Where to put $1,000, $5,000, $10,000 or More Whether you are investing your first grand or tuning up a six-figure portfolio, here are the best possible places for your money.
(MONEY Magazine) – Investing will never be a completely worry-free endeavor, but these days the anxiety is running especially high. More than two years into an alleged recovery, the economy is still staggering, inflation is once again rumbling ominously and market indexes are trading at prices so lofty that many pros warn that stocks are cruising for a 10% to 20% fall. Yet even in forbidding markets, there are opportunities to profit. The goal of this article is to help you find those opportunities. To that end, we canvassed more than two dozen financial planners, money managers and securities analysts and challenged them to name their favorite investment today. We also profiled three families at different financial stages and asked top planners to recommend the best moves the families could make to realize their investment goals.
Not surprisingly, the pros' specific recommendations differed. But they consistently stressed the importance of diversification and a patient search for investments with undiscovered promise -- two touchstones of prudent investing in any market. With those principles in mind, here are the best of the pros' best, whether you are starting out with $1,000, spreading your risks with $5,000 or jazzing up a six-figure portfolio with a strategic $10,000 move.
$1,000 An investment that promises a guaranteed 18% today sounds too good to be true. But wiping out a $1,000 credit-card balance that costs you 18% interest is the same as earning 18%. So before you plunge a grand into stocks or mutual funds, check your credit cards or other high-rate unsecured loans. The tactic has another advantage for young investors like Michelle and Cliff Wright of Portland, Ore. (profiled on the opposite page): By getting out from under installment debt, you can free up income for a monthly saving program. And over a lifetime, getting into the habit of investing regularly will matter much more than where you put your first grand. Another investment to attend to first is a cash reserve to protect against being laid up -- or laid off. Knoxville financial planner P. Kemp Fain advises stashing away money equal to three to six months of your net salary in ultrasafe, readily accessible money-market funds. Two rock-solid choices: United Services Government Securities Savings, recently yielding 3.4%, and Strong Money Market, yielding 2.8%. For high-bracket investors, a tax-exempt money fund such as Kemper Tax-Exempt may make even more sense. Kemper recently paid a tax-free 2.4%, the equivalent of a 3.5% taxable yield for investors in the 31% federal bracket. Once you have cleared up your high-cost debt and squirreled away a cash reserve, you can start to build the core of a long-term portfolio with so- called total-return mutual funds, which control risk by blending stocks with less volatile income investments such as bonds. For risk-shy investors, Philadelphia financial planner Neil B. Kauffman likes $837 million USAA Mutual Income Stock, which has returned an annualized 14.8% since 1988. The fund specializes in conservative stocks yielding more than the S&P's 2.7%. (The fund is sold directly by its sponsor to investors without a sales charge, as are all funds in this story unless otherwise noted. For phone numbers and more portfolio data, see the accompanying tables.) A modestly more daring choice is $5.4 billion Fidelity Asset Manager, which has returned 17.4% annually over the past three years. The fund recently held 49% of its assets in high-quality growth stocks, 35% in government and corporate bonds and 16% in cash. (Although the fund's minimum initial purchase is $2,500, you can open an Individual Retirement Account for as little as $500.) One final pick: $768 million SoGen International. Despite its name, the fund is less an overseas stock choice than a highly diversified total-return portfolio. Recently, it held 46% of its assets in foreign and domestic stocks, 26% in cash, 17% in bonds and 11% in convertible securities. The fund's 14.5% annual returns over the past decade more than made up for its 3.75% sales charge. If you are willing to take higher risk in pursuit of more generous returns, you might prefer a fund that invests purely in equities. Given the lofty levels of today's stock indexes, you should confine your search to portfolios that follow what is called a value-oriented investing style. Managers of such funds buy stocks in companies that they think are trading below their intrinsic worth as measured by their assets or earnings, an approach that often thrives when the markets are at the high end of their price range. Don Phillips, vice president of the mutual fund research firm Morningstar Inc., leans toward $739 million Gabelli Asset. This fund's manager, the renowned stock picker Mario Gabelli, focuses on companies whose total market value is below what he thinks the business would be worth in a private buy- out. Gabelli's enviable record: 13.6% annualized returns over the past five years. Another top choice is MainStay Value. Fund manager Denis Laplaige picks only from the cheapest 20% of the 2,000 or so stocks he follows, based on ratios of stock price to earnings and cash flow. The fund's 16.7% annualized returns over the past five years make the fund worth a look despite a sales load on withdrawals that can run as high as 5%. Finally, you might try $477 million Selected American Shares, which has returned 14.3% over the past five years. Fund manager Shelby Davis searches for high-yielding companies that he believes have stronger earnings potential than Wall Street generally recognizes. If you might need your money back in less than three to five years -- which means that even a total-return fund is too dicey -- consider a bond fund. For cautious investors, money manager Earl Osborn, a principal at the San Francisco money-management firm Bingham Osborn Scarborough, recommends $2.9 billion Scudder Short-Term Bond, up 9.9% annually since 1983. You can get higher returns by choosing intermediate bond funds, but remember: The longer the fund's average maturity, the more it will sink in price if interest rates move up. Although some rate increase is likely over the next few years, Osborn thinks that intermediates' higher yields compensate investors for the greater risk of price declines. His picks: $282 million Columbia Fixed Income Securities, up an annualized 11.5% over the past five years, and $157 million Babson Bond L, up 11.1%.
