Step 7: Decide on each investment vehicle

So which investment vehicles are right for your goals? It's finally time to decide.

Let's assume for now that you chose for your portfolio to be allocated with 60% in stocks, 30% in Bonds, and 10% in cash. That's a good start, now which investment vehicles to buy in order to fill those ranks? Let's take each pie slice at a time.

For stocks, we have Large Cap, Mid Cap, Small Cap, International, and Emerging. These are the five types of common stock, intoning where they came from. For example, 'Large cap' is from the fortune 500 companies and corporations that are publicly traded, and international is obviously from non-US markets.

On top of choosing between the five types of stock, you also need to decide how much of each type is a Value stock, and how much is a Growth stock.

Value is a category of any stock or bond that is analyzed and rated to have good performance in the long run, and is therefore basically chosen for endurance. Growth is not exactly the opposite, but it is geared more for the actually short or medium term growth of the stock, which doesn't mean that it will do well in the long run, just as long as the price goes up as much as possible, as quickly as possible. (Usually the stocks that day traders love.) The two categories achieve different goals in your portfolio, as one is there to boost immediate stock performance, and the other is to make sure your stocks have endurance, or at least don't drop too much in the long run. Usually only very detailed analysis can tell you what class you should weigh more or less heavily in at any given time, so if you really want to take advantage of this strategy, consulting a Financial Advisor for quality investing advice is a must.

Also under Stocks, you also have the choice between investing directly in stocks themselves, or in mutual funds made up out of stocks. If you go with individual stocks, what you have to do to ensure success is basically become your own fund manager, investing in a diversified, hopefully correlated, broad spread of stocks to reduce your risk and maximize your gains. I would not think it possible to do this without quitting your day job, even if you have software monitoring each stock's performance 24/7.

If you decide to invest in mutual funds though, all you really need to do to start is properly allocate your account as discussed earlier and in the previous step. However, you should be careful to note that the classification of the funds aren't universal, and while Morningstar (for instance) might classify a fund as a 'Mid-Cap,' that doesn't mean every stock inside is mid cap... Those managers have to keep the fund performing well, so when they feel they have to compliment a mid-cap fund with some other type of stock to keep up the bottom line, they do so.

One last thing to consider about mutual funds is that you have to pay tax on them yearly, as Uncle Sam wants his cut on these well-performing moneymakers. Stocks themselves are only taxed when sold, so take that into account when considering mutual funds. Usually this would only dissuade those investing large amounts of money in them though.

Onward to Step 8: The Importance of Market Timing