INVESTING for succes: PART 1

Strategies for advancing your business through practical reinvestment

Every outdoor power equipment dealer wants a successful, profitable business. They see to the business's daily operations, ordering equipment and parts inventory, supervising the staff and servicing the customers. When the year is done, and all the hard work and dedication has hopefully paid off, what now? What do you do with any profit dollars you accrued?

For some dealers, the decision is made before the profit is even earned. Developing an annual business plan is something strongly encouraged by Steve Hoctor, a business development manager for SCOTSCO, an Oregon-based distributor. As part of the company's dealership training, they assist dealers in developing and refining their business plans, including where and how to invest their profit dollars.

With the numerous factors that influence the success of the seasonal dealership business, it may be difficult to forecast profit earnings. Without specific forecasting, planning for business reinvestment may also be a challenge. It should, however, not be too difficult for a dealer who is very involved in the day-to-day operations of their business to know where it needs investment most Many distributors, consultants and dealers advise investing money in similar segments of the business.

INVESTING AND BORROWING

Before deciding what to invest in, how much will you invest?

"Dealers should be putting 20 percent of their profit right back into their business," suggests Hoctor. "The minimum they should invest each year is five percent"

Mike Marks, from the Indian River Consulting Group, warns dealers not to invest too much too fast "Many more people go out of business than people think because they have grown too fast," says Marks. "After a good year they invest to grow their business, but they run out of dough and can t keep up with it-and it kills them." Dealers should be cautious when growing and be sure to only invest as much as they can maintain.

Marks suggests making small investments here and there instead of putting all of the investment dollars into one big investment idea. "Make lots of small bets," says Marks. "You can lose a lot of small bets and still be here tomorrow."

The actual dollar amount invested by a dealer depends on how much revenue is earned each year. Many times a large investment may not be entirely necessary or practical. At other times, a larger investment is needed than profit dollars will allow. When this happens, a dealer should consider the possibility of borrowing from a financial institution.

"We try to make a profit of between five and 10 percent of sales," says Charles Winstead of Land & Coates, a five-location dealership located in the Virginia Beach area. "If we have lots of profit, we will definitely use it to reinvest. If the reinvestment is really necessary, we would borrow the money if sufficient profits were not available."

Ideally, a dealer's relationship with a financial institution should be built before the actual planning for reinvestment occurs. Having already built a relationship with the banker or financial institution has the potential to benefit the dealer greatly.

Stan Grader, of Grader Distributing in Marble Hill, MO, has sat on a bank board for 20 years, and has gotten to know how banks and lenders think. "I would really encourage dealers to get to know their bankers," Grader advises. "The more familiar a loan officer is with your total operation, the better the terms you will get and the more likely it is they will approve the loan."

Grader explains that dealers should begin to build those ties with the bank by setting up corporate checking accounts as well as lines of credit for purchasing inventory. However, building a relationship with the bank is only the first step in gaining their trust, ultimately leading to approval on a business loan. Grader warns that dealers should be prepared to prove to their bank that they are able to responsibly and effectively handle the finances of their business.

"Dealers are used to talking about how many trimmers they sold or what advertising they did," explains Crader. "They talk about when their next open house will be, not their return on assets. But a banker will ask those tough financial questions." Dealers should be prepared to talk to lenders about their return on assets as well as their profitability over the past few years. Crader advises dealers to prepare several accurate, detailed profitability and cash flow statements on a regular basis to prove they have a strong handle on their business.

10 steps to financial success

Real world riches start with the 10 steps to financial success, either during college or right after. Think about it you've got your college diploma in your hand, and it signifies your entry to the "real world". Is it too early to start putting your soon to be good income into a wealth creation strategy? You'll be happy to know it isn't, and you can use the ideas listed below to get what you want.

10 Steps to Financial Success - How to Become Rich Right after College

Have a goal. Your 10 steps to financial success should always start with goal setting. Without it, you will have no plans or direction for achieving financial success. Goals must be SMART - specific, measurable, attainable, realistic, and time bound. Know the definition for financial success for you.

Do what you love. You will become rich more quickly and easily if you're doing something you love. When you get paid for doing something you have fun with, you feel motivated to work harder even if there is no significant increase in motivation or rewards. You also don't count the hours till you can leave your job because you're already enjoying yourself.

Pay off your debt. It's never too early to start clearing your name from debt. Know your credit score and do what you can to eliminate debt from your life. It's not bad to be in debt, but only if it's not earning as much interest as it would with credit cards. Also, it's not bad if you used it for investment purposes and the promised returns are greater than what you've borrowed.

