How to Start Investing and Do It Right

MANY people who have not done it before are wondering how to start investing and do it right. If you are in that position, you need an investment strategy. Start by analyzing yourself. Define your financial goals and how you plan to reach them. Is your goal to pay for college or for a house or for a comfortable retirement and just how much money will you need to achieve that objective?

Before you invest in anything that has the slightest risk, be sure you have enough insurance and savings to protect yourself against an emergency. It is smart to hold savings equal to three months of your after tax income. Do not worry if it takes you two or three years to accumulate that amount. It is also important to assess your tolerance for risk. If your fear of losing money is stronger than your desire to make large profits, stick with a conservative investment philosophy. Conservatives invest for safe and steady returns of income. More adventurous types invest for future growth.

People younger than 50 years old probably should not be too conservative. One top adviser recommends that they put no more than 20% of their spare cash into investments that promise steady income returns from dividends and interest, He says that 80% or more of their investment should be aimed at growth.

If you are over 50, however, you will probably want to put a large share of your spare cash into income producing assets. If you want steady income payments plus the possibility of growth, consider Treasury and top grade corporate bonds. You can get instant diversification by investing in a bond mutual fund or unit trust.

Whether you buy bonds or stocks, do not get too caught up in the race for quick profits. Most investors do best by picking several stocks as a way of cushioning the loss of one flier that takes a dive. And be prepared to live with the rule of five. It says that out of every five stocks you own, probably one will be a loser, three will do nicely and one will do much better than you expected.

Stocks and bonds are, of course, your basic tools of investing. Before you invest, you should determine just what you want your tools to accomplish and which ones to use to reach your goals.

When you buy common stocks, you become part owner of a corporation. A stock can increase your wealth in two ways: by paying you regular dividends and by rising in price. If it does indeed rise, you can sell out at a profit. It is this growth, not the dividends, that gives stocks their investment edge. Over the long term, since 1926, the 500 stocks in the Standard & Poor's index have produced an average return from price appreciation plus dividends of 10% a year. That is double the average 5% annual return that investors got from corporate bonds.

You can choose from different types of stocks depending on your investment goals. Growth stocks are shares in companies that often expand faster than the overall economy. In rising markets, the stocks of young and growing companies tend to do at least one third better than the broad stock indexes. But when the market falls, they are also likely to plunge faster.

Income stocks place an emphasis on dividends, so their prices are more stable. In a prolonged market rise, income stocks do not climb as fast as growth stocks. Utility shares are a foremost example. In the 12 months after the bull market began in August 1982, the Dow Jones Utility Average rose 24%, which was less than half the gain of the Dow Jones Industrial Average. But top rated utilities pay high dividends 61/2% to 81/2% in 1989.

Most investment advisers believe the stock market should do well over the long term. But if you are unsure of how to start an investment program that will take advantage of a favorable future, you should consider buying shares in a mutual fund. Funds offer just what beginning investors need: professional management and instant diversification. You can get in with an investment of $1,000 or less. Once you own shares in a fund, you typically can add as little as $25 at a time. You can find the addresses and phone numbers often toll free 800 numbers of various funds in advertisements on the business pages of newspapers and also in financial magazines.

What if you want to start investing, but you have only a small stake, say $ 100? Will any brokerage houses or mutual funds welcome your business?

Yes indeed, many will. At least 150 mutual funds will accept an initial investment of $100 or less and in some cases there is no minimum at all. For a description of more than 1,650 funds, look in your public library for a book called Wiesenberger Investment Companies Service. Another source is Winning with Mutual Funds by the editors of Money magazine.

As for stockbrokers, many have such large minimum commissions at least $25 every time that you buy or sell that it does not make sense to start an account with just $100. But as an alternative, you can try Merrill Lynch's so called Blueprint Program. It charges 10% on trades up to $200. After that, commissions decrease on a sliding scale. Trades exceeding $7,500 are charged at Merrill's regular rates.

If you find it hard to set aside money regularly, try this: have a mutual fund automatically deduct a set amount from your checking account every month. Many employers also let you have a specific amount taken out of your paycheck and invested in a companysponsored profit sharing or thrift plan. Such programs usually let you choose from at least two types of funds. You can put your contribution in a stock mutual fund or a fixed income bond and savings fund.

The drawback is that you may have some trouble if you want to withdraw the whole amount before you leave the company. But that is balanced by the nice fact that all the earnings on your money compound tax free, until you withdraw it when you leave the company.

Some employers will match part of your contribution. This gives you an immediate profit. If that is the case, be sure to accept this company offer and save or invest as much as you possibly can.

After you have built up some mutual fund shares, you may get the itch to start picking stocks on your own. You will have an advantage over major financial institutional investors, those who tend to buy conservatively for bank trust departments, corporate investment plans and pension programs. The institutions' investment managers generally stick to the shares of 500 or so fairly substantial companies, but you can choose from some 7,000 stocks. It is easier for small investors to buy shares in young, unproven, fast growing firms, If the business becomes large enough to attract big investors, the stock's price and your profits may jump dramatically.

Anyone with more than $2,000 to invest in stocks should put it in two or more companies. You will want to diversify among industries too. That will help protect you. If, for example, mortgage rates rise and you own nothing but housing stocks, you could be pummeled.

Ultimately, you should aim to own five or more stocks. That is a small enough number to be manageable and large enough for diversity. When you reach that point and you want to strike a balance somewhere between the young, daring investor and the older, conservative investor mentioned earlier you may want to aim for the following division of your money:

A quarter of your stock portfolio should consist of small and promising companies producing goods and services that are unique or stand to be in strong demand even in periods of recession. Another quarter should be invested in the largest, most conservative companies; they can offer stable growth. The remaining half should be in medium size concerns that are growing faster than the economy as a whole.

You will have to do your homework. Before buying a stock, look up its record in The Value Line Investment Survey or Standard & Poor's Corporation Records or Moody's manuals, available in many public libraries. You also can ask a broker to send you a copy of the company's annual report and the even more detailed 10 K statement that must be filed every year with the Securities and Exchange Commission.

Finally, deciding when to sell your shares is as important as choosing when and what to buy. Do not rush to dump a long term growth stock just because it hits a temporary sinking spell. In fact, that is when smart investors consider buying even more shares at bargain prices.

In sum, here are three sensible rules for investors, beginners and veterans alike:

First, put aside a fixed amount of money each week or each month, no matter how small. Then save or invest it regularly, come rain, come shine. When markets fall, you can figure you are at a bargain sale because you will be able to buy more shares for your money. And when markets rise, you can congratulate yourself, because your investments will rise too.

Second, diversify. No longer can you buy just one stock or bond and confidently hold it for a lifetime. The world changes too fast for that. So, even if your investments are modest, spread out to several kinds of stocks or into a widely diversified mutual fund.

Third, do not wait to buy in at the very bottom of the market and do not try to sell out at the very top. Nobody but nobody is smart enough to do that. Remember: Bulls make money and bears make money, but hogs never make money.