Smart investments for young professionals: whether you have $500 or $5,000, here are great places to stash your cash
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You've just pocketed an awesome graduation gift - the kind that
folds. Or perhaps you scored a nice sales bonus at work. Maybe you even
received a hefty tax refund from Uncle Sam. No matter what the source
of the cash - whether it's a modest $500 or a meaty $5,000 - you now
have the happy task of figuring out what to do with it. The Caribbean
is calling ... you can taste that Pina Colada, smell the salty air,
feel the palms swaying ...
Snap out of it. True, this kind of dough is enough to drum up some
serious fun, yet not enough (not by a long shot) to allow you to
declare financial independence and withdraw from the nine-to-five set.
Still, if you cultivate your stash carefully, it can become a powerful
tool to help you realize your dreams and financial goals. After all,
"It doesn't really matter how much money you have to invest to begin
with," says Don Phillips, publisher of Morningstar Mutual Funds, a
Chicago-based mutual funds ranking service. "The trick is to get into
the game."
Before you consider locking even a cent of your newfound nest egg
away, however, make sure you have enough extra cash at the ready.
Typically, financial advisers suggest keeping at least three to six
months' worth of living expenses on hand to cover any unexpected
financial demands. "To really make your money grow, you'll want to
invest it someplace for several years," explains Lynn Ballou, a
financial planner in Lafayette, Calif. "And because investing can be
risky - a market may drop or dry up just when you want to cash out -
you shouldn't do it with money that you may need to live on."
Where to park your funds, then, if you'll need them back in less
than five years? The surest, safest places are bank certificates of
deposit where, usually for minimum initial investment of a few hundred
dollars or less, your funds are insured by the U.S. government for up
to $100,000. Recently, rates for six-month CDs were about 3.10%. Care
to up the ante with slightly more risk to your principal? Then consider
short-term bond funds. Two winners are Babson Tax-Free Income-Short
Term (recent yield: 4.43%; 800-821-5591) and Strong Short Term
(taxable; recent yield, 7.33%; 800-368-3863). Both have minimum
investment requirements of $1,000.
Beyond that, if you can commit your money for five or more years,
you'll want to steer it towards faster-growing vehicles. In general,
that means stocks: Over time, they've outpaced almost every other type
of investment. Going back 50 years, for instance, equities gained an
average of 12.6% per year, while corporate and government bonds and
Treasury bills sputtered along at about 5%. Meanwhile, inflation (as
measured by the consumer price Index) ticked up at an annual rate of
4.3% over the last half-century.
Thus, "if your (investment) horizon is long, the place to be is in
stocks," says Ivan Thornton, a financial consultant at Shearson-Lehman
Brothers in New York. "In fact given the way inflation cuts into your
spending power, you can't afford not to be in them." The question, then
is which type of stocks? And what are the best ways for young people to
get into the market? Here are some suggestions.
You Have $500-$1,000 To Invest
If you're a novice investor, your first dive into the stock market
should be a cool glide - not an icy splash. The best way to invest a
small amount of money in stocks, then, is through mutual funds, which
enable you to buy into a diversified portfolio of hundreds of stocks
and bonds. Funds offer another advantage besides diversification:
They're managed by expert stock pickers whose sole job is to follow the
market.
The hitch? Many mutual funds have recently raised their minimum
initial investments from $500 to $1,000, making it tougher for new
investors to get their feet wet But there are two ways to buck the
rules. The first is to open an individual retirement account in the
fund of your choice: Some fund companies who impose minimums of $3,000
or more will accept IRA contributions of as little as $500. Aside from
any 401(k) program that you may be eligible for at work, this is the
best way to invest in funds, since earnings from both IRAS and 401(k)s
accrue tax-free until you withdraw the money at retirement.