Be healthy. You might wonder what your health has to do with financial success, but apparently, it has a lot to do with it. If you're healthy, you have lower medical expenses and insurance payments. You'll also see your total expenditure decrease if you cut back on smoking, drinking, and other health vices.

Save more and spend less. The fifth of the 10 steps to financial success is defined by practicality. You can't be rich if you don't know how to be practical. Don't spend more than you're earning and learn how to invest your money.

Take risks. You'll get nowhere if you always want to wait for things to happen rather than making things happen. Opportunities come once in a lifetime so grab them when they come your way!

Work hard. Financial success doesn't come to your life for free. You must be willing to sweat blood and tears for it.

Make your money work for you. The eighth commandment of the 10 steps to financial success is actually based on one of the main principles behind the success of the Rich Dad Poor Dad series from Robert Kiyosaki.

Be generous. Reward those who have helped you. If giving something another person needs won't cost you anything then give it! Share your wealth and you'll definitely see it multiply!

Be ethical. Lastly, be fair to other people. Treat them honestly. Do things by the rule even if you know that no one's going to catch your hand in the cookie jar. Ethics might seem to lower your profit margin at the start, but it's actually increasing your profit in the long run because more people are inclined to trust in you based on your actions.

These 10 steps to financial success may seem too simple, but it will definitely build you a solid financial foundation for your life. You may receive other seemingly more complex tips for financial success but when you break them down, you'll find all of them reverting back to one of the 10 steps to financial success stated here. So really, why complicate things when you don't have to?

Best investments this year

The stock market should present us with a wide variety of NEW hot stocks in 2009. Many of them are going to be new technology stocks that come from the nanotech, biotech, financial, energy, healthcare & communications sectors.

Most of them might seem promising, but the truth is that a good number of these trading & investing opportunities could be extremely risky, while others are simply not as good as they look. That's why it's very important to know how to choose among the best especially if you want to day trade them.

When you know how to pick and approach the best hot stock trading opportunities, you are able to generate a consistent and respectable amount of money in a very short period of time.

Experienced day traders recognize that trading hot stocks on momentum can be the fastest way tomake money in the stock market, especially on uncertain times like these.

You don't necessarily have to trade momentum hot stocks all the time. But you can learn how to take advantage of them when you encounter the best opportunities for going long or for shorting them to make money when they are poised to fall down.

If You decide to day trade stocks just keep always in mind that for a trader to survive and be consistently profitable, its necessary to keep things as simple as possible. To much confusion and technical indicators will most of the time make you slow in your decisions and froze you up when a good opportunity is right in front of your screen.

In the end, stock market day trading is all about picking the best daily stock opportunities and following your buy and sell signals with ease and simplicity. Once you learn to master your trading decisions, you can aspire to produce consistent profitable results.

TOP 10 ways to get affordable health insurance!!!

The statistics are startling when it comes to the outrageous uninsured Americans and the numbers keep getting bigger. But what do you do when you don't have a job and can't get affordable individual or family health insurance from an employer? Or, what about all the families that have jobs but still cannot afford the health insurance offered by their employers and can't find an option for affordable health insurance?

There are low cost health insurance options out there that, in fact, many Americans have already implemented and are beating the rising battle against being uninsured. In addition, more individual and family health insurance options are being brought into the market as the rising number of uninsured Americans increases. This is great news for people who just don't know what to do when it comes to obtaining low cost and affordable health insurance. Below are the top 10 ways Americans are getting the affordable individual and family health insurance coverage they need.

1. COBRA: First, it is best to start with the Consolidated Omnibus Budget Reconciliation Act (COBRA). If you are not employed you may be eligible to continue your previous employers' health insurance through COBRA. This also applies to children going off to college... you also may be able to continue on your parent's health insurance coverage through COBRA. This is a very good option for people who may have lost their job and are still undergoing medical treatments. If you were to switch to another insurance plan, your current medical treatments may not qualify under the new health insurance plan. But.. WARNING! This will not be an affordable health insurance option. The premiums will be much higher and you may be able to better afford one of the below options first. It is best to gather all your available health insurance options and pick the best health insurance plan for you.

2. Workers' Compensation: Many people don't realize that they may be covered under their state's Workers' Compensation program. If you are being treated for any work related injury, your employer must offer you treatment under their Workers' Compensation program.

