allow you to purchase fund shares on a monthly basis if you set up an automatic deposit from your bank account. You will pay taxes each year on the income earned in these accounts.

When looking at mutual funds (and since you are military), I would recommend the following two companies: Vanguard & USAA. You can check them both out at www.vanguard.com and www.usaa.com. These are two of the best fund families for integrity, low cost, no-load, and great customer service. The performance of their funds is top notch too. We recommend that you stick with index funds whenever possible, they cost less than actively managed funds. USAA has a limited number of index funds, so Vanguard may be your best option. Remember this -since only 30% of active managers have been successful at beating the index it's not worth the extra cost or risk involved.

Now that you have a fund family, how do you pick the funds to invest? We believe that every investor should have a well rounded diversified portfolio to reduce their risk. This may take you some time, since you are starting out with a smaller amount, but here's a good start:

Find a fund in each of the following classes: US Small Growth, US Large Growth, Int'l Small Growth, Int'l Large Growth to start, invest $50 -$75 in each per month as the fund allows and as you can afford. Then as your savings increase add a Value fund in each of those classes and an Emerging Markets Fund. Now your on your way to an "Efficient Portfolio"!

PS. - Buy this book - The Informed Investor - by our very own Frank Armstrong (Amazon.com), if you want to design an efficient investment plan. (Heck, I had to get a plug in for the book!)

Good luck & may all your investments be wise!

Important Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

Lastly, the questions and responses set forth here are for general informational purposes only and are not intended to substitute for performing your own independent research or contacting your financial or legal professional before making any investment decisions. We make no guarantees as to the performance of any investment strategy you choose and are not responsible for any losses you might incur.