Dr. Don,

I am 21 years old and have a relatively high income for my age (about $175,000 a year). I currently have about $60,000 in the market and I'm adding a minimum of $5,000 every month to my account. Being as young as I am, I feel I can take on more risk than most in order to get higher returns. I don't plan on touching this money for at least 10 years. I also have about $15,000 in cash in my checking account and no debts other than a car loan. I don't carry much of a balance (if anything) on credit cards.

What would you suggest? I realize I'm overweight in financials but I've felt they represent an excellent risk/reward play right now, with the Fed easing and the market recovering.

Thanks,

M.L.

ML,

It's great that you're investing about one-third of your annual income to meet your future financial goals. The more money you invest in your 20s, the easier it is to attain your long-term goals. Not many 21-year-olds are thinking about retirement or college funds for children yet to be born, but as your life progresses, these goals among others will become important to you. Spend some time thinking through what your goals are because investing, like exercise, is harder to do without a goal in mind.

If you are able to invest in a 401(k) plan, SEP plan or another type of tax-deferred retirement plan, you should start contributing to that plan -- especially if your employer matches part of your contribution. Tax-deferral keeps your money working for you over the years until taxes are due on the distributions from the account.

Keeping three to six months worth of expenses in money market investments will provide a cushion of liquidity for unexpected expenses or living costs if you find yourself between jobs. The larger your portfolio, the less you need in liquid assets, but don't ignore this aspect of managing your investments. If you're not earning a market or near-market return on the $15,000 in your checking account, look into other ways of investing cash. You want it readily available, but that doesn't mean it doesn't need to earn a return. You might consider a tax-free money market fund for part of your cash investments. The

Money Fund Report can show you current yields on taxable and tax-free money market funds. Though its interest rate tables are dated,

this past Dr. Don feature can help you decide how to invest your cash.

Many investors think that having a long-term horizon means that they are buy-and-hold investors looking for one-decision investments. Even with a buy-and-hold outlook on investing, you still need to monitor your portfolio's performance to make sure that the investment continues to deserve a place in your portfolio. Your overweighting of the financial sector is a good example of the need to monitor a portfolio.

It's unlikely that you intend to overweight this sector forever. What caused you to overweight the sector and what will cause you to rotate out of some or all of these stocks? The

fed funds rate is a reasonable proxy for a bank's cost of money. Lower money costs can mean higher loan margins. That can translate into higher earnings. But there are a lot of other influences on these stocks and you should be wary of painting this sector with too broad a brush.

If the lower interest rates are coming about because the Fed is trying to avert a recession, the slowing economy can increase the number of bad loans, decrease the demand for loans and potentially reduce investment banking business. You own three different types of finance companies, along with

General Electric

(GE) - Get Report

(which has

multiple financial services divisions). A lower fed funds rate won't affect these companies equally. About 43% of your portfolio is invested in financial stocks compared to a 17% weighting in the

S&P 500

.

Your one mutual fund, Oakmark Select I, only owned 21 stocks at the end of December. It's your largest holding, and financial stocks represented almost 20% of that portfolio. So you own about 30 stocks. Academicians have demonstrated that you can do a reasonable job of diversifying your portfolio with just 30 stocks, but not when 43% of your capital is invested in the same sector of the financial marketplace.

Why diversify? Diversify because it reduces the volatility of your portfolio and improves its risk/reward attributes. You don't have to own mutual funds to diversify, but if you own individual stocks, you want to avoid the big sector bet you're taking on now. You can overweight the sector without placing this heavy an emphasis on the group.

With your investment schedule you can rebalance your portfolio in a few months' time without selling your current holdings. Just expand your view beyond the financial sector. A good place to read about asset allocation is

James J. Cramer's

Asset Allocation Adventure Worksheet (lie about your age and say you're 25!). Adding some energy and utility stocks would be an easy first step.

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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 none of the funds or stocks mentioned, 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

portfoliorx@thestreet.com.