3. Medicaid: Don't automatically think that since you have a job you won't qualify for Medicaid. Medicaid will pay health care expenses for low-income families and individuals. Each state sets the eligibility requirements so qualifying for the program is state specific. If you are working and still don't have enough to buy affordable health insurance, it doesn't cost you a penny to see if you or your children qualify for Medicaid so it is always best to check Medicaid first before moving on to the next options. And, there is good news about Medicaid... more and more states are adding health care benefits for low-income families so if you don't qualify now, keep informed of your state's Medicaid and health insurance laws because you may qualify in the future.

4. Medicare: Most people know if they qualify for Medicare or not, but I need to add it to the list just to make sure it is not overlooked. Medicare is provided by the government and administered by the Social Security Administration. If you are sixty-five years old or older you would qualify for Medicare. You may also qualify if you are getting Social Security

5. State High Risk Health Insurance Pool: If you are turned down by individual health insurance companies because of pre-existing conditions, your state may have a high risk health insurance pool you can obtain health insurance from. It may not be an affordable health insurance choice, but it may be the only individual or family health insurance option available to you that will pay for your pre-existing conditions if you don't qualify for COBRA(see #1 of this list).

6. Individual and Family Health Insurance: This is where you just go to an insurance company and buy individual or family health insurance the same way you would by home or auto insurance. These plans work similar to what an employer would offer their employees but would be more expensive since you don't get the cheaper group rate and you would not have an employer contributing to some of the costs. Another drawback of individual and family health insurance plans is that there is usually a pre-existing conditions clause (they may not cover pre-existing conditions or may not cover them until after a certain period of time) and a medical exam. If you do want to choose an individual or family health insurance policy, remember the higher the deductible you choose the lower your premium will be, but the more you will pay out of pocket when you go to the doctor or hospital. Getting a high deductible "emergency" policy is a better way to maintain a low cost health insurance plan and keeping a Health Savings Account for smaller health issues will probably save you money in the long run.

7. Short Term Health Insurance Coverage: This is a great affordable health insurance option for someone in-between jobs or who knows they will be starting a job soon. Short-term health insurance coverage works the same as an individual health insurance policy (see #6 above), but you will only be covered for a specific amount of time which would keep your premiums down. This is also a good option for someone who needs time to examine their individual and family health insurance choices but still would like to be covered quickly to avoid any coverage gaps.

8. Group Insurance from Organization Memberships: This is often an overlooked source of affordable or low cost health insurance. Some people are members of specific organizations that offer health insurance coverage. For example, people who are members of The Sacramento State Alumni Association can obtain a variety of insurance choices. Although these organizations often do not help pay the health insurance premiums like an employer would, the rates would be lower because of the group discount. So, figure out what organizations you are a member of and see if they offer group health insurance. You could also research organizations that provide group health insurance and join those groups, or even ask current organizations you are a member with to offer group health insurance. They may just not realize they could offer a plan to their members.

9. Group Health Expenses Sharing Plan: This is not insurance but works similar to it. This is when a group of people pool their money together and pay each others' health expenses... they pretty much become their own insurance company. The contributions are pooled together and usually invested in order to accrue interest on the pooled funds. It works well when there are a lot of people who contribute and everyone is only using the money for major medical expenses. There are religious groups that use this model successfully. Medi-Share is a popular health expense sharing plan and has been around since 1993. If you are interested in this option make sure you choose a group that has been around for a long time and has a good track record.

10. Health Insurance Discount Cards: Again, this is also not an insurance plan but can be a good source for getting low cost health services. There are many companies who offer affordable health insurance discount cards and they work like this: You pay a small monthly fee for a membership card and when you go to the doctor or hospital you will get a discounted rate on your services. These are not for everyone and one thing you have to remember is that if you had a catastrophic health crisis the discount on these cards is not a lot, so you would still have an enormous amount of bills left to pay. But, on the other hand, some people do choose to go this route and at least are able to get a discount on their doctor bills. These cards should not be used in place of insurance and if you choose this option you should still be working towards getting health insurance in the future.

Money Market Funds vs Accounts

Money market accounts are bank alternatives to money market mutual funds. What’s the difference? The main factors are risk and choices. Let’s do a comparison of money market funds vs. money market accounts so you can make the best choice.

Money Market Accounts

Money market accounts are your plain-vanilla option. They’re what you’ll find at a bank. Money market accounts should pay you a nice annual percentage yield (APY) while keeping your money safe.

