Once you have three to six months of income in your emergency fund, the next phase is to build your core exposure to the market. The main objective of this phase should be giving your portfolio broad exposure to your main equity market: the assets in this market have consistently yielded the highest return of any of the major asset class after taxes and inflation.

You hopefully already own a money-market mutual fund or another cash management vehicle in your emergency fund, so the next asset you will want to purchase for this phase is a low-cost broad market index fund or a core low-cost low-turnover mutual fund. I recommend investing in a large-capitalization stock mutual fund because large-capitalization stocks are the least risky of all equity asset classes and mutual funds are diversified and low cost. An S&P 500 index fund will have roughly 500 stocks in their portfolio.

Using the principles discussed in Investments 1: Before you Invest, invest in the main equity markets. These markets will give you a higher risk-adjusted return. I recommend purchasing a low-cost, no-load index fund that follows large-capitalization stocks. These funds generally have a low minimum purchase amount (this amount may be less than $100) and cost about 0.30 percent per year or less (or 30 basis points: a basis point equals 1/100 of a percent). These funds have low turnover, are very tax efficient, and generally match the performance of the benchmark.

During this phase, you should also add a broad market index fund or core mutual fund to your retirement vehicles (your 401(k) plan or your IRA). The amount you invest in your retirement account versus the amount you invest in your taxable account depends on your personal goals and budget and the availability of retirement vehicles.