Primer on investments; Salting away your money -- an ocean of choices

An octopus would feel right at home in the investment world: There are enough investment alternatives available to keep more than its eight arms occupied.

For example, mutual fund companies offer funds that cater to just about any desire; insurance companies have crafted various types of annuities and life insurance plans; bankers can pull out of their pockets such investments as certificates of deposit and trust agreements; and risk-conscious investors can buy government securities.

In short, there are enough standard investment options around for nearly everyone. Here is a short primer on some options:

Mutual funds: There is a mutual fund for nearly every taste. For the gold buff, there are gold funds; for investors interested in oil wells, there are energy funds; for those with a yen for Japanese stocks, there are funds that invest only in the Tokyo stock market; for investors who think old companies never die, there are funds that invest in bankrupt companies; and, for investors who think common stocks are nice but bonds nicer, there are funds that invest for income first, then capital gains.

Not only are there individual funds, there are also whole families of funds. For example, the Boston-based Fidelity Management & Research offers 17 possible funds an individual can invest in. These range from money market funds and tax-exempt funds to common stock funds which permit the investor to choose which industry group he or she wants to invest in.

Some advisors believe investing in a group of funds is the best way to use a mutual fund. Don Ashe, editor of The No-Load Fund Investor, a quarterly newsletter, says that if an investor has any interest in market timing at all, the best way to invest is with a family of funds. He explains his theory: ''In the first year and a half of a four-year cycle you are more conservative; in the last 21/2 years you are more aggressive.''

In a conservative posture, an investor would most likely keep his funds in a money market fund. During the aggressive phase, the money would be shifted to the common stock fund.

Dennis Nelson, a vice-president of Fidelity, says the best way to use such a family of funds is to start with money in a money market fund, then at various times put funds into a common stock fund. This way an investor benefits from dollar cost averaging.

Still other advisors suggest finding a solid fund with a long-term record of achievement. John Dorfman, in his book ''Family Investment Guide,'' suggests researching funds' 10-year records, either in Forbes magazine's annual mutual fund survey or in Yale Hirsch's Mutual Funds Almanac. The importance of such research, he points out, is that some funds may show spectacular results because of blind luck, or because they invest in volatile assets.

''The very fund that looks great in a good year,'' he says, ''may be one that looks terrible in a down year.''

In planning for retirement, mutual funds are important, says Fred Newcombe, president, No-Load Mutual Fund Association. ''Because of the severe questions that have been raised about social security,'' he says, ''people have to begin to build their own retirement pool. This is the place for a fund.''

Annuities: ''Along comes this insurance salesman, you see. He rolls up his sleeves and says I can have an annuity. I don't know what it is, but I sure do like the sound of it.'' For many investors, sadly, this little tale sounds familiar.

An annuity is quite simple. Basically it's a form of life insurance in which an individual makes payments -- either a lump-sum payment or periodic premiums -- to an insurance company. When the policy matures and is paid off, the individual receives payment -- either all at once, or in installments. In some cases, payment of a lump sum is made to the insurance company and the annuity starts immediately. Other times, it starts once you reach retirement age -- called a deferred annuity. The money invested in the annuity is deferred from taxes. However, once the annuity starts, it is taxed like regular income.

David M. Brownstone and Jacques Sartisky, authors of the book ''Personal Financial Survival,'' offer a caution: ''The problem intrinsic to annuities, as it is to whole or straight life insurance policies, has been the very low rate of accretion.'' The two continue, ''Insurance agents and companies have done extraordinarily well selling them, but people buying them have, in most instances, made some of the worst investments possible.'' Traditional annuities, they note, give such a small investment return that its payments later -- when adjusted for inflation -- seem too small.

Mr. Dorfman, in his book, notes that the fees involved in annuities can be quite steep. The FTC, in a study in 1978, found that in one plan involving a major insurance company, the cash value of an annuity after the first year was only $178 (after a $1,000 premium). Sales charges often run 15 percent the first year and 7 percent in subsequent years. Thus, these charges can take a large bite out of any investment.

Brownstone and Sartisky do like the ''single-premium deferred annuity.'' This transaction involves a deferred annuity with the buyer having the right to turn the purchase into an immediate annuity at any time, and to withdraw all or part of the lump sum at any time. At least this way, the individual, not the insurance company, has control over the funds. If an individual does withdraw the funds early, there are often extra charges. So read the fine print in the contract.

Life insurance: How much life insurance do you really need? According to Andrew Tobias, in his book ''The Only Investment Guide You'll Ever Need,'' the answer is ''probably more than you can afford.'' But, he adds, ''What you want, ideally, is enough insurance, when combined with whatever assets you have, to pay for what are euphemistically called 'final expenses,' . . . and then enough in addition to replace the income you had been kicking into the family till.''

For final expenses, Tobias says you will need at least half a year's income, and to replace your income, about 60 to 75 percent of your current take-home pay. Thus, if you are making $30,000 a year and taking home $23,000, your family will need $14,000 to 17,000 a year. Social security will provide about $10,000 a year. To provide the difference and keep your family in funds for, say, 20 years , you will need $112,000 in life insurance, assuming the insurance earns at least 3 percent a year after inflation and taxes.

Certificates of deposit and other bank instruments: The concept is simple. You agree to lend the bank your money for an agreed-upon time and it agrees to pay a set amount of interest. The longer the period of time you lend the money, the higher the interest. At this point, banks have so many certificates available, their front windows look like supermarkets. Available to the investor are six-month certificates, usually with a $10,000 minimum; 30-month certificates, with a $500-to-$1,000 minimum; traditional passbook savings, with no minimum; and All-Savers certificates, which give up to $1,000 a year in tax-exempt interest and pay 70 percent of the interest available on Treasury bills. William Donoghue, publisher of the Donoghue's Moneyletter, considers the worst pitfalls for consumers to be passbook savings accounts, money market certificates, some certificates of deposit, the All-Savers certificates (which he dubs the All-Losers certificate), and US savings bonds. This dosen't leave much. But he does consider the Small-Savers certificates (30-month certificates) to be a good deal over the life of the certificate.

Government securities: How can you go wrong investing in the US government? You can't. Government securities may not provide the highest yields, but they are the safest. Investors have a whole array of government offerings to choose from. There are US Treasury bills, with a maturity of under a year; US Treasury notes, with a maturity of under two years; and US Treasury bonds, with a maturity of 10 years or more. There are also savings bonds - but these are considered a mediocre investment, since the interest rates are so low. For more sophisticated investors there are also Fannie Mae and Ginnie Mae bonds, both investments in US government agencies, backed by the full faith and credit of the US government.

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