Nice problem to have: too much savings

Q: : I'm 31 and want to start investing for my family's future. Our annual household income is just over $100,000, and my wife and I both contribute the maximum amount to our 401(k)s. But I feel we should do more. We have $20,000 in the bank and can save about $750 a month.

B.S., Chicago

A: : "You are already doing very well by maxing out your 401(k)s," says David Bendix, president of Bendix Financial Group, Garden City, N.Y.

Assuming you can save an extra $9,000 a year, Mr. Bendix recommends two additional steps: "Both you and your wife should contribute $3,000 a year to a Roth IRA, at $250 a month each. Put the money into an aggressive-growth stock fund - perhaps a small-cap or mid-cap fund. Put the remaining $3,000 into a small or mid-cap stock fund." You are young, so "be fairly aggressive," he says.

Q: : Much information is flooding the media relative to investing advice - in particular many statements that index mutual funds are "safe" vehicles of investing, since they provide instant diversification. Yet, in today's market, are they really a good investment? Index funds have been on the downside for many months.

K.R., via e-mail

A: : "Safety is probably not a main characteristic of index funds, but consistency and diversification are," says Russ Kinnel, who heads up equity research for Morningstar Inc. in Chicago.

In a down market, you will probably "lose less than most actively managed funds," he says. Conversely, in an up market, "you will come out a little ahead."

Judged over time, say 10 years, index funds will typically beat most actively managed funds. Index funds cover most market sectors, Mr. Kinnel says. So, if you are in an index fund, you automatically scoop up gains in rising sectors.

Q: : What are "wrap accounts"? Are they much more expensively managed than regular mutual-fund accounts?

G.J., New York

A: : Yes. Wrap accounts are managed investment accounts, usually offered by brokerage firms. They charge a fixed percentage of total assets under management.

Eric Tyson, in "Personal Finance for Dummies" (IDG Books), argues that investing in a no-load mutual fund offers far lower expenses. A typical Vanguard mutual fund has an expense ratio of about 0.2 to 0.5 percent. A wrap account charges up to 3 percent or so of total assets.

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