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The Fund Way to Start An Investment Plan

By Guy HalversonStaff writer of The Christian Science Monitor / November 10, 1997


Most of us, starting an investment plan, look to the stock market to build a little savings into a big nest egg.

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But Wall Street can be a formidable force, evidenced by last week's 554-point bail out. And finding good stocks takes time, skill, and money. It's a practice perhaps best left to professionals.

That's why mutual funds are so attractive, says Suze Orman, a financial planner in Emeryville, Calif.

Funds can "get your feet wet" in the world of stocks and bonds, Ms. Orman says, and give you access to the brightest minds and best track records.

No matter how humble your investment kitty, you can always find a fund that provides "instant diversification" for your money (assets) and diligent management - at a modest fee.

Mutual funds have become the undisputed king of the investment hill since the early 1980s. Some 40 million American households have invested more than $3 trillion in 7,000 funds.

Mutual funds are investment companies that pool money from many investors and then buy a collection (a portfolio) of stocks and/or bonds.

The "net asset value" or NAV of each share, listed in newspaper tables, changes based on what happens daily to the value of the stocks or bonds in the fund.

The NAV is essentially the share price when you buy or sell your stake in a fund.

For example, suppose you decide to invest in the Janus Twenty fund mentioned in the chart at left. The minimum, initial investment is $2,500 ($500 to open a retirement account), or $500 plus regular, monthly investments of $100.

So let's say you take the minimum plunge for $500. Janus Twenty's NAV is about $36.59, so you now own 13.66 shares of the fund. But what you really own is a small piece of all 20 stocks in the fund: Citicorp, United Airlines, General Electric, for example, all of whose shares cost lots more than $36.

(Worth noting: Janus Twenty has been a star performer, but its star manager recently left.)

Here are some basic steps to getting your fund feet wet.

Step 1: Know thyself

Know how you work - your investment goals and strategies. Consider three fundamentals:

1. Have a goal. One rule of thumb says your retirement account should amass 15 times the annual income you hope for, if you retire at age 66 (not including Social Security or pension income). Many fund companies offer worksheets to plot your goals.

2. Determine your tolerance for risk. Stocks have sharp ups and downs, for example, but a "risk-free" cash fund (also called a money-market fund) will barely outpace inflation.

3. Know your investment time frame. It varies - perhaps 30 years for retirement but 10 or 15 years for a child's college education.

Step 2: Allocation

The three factors above help determine asset allocation - dividing your money among stocks, bonds, and cash.

The longer your horizon, the more you can afford to put into stocks.

"The best financial gains have come from stocks," says Larry Armel, president of fund company Jones & Babson in Kansas City, Mo.

Stocks historically have beaten inflation by seven to 10 percentage points a year.; government bonds by only two percentage points a year since 1926.

And remember: Over time, each annual percentage point adds up to lots of money.

Traditionally, long-term investors were urged to put 60 percent of their assets in stocks, 40 percent in bonds. But many experts now question that division.