Money Market Funds

Money market funds are more complex – you’ll find more options and you’ll likely earn a slightly higher yield than you’d get from a money market account. Some examples of money market fund options are:

• US Treasury backed money market funds
• US government and agency backed money market funds
• Municipal money market funds
• Local municipal money market funds
• Socially responsible money market funds

The options listed above allow an investor to choose the money market instruments used in the fund. Some people are only comfortable with securities backed by the US government. Likewise, some people use municipal money market funds in order to earn tax-free income.

Safety First

For some investors, safety is more important than high returns. If you agree, you should stick with money market accounts. Money market accounts offered by banks are typically FDIC insured (although you should check with your bank and the FDIC for details).

If money market accounts are FDIC insured, it’s only fair that they would offer a slightly lower rate than a money market fund.

Money Market Account or Money Market Fund?

Which should you use? It depends on what you want. Money market accounts have their place, as do funds.

The main thing is to consider your needs. If you don’t need the options available from funds, just use a money market account. You should get a competitive return from a money market account, and you can sleep at night knowing that you’re taking less risk.

In addition, you should consider how much time and energy you’re willing to invest. Money market accounts will be easier to find at standard banks. For a money market fund, you may have to open an account with a brokerage firm or mutual fund company.

Simple advices about Roth 401k Plan Provisions

Overview of Roth 401k

Roth 401k is simply another choice for 401k plans. It allows participants to defer after-tax salary dollars. Contrast this to traditional 401k salary deferrals – which have been on a pre-tax basis. Roth 401k is an optional feature that employers can add to a plan, but employers are not required to do so.

Roth 401k Basics

In very general terms, Roth 401k money is “after-tax” money. Like a traditional IRA, earnings within the account are not taxed each year. However, Roth 401k money is unique in that qualifying withdrawals are not subject to ordinary income-tax. This means that if you follow all of the IRS rules, the money you take out of a Roth 401k at retirement is tax-free. Of course there are tradeoffs and pitfalls, which you should carefully study before choosing.

Roth 401k Limits

The contribution limits for Roth 401k dollars will be the same as those for traditional 401k contributions. In 2006, the maximum salary deferral limit is $15,000, with an additional $5,000 catch-up provision available to those over age 50.

Combining Money-Types

Employees may be able to mix how a plan characterizes salary deferrals (if their plan allows it). For example, an employee could say “I want 60% of my deducted pay to be Roth 401k money, and the rest to be pre-tax money”.

Roth 401k – Employee vs. Employer Dollars

The Roth 401k is only available for employee deferrals. In other words, an employee’s salary deferral (or paycheck deduction) can be characterized as Roth-type. However, employer money (matching contributions, profit sharing, and so on) will not be part of Roth 401k.

Roth 401k Timeline

Plans may begin deferring after-tax dollars starting January 1st 2006. However, it is likely that some plans will not offer the feature at that time. Possible reasons for delay are:

At the end of 3rd quarter 2005, the IRS had not issued final regulations and guidance on Roth 401k

Plan providers (investment companies) may not be ready to administratively handle Roth 401k accounting

Employers may not have fully analyzed the tradeoffs involved in offering Roth 401k

There are a variety of other reasons that may hold up the implementation of the Roth feature for a 401k plan. Remember, the employer may offer Roth 401k, but is not required to. In addition, some plans may only offer a portion of what is allowed under Roth 401k rules. The rules say they are allowed to do this, not that they must.

Roth 401k Sunset

Roth 401k may not be around forever. The laws that allowed Roth 401k were part of EGTRRA, and the rules that allow Roth 401k “sunset” (or end) in 2011. This means that Congress would need to take action before 2011 for the provisions to become permanent. There is no guarantee that they will do this, so we will have to wait and see.

Money Market Funds udercover!

Money market funds are a popular cash management tool. Before you use money market funds, make sure you know what they are, how they work, and what risks you might be taking.

What are Money Market Funds

Money market funds are mutual funds that invest in the “money markets”. If you imagine that people buy and sell stocks in the stock market, then you can see how people buy and sell money in the money markets. What does it mean to buy or sell money? It means that you borrow or loan money, respectively.

Similar to your deposit accounts at the bank, money market funds take your money and invest it. Then, they pay a portion of their earnings to you in the form of dividends. Money market funds usually pay a monthly dividend, but there are some alternatives out there.

What do Money Market Funds Invest In?

These funds invest in short term instruments that mature in less than 13 months – at a maximum. By keeping a short time-frame, these funds attempt to reduce risk. In fact, the SEC says that the average maturity of all the investments in a money market fund must be less than 90 days. The longer you loan money to somebody, the greater the chance that something will happen and they won’t be able to pay you back.

