Arguably the hardest step in investing is the first step. Investors who are just starting out face a sometimes bewildering array of choices, a deluge of advice and the dread that if they make a mistake, they will lose everything.

It does not have to be that difficult, though. By following a few general guidelines, investors can make their initial forays into the market. Consider sample, or model, portfolio allocations. These give investors a rough outline of how to apportion their money, however much money they may have.

IN PICTURES: Learn To Invest In 10 Steps

Large What?
Terms like "large cap" and "value" are vague, but they also tend to mean what you think they should mean. Wal-Mart (NYSE:WMT), for instance, is a very large company that has a P/E below the market average and a higher-than-average dividend yield. Not surprisingly, it is considered a large-cap value stock. On the other hand, Apple (Nasdaq:AAPL) is even larger but is growing faster and has richer multiples - making it a large-cap growth stock.

For the sake of simplicity, we are looking only at stocks and bonds here. Other investment categories like hard assets (commodities and precious metals) and real estate certainly have a proper place in personal finance, but those go beyond the scope of this piece.

Model #1 - The Risk-Seeking Approach
A risk-seeking investor is typically one with a long investment horizons (decades) and a willingness to trade volatility and uncertainty for higher overall returns. A risk-seeking approach is going to prioritize growth over value, smaller market capitalization over larger, and will lean more towards international diversification. Fixed income is not likely to be a major part of the portfolio, apart perhaps from international bond and/or lower-rated corporate bonds.

5% - Large-cap value 20% - Large-cap growth
10% - Mid-cap value 25% - Mid-cap growth
15% - Small-cap value 20% - Small-cap growth
5% - Fixed-income

Foreign / domestic - 50% / 50%

This allocation may actually seem too conservative for very aggressive investors, but beginners should probably get a little experience under their belts before really ratcheting up their risk threshold. Why include any value allocation at all for risk-seeking investors? Well, with the exception of the 1990s, value-oriented investment approaches actually out-perform growth-oriented strategies. Still, it is generally true that growth is what fuels returns and this portfolio is designed for those who want growth.

Model #2 - The Risk-Tolerant Approach

10% - Large-cap value 15% - Large-cap growth
15% - Mid-cap value 20% - Mid-cap growth
15% - Small-cap value 15% - Small-cap growth
10% - Fixed income

Foreign / domestic - 35% / 65%

As you can see, this is a much more balanced approach than the first portfolio. This approach surrenders some of the growth opportunities of the more aggressive approach in exchange for a bit more conservatism and predictability.

Model #3 - The Risk-Limiting Approach

25% - Large-cap value 10% - Large-cap growth
20% - Mid-cap value 10% - Mid-cap growth
15% - Small-cap value 5% - Small-cap growth
15% - Fixed income

Foreign / domestic - 25% / 75%

This portfolio is better suited for an investor who believes "slow and steady" wins the race, as well as investors who do not want so much month-to-month or year-to-year volatility in their results. Still, there should be more than enough growth in this sort of allocation to outpace inflation. (For more, check out Fight Back Against Inflation.)

Security Selection - How Do I Choose?
Given this sea of numbers, how should a beginning investor turn those allocation percentages into actual candidates? A lot of that depends upon the time you have to devote to the work and your confidence in your own abilities to pick individual stocks.

Stocks and Mutual Funds
It takes a few hours to properly research a single stock. In that same time, you can thoroughly research a mutual fund, and you can search for them by broad characteristics like "large-cap growth". Moreover, an individual mutual fund is not going to be nearly as volatile or risky as any single one of its holdings. In other words, pick the wrong stock and you could have a 20% loss in one week, but you are unlikely to see such a sharp decline in a fund. Of course, the reverse is true as well - if you can "out-pick" a fund manager, you will outperform.

Exchange Traded Funds
Going a step further, you can find sector-specific ETFs (or mutual funds) that meet those allocation guidelines. For instance, the S&P Biotech SPDR (NYSE:XBI) would certainly fulfill some of the "growth" allocation in a portfolio, while the iShares NYSE 100 Index (NYSE:NY) probably fits the bill for large-cap value seekers. There is more risk here (say, if the entire biotech sector sells off), but more potential for return as well. (To learn more, see How To Use ETFs In Your Portfolio.)

Picking Stocks
Individual stock selection is also always an option. This takes the most time and the most effort, but it allows you to invest in more or less exactly the sorts of companies you want to own. It may take a bit more work here to distinguish growth from value or foreign from domestic - Procter & Gamble (NYSE:PG) gets a lot of its revenue from overseas; it is not a 100% U.S. company even if it is headquartered in Cincinnati - but there is no need for absolute precision here.

Investors do not have to go 100% in any direction. Especially for beginners, it may make more sense to buy one or two individual stocks and then round out the portfolio with ETFs and mutual funds. As you become more comfortable with individual stock analysis and selection, you can gradually replace more and more of the holdings with individual stocks. By the same token, you may find that you are better at selecting managers or ETF concepts than individual companies.

The Bottom Line
In any case, the most important step of all is to begin investing. We have laid out some starting options for you here, but they are just that - options. The right mix of risk and reward or growth and stability is a very personal decision and there is no "right" answer. (For more tips, check out Rebalance Your Portfolio To Stay On Track.)

Catch up on your financial news; read Water Cooler Finance: Who Is The Next Buffett?

Related Articles
  1. Mutual Funds & ETFs

    3 Invesco Funds Rated 5 Stars by Morningstar

    Learn about the top three mutual funds administered and managed by Invesco Ltd. that have received a five-star overall rating from Morningstar.
  2. Mutual Funds & ETFs

    The Top 4 Russell Funds for Retirement Diversification in 2016

    Discover four mutual funds administered and managed by Russell Investments that would add diversification benefits to a retirement portfolio.
  3. Mutual Funds & ETFs

    The 3 Best American Funds for the Income Seeker in 2016

    Learn about American Funds' mutual fund offerings, their past performance compared to peers and three American funds to consider for income investors.
  4. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  5. Term

    How Market Segments Work

    A market segment is a group of people who share similar qualities.
  6. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  7. Mutual Funds & ETFs

    5 Low Fee Lord Abbett Mutual Funds

    Learn about five low expense ratio Lord Abbett mutual funds and the key characteristics about each mutual fund's top holdings, returns and total assets.
  8. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  9. Fundamental Analysis

    3 Long-Term Investing Strategies With Strong Track Records

    Learn why discipline and a statistically valid investment strategy can help an investor limit losses and beat the market over the long term.
  10. Products and Investments

    There's a Reason They're Called Junk Bonds

    The closing of Third Avenue Managemet's Focused Credit Fund is a warning to investors and advisors. Beware the junk.
RELATED FAQS
  1. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  2. What is the 'Rule of 72'?

    The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of ... Read Full Answer >>
  3. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  4. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  5. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
  6. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center