I'm a REALTOR® in my twenties generating a fair amount of disposable income. What would a sound investment strategy be for someone in my position? How should my strategy change over time as I get closer to retirement? Jason Edwards, Coldwell Banker Richard Smith REALTORS®, Austin

Certified Financial Planner John Henry McDonald answers:
First things first. I'd like you to have three months of living expenses in a money market fund or staggered CDs (one-month, two-month, three-month maturity) before you invest for growth.

Then that nasty word—insurance. Health and disability insurance are a must; life insurance is important if you are married. Buy good health insurance (a higher deductible if you are healthy and single). Buy an income-protection policy with a three-month wait and a three-year benefit (a relatively short benefit—but this stuff's expensive). Buy level term life insurance if you're married to a working spouse to cover all your debts. If you have children, add a zero to your combined income, or get an agent to do a "needs analysis" (but be careful of a sales pitch for life insurance that combines mutual fund investing).

If you're saving short-term (say, three years) for something expensive like a house, a short-term "no-load" bond fund like Strong Short Term High Yield Bond Fund (90% of your investment) and Vanguard's Total Stock Market Index (10%) might be a nice combination. A three-year goal is too short for a great exposure to stocks. The day you make your purchase, the markets might be down.

Now, set up a retirement plan. If you are self-employed with no employees, use a SEP (Simplified Employee Pension plan). In a good year, you can sock away about 15% of your income. In a bad year, you can dedicate less. Caution: If you have employees, they will have to receive a contribution percentage equal to yours.

For your investment mix, I suggest a portfolio of stocks in no-load index mutual funds. (Only 15% of money managers exceed the benchmark index their funds track. Index funds also have lower costs because they have no manager.)

I recommend a mix of Vanguard 500 Index (30%), Scudder Global (30%), Vanguard Small Cap Index (30%), and Strong Short-Term High Yield Bond Fund (10%). Stay on that course until 10 years from retirement. Then begin to reduce your exposure to the equity markets and shift into your bond fund until you have accumulated three years of living expenses or a 60% exposure to bonds (a 60/40 mix of bonds to stocks).

These are rules of thumb, and individual cases may require some different solutions, but these guidelines should point you in the right direction.

John Henry McDonald, CFP, (aam@austinassetmanagement.com or 512/453-6622) is the president of Austin Asset Management Co., the first fee-only financial planning firm of its type in Austin. The company specializes in comprehensive financial planning and asset management.

Artwork by John Green