An investment program doesn't always start with a windfall.
Sometimes it's a few hundred dollars you've managed to keep awayfrom everyday bills or the occasional spending spree.
Or maybe it's $30,000 or $40,000 from a company buyout that tookyou by surprise a few weeks ago.
In any case, there's the money, and it's in your hands. Butthat can be intimidating if you've never ventured beyond acertificate of deposit or a company savings fund that someone elsemanages.
What do you do?
Moneylife picked out four dollar figures - $1,000, $5,000,$10,000 and $50,000 - and called experts to get some "how to getstarted" advice.
And boy, do people need it.
"More and more, people are having money put in their hands toinvest that they never thought they'd have to manage before," saysJohn Markese, president of the Chicago-based American Association ofIndividual Investors, which gives basic investment advice to some150,000 Americans.
"One thing everyone is smart enough to figure out - you don'twant to get just 3 percent on your investments," Markese notes.
Generally, experts advise novices to get into mutual funds withvarious risk - conservative when you start, riskier when Tyouunderstand the market better. Most of the advice below has to dowith specific funds and investment strategies first-time investorsshould follow.
Before you start. You want to become an investor, right? Don't do anything without asafety net, and that means keeping some savings in a safe place.Before you begin subjecting your money to any risk at all, put threeto six months' living expenses into an insured account in case youlose your job or if there's a family emergency, planners say.
Also, get rid of those credit card bills before you start. Three important words to keep in mind: Diversification,diversification and diversification. As your investment grows,spread it out into a variety of investments. Get in touch with the news. The complexity of the globalmarketplace should make you a news junkie. Learn what's happeningwith political trends (economic trends always follow); check thelocal and national business news. And watch how people are acting asconsumers - many investment opportunities are born simply from howpeople spend their money now.
It's especially important now, with the uncertain outlook forthe U.S. stock and bond markets.
"An enormous number of people have 40 to 50 percent of theirmoney in U.S. stocks," said Bill Kovacic, a financial planner inPalos Heights. "Under current economic conditions, in my opinion,that could be classified as high risk," because he sees the U.S.market as overvalued.
OK, so where should you put your money?
You've got $1,000. Don't be embarrassed about starting withonly $1,000 - assuming you've got your emergency fund. Everyone hasto start somewhere.
Financial Planner James Platania designed a plan for a23-year-old making his or her very first investment. This person cantake a little risk in exchange for growth, because he or she isn'tretiring anytime soon. So Platania turned to equity mutual funds.
Specifically, Platania advises the $1,000 starter get into ano-load growth stock fund such as the Janus Fund with half his money,and place the other half into a diversified global stock fund such asG.T. International, which has a 4.75 percent load, or service fee. A4.75 percent load means that 4.75 percent of your investment goes tocommissions right off the bat. For a $500 investment, the load wouldbe $23.75.
Platania would add $100 to these funds monthly, using automaticwithdrawal programs, under which funds automatically take money fromyour checking and savings account every month. "It's like payingyourself," Platania said.
The AAII's Markese generally agrees that small investors shouldstart with mutual funds instead of putting their eggs in one basketwith individual stocks or bonds.
"With a fund, you hire an experienced investment manager verycheaply, for an entry fee of about $500. And you get the benefit ofdiversifying your investment, since funds may invest in hundreds ofinvestments that that offset each other's risk."
One important note about mutual funds: unlike banks, they don'tcarry deposit insurance, so in most cases, there's no protection ifyour investment plummets. But generally, the best-known andbest-managed funds are diversified enough so serious losses are rare.
You've got $5,000. Keep looking at funds to build yourportfolio. Half your money should go into a moderately aggressivefund such as the Putnam Growth and Income Fund (which holds bothstocks and bonds), with 25 percent into G.T. International and 25percent into Putnam Voyager, a domestic common stock fund, Plataniarecommends. Putnam funds charge a 5.75 percent load.
If you're older than 50, however, he'd use a utilities fund,either Putnam or Franklin, rather than a common stock fund, becauseutilities usually have a reliable income stream and are among thesafest of stocks.
Again, Platania advises dollar-cost averaging into these fundsover the year, putting a little money in at specific intervals. It'sa mechanism that helps you even out the ups and downs of the market.
You've got $10,000. This amount may allow you to dabble inindividual stocks while maintaining a base in mutual funds. If yougo into individual stocks, do your homework.
But Kovacic would put $2,000 into each of the following funds: Vanguard Windsor II (a no-load domestic stock fund). EuroPacific Growth (an international fund with an 5.75 percentload). Vanguard GNMA (a domestic no-load bond fund). Scudder International Bond (no load). And the Vanguard money market fund.
That's 60 percent in fixed-income and 40 percent in stocks, aconservative approach, he noted.
You've got $50,000. People usually get such amounts in lump-sumpayouts from a retirement plan, or in the case of John and CaseyPlecinoga, from the sale of two restaurants.
Platania, their financial planner, not only invested fordiversity but used dollar-cost-averaging.
Because the Plecinogas are in their 50s and nearing retirement,Platania is using a very conservative time frame, doingdollar-cost-averaging over 18 months, putting $695 per month intoeach of four funds until their $50,000 is invested.
The money is being kept in a government bond fund untildispersed into funds in the Putnam family: Utilities Growth andIncome, the Fund for Growth and Income, the Global Fund and theVoyager Fund.
This offers conservative utility and bond investments as well asaggressive growth in the Voyager fund, he said.
"The keys are that they invest with discipline anddiversification," Platania said. "This will definitely reduce theirrisks and increase their chance for overall long-term success."
Sometimes the complexity of a person's situation leads a plannerto choose investments beyond mutual funds.
Take the case of Judy Gould, a single woman who runs a farm withher brother near Harvard, 65 miles northwest of Chicago. Retirement,tax and estate planning all had to be taken into consideration, saidFrances Schrader, a financial planner with IDS Financial Services inTinley Park.
Schrader had her put: $2,000 a year into an aggressive growth fund for her individualretirement account. $2,400 a year into a life insurance policy as part of estateplanning (to make sure estate taxes are paid). $6,000 into a variable annuity (which invests in stocks) tosupplement the IRA. $15,000 into municipal bonds, which produce untaxed income and thuscut down on Gould's tax liability. $7,500 for two real estate limited partnerships.
Gould also purchased a low-income housing tax credit for $10,000to further cut taxes. This will allow Gould to reduce her taxes by$1,400 each year for 10 years.
