Where should you invest your money?

I have been getting a couple of e-mails from current and former students asking for some investment advise (these are the ones who paid attention and realized I was a financial analyst by trade). The short answer to any questions is: you are young, put your money in a diversified index fund.

Usually you will get bad advise on investing if you listen to the talking heads on CSPAN (especially Jim Cramer). You will also, apparently, get bad advise listening to Suze Orman as well.

You basically want to avoid 2 things.

1) You don't want to be too conservative. Suze Orman invests all her money in low risk municipal bonds. Bonds indeed have little risk, but they also have a lower return to compensate. by putting all your money in bonds over a long period you will miss out on financial gains that you could have enjoyed. Remember if you invest your money in stocks over the long haul, risk is minimized to just overall market risk. Take a look at the S and P over a long period of time. (or the Nasdaq. Google has an excellent resource with some graphs here.

2) Don't be stupid aggressive. You are young so you should be weighted more heavily into stocks than bonds. But this does not mean you should dump all your money into GM or GOOGLE or whatever. Granted, there is the potential for large gains, but by putting all your eggs in one basket you increase your risk. (Remember return is positively related to risk....and cliches are sometimes accurate).

Rather, you should put your money in a broad index fund that contains a mix of stocks and bonds. The diversification eliminates the risk that you get burned if Google goes under or if oil collapses (rises). You can still enjoy large gains as well. More than Suze Orman.

One caveat: Do not be lured into the trap that if you put your money in the hands of a money manager you will earn a larger amount of money than if you put your money into index funds. Read this for some sobering coffee

A second caveat: The specific weighting of stocks and bonds depends in part on how young you are but also on how long of a time frame your investment is. Generally, the younger you are and the longer you plan on investing, more more you should weight towards stocks (greater risk) than bonds (lesser risk). Time lowers the overall risk level.