Dr. Don to Young Investor: Don't Settle for a Mere $1 Million - TheStreet

I am 30 years old, have been investing since I was 24. My father sat me down and told me to open an IRA because that was the one mistake he made -- not saving for retirement. I am finally at a point where I will have a significant amount of money to put away on a regular basis and I need some direction. Do you have any suggestions? -- D.K.

D.K.,

Congratulations on your great start toward meeting your future financial goals. I wish my father had sat me down when I was in my 20s and started me investing for my retirement. I would have caught the entire run of the bull market. But as any experienced investor will tell you, should-haves, would-haves and could-haves don't count in measuring investment performance.

Conventional wisdom says that if you begin investing in your 20s you're way ahead of those who wait until their 30s and 40s. Here's one case where conventional wisdom is right.

In your case, I'm preaching to the choir. You've gotten a great start. Now, like a chiropractor, we need to see how you stand and make any necessary adjustments.

First, keep it up. Don't think you can stop investing now that you've gotten this far. A lot of people use $1 million as their retirement bogey. That may be fine if you are in your 50s or 60s, but not if you're in your 30s. Ignoring taxes for the moment, if the current value of your holdings grows by 8 3/4% annually -- a fairly conservative growth rate -- your portfolio will be worth $1,045,000 when you're 65. If your portfolio continues to earn 8 3/4% annually after you're 65, you'll have $91,500 to spend each year without touching principal.

Let's assume a blended tax rate of 25% for your taxable and tax-deferred accounts. (Distributions from your Roth IRA won't be taxed, but distributions from your SEP IRA, a type of retirement plan for self-employed workers, will be taxed at your ordinary income rate.) That leaves you with an estimated $68,500 to spend each year. But if you are living on, say, $40,000 a year now after taxes, in 2035 when you turn 65, you'll need to earn $112,500 a year to keep that same level of purchasing power, assuming an average annual inflation rate of 3%. Let's also not forget that retirement isn't likely to be your only financial goal.

Now let's see how you can organize your portfolio to meet that challenge.

Allocate your assets among a wider variety of stocks.

For a quick and dirty look at how to allocate the assets in your portfolio, see

Jim Cramer's Asset Allocation Adventure.

Reconsider your cash position.

You have more than $13,000 -- about a quarter of your portfolio -- in a money-market fund. At your age you should be invested in stocks, not cash or bonds. The only exceptions I would make are for money you are saving toward a down payment on a house or car, and some cash for emergencies. The conventional wisdom is to have three months of living expenses held as cash. For most people, that's too much liquidity.

Weigh how secure you are in your career, your health, the age of your car, your furnace, your water heater and the number of teen-agers in your home, and you'll have an idea how probable it is that you'll need ready access to cash. When you keep a one-month cushion instead of a three-month cushion, the difference can be invested. Over the years, the extra money in the stock market will reward you handsomely.

Evaluate how your mutual funds overlap.

(FCNTX) - Get Report

Fidelity Contrafund and

(FFIDX) - Get Report

Fidelity fund have a lot of overlap. If you own two mutual funds that are investing in the same stocks, you're not diversifying. It will be easier for you to switch out of Contrafund, because it's in your Roth IRA and there won't be any tax consequences from a change. But Fidelity Fund has a new manager, and that bears watching closely.

Focus on core holdings.

I can see

Cisco Systems

(CSCO) - Get Report

,

America Online

(AOL)

and

Walt Disney

(DIS) - Get Report

as core holdings in your portfolio. However, you can love shoes without loving shoe stocks (

Steven Madden

(SHOO) - Get Report

), and you should read

TSC's

recent coverage of

Lucent

(LU)

to determine whether it has lost its luster for you. Cisco and cash make up 36 1/2% of your portfolio. Lighten up on the cash. Put the money in a

no-load index mutual fund. That will be another core holding in your portfolio.

In general, when you review your portfolio you should be willing to take losses in you taxable accounts and move the money into stocks or funds that meet your asset-allocation model targets. Use your losers, not your winners, to rebalance. Get uncomfortable when one stock exceeds 10% of your portfolio, but don't throttle back on the holding just to get back to that magical 10% level unless the stock's performance is slipping or it exceeds 15% of your holdings. Mutual funds, especially index funds, don't have to follow this guideline, except in the case of a sector fund like your

(FSDCX) - Get Report

Fidelity Select Developing Communications fund.

Finally, continue to take advantage of the tax-deferred and tax-advantaged retirement plans available to you, but don't lose sight of intermediate goals and how you need to invest to meet those goals as well. Good luck and keep the momentum going.

Send In Your Portfolio

If you would like to submit your portfolio for a makeover, send it to portfoliorx@thestreet.com. Give us enough details -- dollar values or percentages -- so we can determine how your assets are allocated. Also tell us a little about yourself and your investing goals, and let us know how we can contact you if we have further questions. Though we'll only use your initials publicly, please include your full name so we can verify your identity. Unfortunately, we cannot guarantee your portfolio will be selected for a makeover, nor can we promise to respond individually to everyone who submits a portfolio.

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. 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.