I'm 26, where do I put my money to get the most out of it?

I have a 401k at work with a decent amount of change in it. I’d like to open a stock trading account through one of the online brokers with my income tax check. I also plan on purchasing a few bonds in the next couple months. What would be your input on how to invest in the stock market correctly and safely with minimal risk? Also, what should I look for in the fine print when buying a bond? What kind of bond is best and pays the most? I won’t need the cash for 5-10 years. I'm trying to get my ducks in a row so I can make a few dollars now, and save a few dollars for later. Thanks.

Financial Planning, Investing
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March 2016

Hebner, Mark

Irvine, CA
85% of people found this answer helpful

First, risk and return go hand in hand. There is no such thing as a free lunch. For someone who is 26 years old, it is imperative for you take a healthy amount of risk (at least 70% in stocks). The best way to gain exposure to both the stock and bond markets is to hold a globally diversified portfolio of index funds. Forget trying to day-trade, pick winning stocks, time markets, or invest money with hot mutual fund mangers. All of these strategies have led to more destruction of wealth versus a low-cost index alternative. There are times when markets are going to be very turbulent, but you need to stay in it through thick and thin. Time is on your side.

Stay away from buying individual bonds. Transaction costs are too expensive for the amount of money you are looking to invest. Buy a low-cost bond fund instead.

Ideally, you should have 6-12 months of living expenses set aside for a rainy day, with the rest of your assets invested based on your longer term goals. This can include retirement, college planning, purchasing a home, starting a business, etc. Your 401(k) should be heavily invested in equities since you have 35-40 years before you will touch those assets. Shorter term goals should be invested very conservatively using money market funds, short term bond index funds, and maybe a little bit of stock index funds.

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