Typical investments inside a money market fund might be US Treasury issues, short-term corporate paper, and CD’s.

What Risks am I Taking in Money Market Funds?

There are at least three risks that we should highlight.

First, a money market fund is technically a security. The fund managers attempt to keep the share price constant at $1/share. However, there is no guarantee that the share price will stay at $1/share. If the share price goes down, you can lose some or all of your principal. The US Securities and Exchange Commission notes that “While investor losses in money market funds have been rare, they are possible”. In return for this risk, you should earn a greater return on your cash than you’d expect from an FDIC insured savings account (money market funds are not FDIC insured).

Next, money market fund rates are variable. In other words, you don’t know how much you’ll earn on your investment next month. The rate could go up or down. If it goes up, that may be a good thing. However, if it goes down and you earn less than you expected, you can end up needing more cash.

A final risk you’re taking with money market funds has to do with inflation. Because money market funds are considered to be safer than other investments like stocks, long term average returns on money market funds tends to be less than long term average returns on riskier investments. Over long periods of time, inflation can eat away at your returns.

Why Would I Use Money Market Funds?

Investors who want a decent return from a relatively safe investment use money market funds. The investments are typically liquid, meaning you can usually get your money out within a few business days. You can also take advantage of rising interest rates by keeping your money in an investment that will adjust to the markets.

A lot of institutions allow you to write checks that draw from a money market fund. Therefore, you get the advantages of dividend earnings as well as easy access to your cash. Make sure you ask what restrictions or fees your institution has.

Where Can I Get a Money Market Fund?

When it comes to money market funds, you have choices. They are easy to find at brokerage houses and mutual fund companies – your free cash is sometimes swept into a money market fund automatically. More recently, banks are offering money market funds to their customers.

Where Can I Learn More About Money Market Funds?

The best place to find out about a money market fund is the fund's prospectus. You should always read one of these before buying any fund, and you can really learn a lot by reading the prospectus from several different funds.

How to invest when you are broke?

How do you start investing if you're barely scraping by?

Say you're making $25,000 a year and know that (along with feeding yourself, paying for gas, rent, etc.) you need to start thinking about your future.

It pays to do that, because even small amounts add up surprisingly fast if you invest on a regular basis. And Uncle Sam will even kick in free money on top of that.

For instance, over the past 10 years, the stock market, at least as measured by the S&P 500 Index ($INX), has returned around 8%, on average, annually. Say you start with nothing and invest only $10 per week. If you pick an investment that only matches the S&P's 8% return, after 10 years, you'd have around $8,000. You have $10,000 if you got lucky and picked an investment that churned out 12% average annual returns.

Even better, if you're a poor person, the government rewards you by refunding as much as half of what you put in. Singles earning up to $15,000, head of households earning up to $22,500 and married joint filers earning up to $30,000 get a credit of 50% of funds contributed to an IRA or 401(k). That means, for instance, if you invested $1,000 in your 401(k) last year and qualified for the credit, your refund would be $500 larger. (A dedicated saver could turn right back around and plow that $500 into a Roth IRA as well.)

One big caveat: Investing in small amounts isn't about investing in individual stocks. All stock investors, no matter how talented, eventually pick a clunker, a stock that drops 25% or 30% before your first cup of coffee in the morning. That's not so bad if you own 20 stocks. But it would be a disaster if you hold only four or five.

Instead, mutual funds and exchange-traded funds make more sense for small investors. Richard Jenkins, editor-in-chief of MSN Money, explains here how to use ETFs. Below, I'll explain how to get started using mutual funds.

Why funds?

For starters, mutual funds give you automatic diversification. Most hold dozens, if not hundreds, of stocks. So, when one goes south, its impact on the portfolio is minimal.

Also, fund managers have advantages over individual investors. It's their day job, and because their trading generates huge commissions, they have access to better information than individual investors.

The problem for small investors is that most mutual funds don't want your money. Why? Simple: Funds get paid by taking a percentage of their investors' money in the form of management fees. It costs them just about as much money to keep track of your account and send you monthly statements as its does for some fat cat that's plunking down $100,000 at a whack.

So most funds establish minimum investing amounts that preclude small investors. Many require you to invest at least $3,000 to open an account, and many ask for much more.

Fortunately, I found a few fund companies (called fund families) that believe the story about small acorns leading to big trees and do welcome beginning investors.

By the way, you have to buy these funds directly from the fund company. Purchasing funds via stockbrokers, even the deep discount types, doesn't work for small investors. Most ask for a substantial check to open accounts. But, that's not a problem. The funds I'm going to describe all accept investments from individuals.

