One of the questions we get nearly every day in the


Start Investing community is simply that: How do I get started investing? What should I buy first? Where should I buy it? How much will it cost?

So we're going to answer those questions. First it's important to know that there is no one perfect investment formula, no magic stock or mutual fund that will make you rich if only you can identify it.

Investing is not like the search for the Holy Grail. If you don't understand that at the outset, you might be tempted to jump out of your own investments and into someone else's once you hear how well he's doing.

Investing is about patience and discipline, about staying in the market through thick and thin. That's the first lesson beginners need to learn.

So what should you start with? Clearly you should buy a mutual fund that invests in the stock market. No, I don't think you should start by buying individual stocks. If you've only got a small amount of money, you can't diversify your portfolio enough. A mutual fund offers that ability. And in that vein, it makes sense to buy one that represents the entire market. The cheapest -- and perhaps the best -- is the

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Vanguard Total Market Index. You can buy just that one fund and then set up an automatic investment plan to keep adding to it at regular intervals such as every month or every quarter.

There is a second total market fund that will be worth considering when it's available later this year: the

Dow Jones U.S. Total Market

fund, an exchange-traded fund that will begin trading on the

American Stock Exchange

this spring. This index consists of 2,118 large-cap, medium-cap and small-cap stocks designed to represent the entire market. (It is one of 36 new index-based funds coming from

Barclays Global Investors

, which I discussed in a

previous column.

One reason an investor might choose it over the Vanguard fund is that I suspect it will be offered at

Sharebuilder, a Web site that allows investors to buy a broad range of stocks and index products for just $2 a trade. This is an excellent way for beginning investors to get started and to set up a portfolio using the dollar-cost averaging strategy even if they do not have a great deal of money. Sharebuilder does not offer mutual funds.

You can stop here. With either one of these funds, you own the market in a very diversified stock portfolio.

Moving On to the Next Step

For those investors who want to move to step two, I would add the

Nasdaq 100 Trust

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, which represents the 100 largest nonfinancial stocks on the over-the-counter market. That includes big tech players like

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Cisco Systems

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TheStreet Recommends


Sun Microsystems

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, and also fast-growing retailers like


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Bed Bath & Beyond

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. I like this index because it gives a portfolio a tilt toward tech, which is where the growth is, but doesn't sacrifice diversification. This index, too, is available at Sharebuilder, and I would weight the portfolio two-thirds to the Dow Jones U.S. Total Market and one-third to the Nasdaq 100 Trust.

You can stop there, too. Or you can move to the next step, now or later. Like my colleague Tim Middleton, I believe that health care is a good long-term play for a variety of reasons that include the aging of the global population and the rising standard of living in many parts of the world.

I don't think beginners should pick individual health-care stocks. They need a good diversified fund. I'm going to recommend

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Vanguard Health Care, a fund I use for my kids' college accounts, even though I have a couple of reservations about it.

Overall, I like this fund. Although it has lagged its peers in the short term, as you can see by looking at the performance area when you've selected a fund, its three-year, five-year and 10-year numbers are impressive. Remember, we're investing for the long term here. Manager Ed Owens is smart but a bit cautious. That's OK. Here's my reservation: Owens' forte is picking the right pharmaceutical company, and the fund is loaded up with them as you can see if you look at its top-10 holdings.

That's fine. But I'd like an adept biotech picker, too. That's a tall order. Ideally, I'd like to split the health-care money between Vanguard Health Care and a biotech fund. But I don't see a good one.

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Fidelity Select Biotech looks good on paper. But I owned that fund for a while and it wasn't so good in practice. Fidelity rotates portfolio managers constantly. At first, star manager Carrie Firestone had the reins. But less illustrious folks have been in charge too.

This fund illustrates a point I like to make about the problem with


star rating system. It rates funds from zero to five stars, five being tops. The problem is that it is backward-looking, basing the rating on history rather than trying to help you look into the future. Indeed, Fidelity Select Biotech had five stars at its peak and no stars at its trough. It is a roller-coaster ride that beginners might not enjoy.

So I'll stick with the more conservative Vanguard Health Care for a beginner's portfolio and pass on a biotech focus. For those who want to add health care, I would bring the Vanguard Total Market Index down to 60%, 25% for the Nasdaq 100 Trust and 15% Vanguard Health Care.

What About Volatility?

This is an aggressive all-stock portfolio that might be pretty volatile. Two things are missing: an international player and some ballast, or cash. Investors who want to add international should look at

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Vanguard European Stock Index for 10% of the portfolio, making it 50% Dow Jones Total Market, 25% Nasdaq 100 Trust, 15% Vanguard Health Care and 10% Vanguard European Stock Index. Those who want a cushion should adjust the percentages to include cash.

Now, for those investors -- and you are no longer beginners if you're at this point -- who want to go further, you can add individual stocks.

Follow Mary's Start Investing Portfolio at MoneyCentral.

Mary Rowland is the Start Investing columnist for MSN MoneyCentral. At time of publication, she was long Microsoft, Intel, Cisco, Vanguard Health Care and the Nasdaq 100 Trust, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. More from

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