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I am 21 and a recent college graduate. The past two summers I was fortunate to have a well-paid internship, and I invested a significant portion of that money. I've just started working full time at an accounting firm, and have elected to maximize my contributions in the company's 401(k) plan. My investment outlook is aggressive and I have no immediate need for the money I put aside over the past two summers. My time horizon is at least five years, but most likely much longer. Most of my investments focus on technology. Should I diversify more? Should I continue to contribute to my Roth IRA now that I have a 401(k)? For my taxable account, I have accumulated a decent portion of my funds through automatic investment plans. If I continue to contribute to my Roth IRA, I was considering diversifying by adding a biotech fund (possibly (DRBNX) Dresdner RCM Biotech). Any thoughts?

-- D.P.


Congratulations on your new career. You've made a heads-up move by starting a retirement savings plan in your early 20s. The longer your retirement money is invested, the easier it is to reach your retirement goals. A lot of recent grads don't have the financial flexibility to start a retirement savings plan because they have to focus on repaying their student loans, buying a reliable car, furnishing an apartment, etc.

You should check with your 401(k) plan administrator to make sure you're truly maximizing your contribution to the 401(k) plan. You may be on track to contribute $10,500 over the next 12 months, but plan years typically run on a calendar-year basis. You may be able to contribute $10,500 through the end of December 2000, and then go on to maximize your contribution in the 2001 plan year.

If the mutual fund companies in your 401(k) plan are charging you annual account fees -- and most do for accounts with small balances -- having multiple accounts eats into your return. With low balances, these fees can rival investment performance for their effect on return. With less than $1,000 in your 401(k), you really don't need to put it in four different mutual funds.

But because you're planning to increase your balances fairly quickly and may have more than $21,000 in the plan by next December, don't worry about changing your allocations. My rule of thumb for people starting to contribute to a 401(k) plan is to select one well-diversified mutual fund -- meaning not a sector fund or a money-market fund -- and don't add additional mutual funds until you have a balance of at least $5,000.

If you're paying a sales load to invest in

(ANWPX) - Get American Funds New Perspective A Report

New Perspective in your 401(k), then stop investing in that fund and reallocate. Sometimes 401(k) investors get a break on commissions, but if you're paying a 5.75% front-end commission to invest in this fund, you want to stop contributing to it.

As long as you have compensation (wages, salaries, tips, professional fees, bonuses, etc.) above the contribution amount and meet the income restrictions -- in your case that means having an adjusted gross income of less than $110,000 -- you can continue funding your Roth IRA even though you are maximizing your contribution in your 401(k) plan. See the

Internal Revenue Service


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Can I Contribute to a Roth IRA? Also, see this table on the IRS Web site,

You Can Contribute to a Roth IRA.

Continuing to fund your Roth IRA is especially advantageous if you expect to face a higher marginal tax rate in retirement than you face now. Since you're just starting out, that's likely to be the case. With a Roth IRA, contributions are made with after-tax dollars, and later on, qualified distributions are tax-free. You can also withdraw your Roth


before retirement for any reason without penalty. (An exception is traditional IRA contributions that have been converted into a Roth. They must remain in the Roth for five years before being withdrawn without a penalty.)

As for adding a biotech fund, your portfolio could use the biodiversity. It's overweighted in technology stocks. Dresdner RCM Biotechnology has had a great run over the past three years. I don't think you'll see the same level of returns in the next three years, but there's nothing wrong with adding it to your portfolio. Just don't invest all of this year's $2,000 Roth IRA contribution.

According to


, you're twice as heavy in technology as the

S&P 500

index (62% vs. 29%). Just because you're young and can afford to invest aggressively doesn't mean you have to double down on the tech stocks. Try to take a broader view of the market. You're in this for the long haul, so don't try to invest like you want to retire at 25.

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Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. At the time of publication, he owned shares of the Vanguard Growth Index fund, though positions can change at any time. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at