About loads

Before I get into the details, I need to tell you about the difference between load and no-load funds.

Originally, all mutual funds were sold through full-service stockbrokers and financial advisers. Those folks have to get paid, and their commissions are called "loads." Then, in the 1950s, funds that marketed directly to investors began to appear. Since there was no middleman involved, there was no need for the loads, hence the name "no-load" funds.

Loads typically run close to 6% and considerably reduce your return on investment. While it makes sense to pay for good advice, I'm going to show you how to pick your own funds. So there's no point in paying a load.

Automatic payment is key

Only a few fund companies cater to small investors, and for those, agreeing to an automatic investment plan is the key that opens the fund-investing door.

Automatic investing means that you agree to invest a fixed minimum amount every month. However, simply promising doesn't cut it. You have to give the fund company permission to deduct the agreed amount from your bank account.

Each company has its own rules about how much it takes to start a fixed investment plan, and the required monthly investment.

Here's a list of the fund companies I found that accept small investors, and their rules.

Amana funds

Minimum initial investment: $250

Minimum monthly investment: $25

Amana operates two funds, Amana Trust Growth (AMAGX) and Amana Trust Income (AMANX), that invest according to Islamic principles. The funds avoid investing in businesses such as liquor, pornography, gambling and banks. Since collecting interest is prohibited, Amana funds avoid bonds and other fixed-income securities.

Hodges Fund

Minimum initial investment: $250

Minimum monthly investment: $50

Hodges operates a single fund, called simply Hodges Fund (HDPMX).

Steward funds

(formerly Capstone Funds)

Minimum initial investment: $25

Minimum monthly investment: $25

Steward operates four stock and two bond funds following biblical principals and consistent with a Christian lifestyle. The funds avoid investing in companies materially involved in pornography, abortion, alcohol, gambling or tobacco.

Minimum initial investment: $100

Minimum monthly investment: $100

Originally serving only teachers and other public employees, TIAA-CREF operates five stock mutual funds that are open to all investors. Finding them on TIAA-CREF's site is more than a little tricky. From TIAA-CREF's home page, select Fund Research, and then Mutual Funds. Then scroll past Retail Mutual Funds to Retail Class -- Institutional Mutual Funds.

Picking the best funds

Not all funds are created equal, and just because a fund will take your money doesn't make it a good investment. Below are a few measures that will help you pick the best funds. You can do most of your research right here on MSN Money.

Morningstar star rating

Morningstar rates funds by comparing each fund's historical returns (gains) to its historical volatility. The ratings range from one to five stars, where five is best.

Returns reflect how much money you would have made holding the fund for a specific period. Volatility is a measure of how much the fund's share price bounced around along the way. Morningstar's star rating compares each fund's historical returns to it historical volatility. The funds with the highest return to volatility ratios get the highest ratings.

While history is no guarantee, I've found that fund managers with a strong record of outperforming the market tend to continue their winning ways. Start with five-star rated funds. If you find your list is too narrow, consider adding four-star funds, too.

Morningstar risk rating

Risk is the enemy of all investors, small or large. So, I'm going to advise you to check risk two ways, starting with Morningstar's risk rating.

As I mentioned above, Morningstar's overall star rating compares return to volatility. A shortfall of that gauge is that volatile funds can still get high scores if their returns are high enough. By checking Morningstar's risk rating separately, you can rule out funds in that category.

Morningstar separates funds into five risk categories: low, below average, average, above average and high. Avoid "above average" and "high" risk funds.

Standard deviation

Morningstar's risk rating compares a fund's volatility to other funds in its same category (e.g. small-value, banks, tech stocks, etc.). So if a fund is in a volatile category, say technology, Morningstar might rate it as low-risk even though it's risky on an absolute basis.

Standard deviation is similar to Morningstar's risk rating, except it measures historical volatility on absolute basis. By adding standard deviation to the mix, you can rule out Morningstar low-risk-rated funds when they are, in fact, risky.

Standard deviation values run from as low as one to as high as 30 and sometimes higher. The higher the number, the riskier the fund. In my experience, it's best to rule out funds with values above 20.

Most of the fund companies catering to small investors operate only a few funds, so you can check the Morningstar ratings and standard deviation on MSN Money's Fund Portfolio report as I've done here for Vanguard 500 Index (VFINX). As you build your nest egg, diversify your money across different funds to decrease the chance of losing money if one fund happens to go sour.