Cheryl Derricotte, 28, a consultant for the Seattle nonprofit
housing developer Common Ground, is determined to revup her $30,000
salary through investments. On the advice of her financial planner,
Oakland-based Cheryl Broussard, Derricotte began contributing $50 each
month to an IRA. Derricotte plans to transfer the money to a socially
responsible growth stock fund like Calvert-Ariel Appreciation, which
avoids companies that invest in South Africa or sell weapons (minimum
IRA investment, $1000; 800-368-2748). Another option is Pax World, a
balanced fund which buys a mixture of stocks and bonds and steers clear
of the gambling, liquor and tobacco industries (minimum investment,
$250; 800-767-1729).
"When you're young and just starting to invest, you need to look at
more growth-oriented vehicles," says Broussard. The logic? Time - to
rack up stellar gains like those cited above - is on your side. To
achieve her financial goals, which include starting her own business,
Derricotte plans to make monthly, equal payments into her mutual fund
picks. Known as dollar - cost averaging, this investing tactic ensures
that you're scooping up more shares when prices are low, and fewer when
prices are up. As for her new attitude about investing? "I felt it was
time to start taking my own money as seriously as I take the public's
money," laughs Derricotte.
Another way to beat the steep initial minimum investment obstacle
is by targeting fund groups with minimums you can afford. Several good
funds will still let you in for $1,000 or less (regardless of whether
you open an IRA with them); others waive minimums for shareholders who
agree to make regular, automatic investments from their bank accounts.
"That's why it doesn't take a lot of cash to get started," says
Morningstar's Don Phillips. His growth-fund picks for budget-minded
investors: Nicholas, which buys market leaders at depressed prices and
is up 12.63% in 1992 (minimum initial investment: $500; 414-272-6133);
Strong Opportunity, a growth-oriented fund that concentrates on solid,
underfollowed companies and gained 17.35% last year (minimum
investment: $1,000; 800-368-3863); and Twentieth Century Select, which
lost 4.43% in 1992 but out-paced the Standard and Poor 500 stock index
by 4.81% percentage points over the last 15 years by snapping up
dividend-paying stocks in fast-growing industries (minimum investment
in an automatic payment plan, $25 a month; 800-345-2021).
If You Have $3,000 To Invest
With $3,000 in your pocket, the fund universe widens considerably.
"You can't beat 'em for diversification when you're talking about this
much money," says Sheldon Jacobs, editor of The NoLoad Fund lnvestor in
Irvington, N.Y. Respected fund families like Vanguard and Fidelity,
which generally require minimum deposits of $3,000 and $2,500,
respectively, now bob into view. In fact, the majority of funds are
yours to pick from, particularly if you establish an IRA account when
you invest the maximum IRA contribution (by law, the maximum IRA
contribution, and thus the minimum set by some funds, is $2,000 per
year).
Even better, you can easily afford to set up a couple of accounts.
Suppose, for instance, that you invested your first $1,000 in a
steady-as-she-goes total return fund such as Neuberger & Berman
Guardian, recommended by planner Broussard, which looks for
high-quality undervalued companies (up 19% last year; 800-877-9700).
Now you want to diversify your portfolio further. Planner Sheldon
Jacobs counsels adding to your selections by choosing funds with
different investing styles.
For instance, you could put $1,000 into Stein Roe Prime Equities, a
growth-and-income fund that buys high-quality, swiftly-growing firms
and was up 10% last year (800-338-2550); another $1,000 into Babson
Enterprise II, a small-company growth fund that looks for
cheaply-priced stocks and gained 17.2% in 1992 (800-422-2766); and
$1,000 more into Financial Industrial, a growth fund that concentrates
on blue-chip companies with significant earning potential, up just 2.8%
last year, but 42% in 1991 (800-525-8085).
Or, if this is your first foray into stocks, Jacobs recommends
putting your whole $3,000 stash into Vanguard Index Total Stock Market,
which attempts to mirror the performance of the stock market itself. As
of a year ago last March, this fund was up 14.8% (minimum initial
investment, $3,000; 800-662-7447).
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