$5,000 If you have already assembled a core portfolio of high-quality U.S. stock and bond funds and you are looking to invest your next $5,000, look overseas. Diversifying 15% to 25% of your equity holdings in foreign markets will cut your losses if U.S. shares tumble this summer as many analysts fear. Burnie Sparks, president of the private client group at San Mateo, Calif. investment firm Bailard Biehl & Kaiser, singles out three internationals. The $1.3 billion Harbor International (up an annualized 15% in the past five years) has nearly 80% of its assets in a blend of underpriced European stocks and fast-growing companies in emerging Asian markets like South Korea and Malaysia. The managers of $2.5 billion T. Rowe Price International Stock (up 16.8% a year since 1983) are likewise optimistic about Europe and the smaller Asian economies, committing 68% of fund assets to those regions. The veteran $1.3 billion Scudder International (up nearly 16% a year in the past 10 years) has a similar mix but also is betting 25% of its assets on Japan's nascent market recovery. (For more on Japan's outlook, see Fund Watch on page 43.) + If you have already diversified overseas, you might consider putting your $5,000 into small-company U.S. stock funds. Many experts predict that small firms will outperform their larger brethren over the next three years. ''When small caps get the edge, they usually hold their lead for six years,'' says Claudia Mott, Prudential Securities' small-cap analyst. ''So we may be only halfway through this cycle.'' Sheldon Jacobs, editor of the newsletter No-Load Fund Investor, likes Fidelity OTC for IRA investors, for whom the fund waives its usual 3% sales charge. This $1.3 billion titan has had 16.9% average annual returns in the past five years at 88% of the risk of the typical stock fund. Another Jacobs pick: $104 million Neuberger & Berman Genesis, up 13.3% annually over the past three years. The fund moderates risk by diversifying its small-cap holdings over more than 100 issues. Remember, though, that both internationals and small-cap funds are chancier than the average domestic equity fund. Such funds are appropriate for investors like Gary and Carole Cottingham of Elgin, Ill. (profiled on page 76), who want to build savings for a retirement that's still 20 years away. But the funds are far too unpredictable in the short term to be a source of funds for, say, their teenage sons' college tuition. With $5,000 in hand, you can also consider individual stocks, since that sum allows you to buy in cost-efficient lots of 100 shares. Brokerage commissions on these so-called round lots run about 2.5%. Smaller odd lots may add as much as one percentage point to your costs. Tom Schlesinger, equity strategist for the St. Louis brokerage A.G. Edwards, advises stock investors to concentrate on firms whose share prices have been unjustly beaten down. His favorites include top drugmakers Bristol-Myers Squibb (estimated 1993 revenues: $11.5 billion; ticker symbol: BMY; recently traded on the New York Stock Exchange for $60) and $8.5 billion American Home Products (AHP; NYSE, $66.50), whose share prices have dropped in what Schlesinger thinks is an overreaction to the Clintons' health-care-reform rhetoric. Schlesinger also likes food companies such as $6.9 billion H.J. Heinz (HNZ; NYSE, $38.50). Despite record earnings last year, Heinz has dropped 14% since March, as part of an indiscriminate sell-off of brand-name consumer companies. (For other promising consumer stocks, see page 58.) John Dessauer, publisher of Dessauer's Journal of Financial Markets, leans toward fast-growing small-company stocks, like $253 million ShowBiz Pizza Time (SHBZ; recently traded over the counter for $33). Dessauer expects profits at the company, which operates the Chuck E. Cheese chain of restaurants, to grow by 35% next year and more than 20% annually over the next five years. Another Dessauer pick: $174 million SEI Corp. (SEIC; OTC, $32.25), which supplies investment performance evaluation services to money managers and administrative services to bank trust departments. He thinks the company's earnings will grow at a 15% annual clip through 1998.
$10,000 If you are weighing how to invest five-figure sums, chances are you already have a tidy nest egg and may merely want to shift assets around to better suit your goals. That's the case for Francis and Beverly Berlin of New Orleans. These seventysomething retirees would like their $75,000 portfolio to throw off more income to supplement the $40,000 they currently get from Social Security, Francis' pension and stock and mutual fund dividends. Equally important, however, is safety. ''I don't want to go overboard with risky investments,'' says Francis. For investors like the Berlins, manager Osborn suggests a conservative municipal bond fund such as $1.4 billion Vanguard Municipal-Limited Term (up 8.2% annually since 1990). The fund's recent yield of 4.6% equates to a generous 6.4% on a taxable investment for investors in the 28% federal tax bracket. For a return that includes income plus modest capital appreciation, Osborn also likes $4.3 billion Vanguard Wellesley Income, which currently has 63% of assets in bonds and the remainder in stocks and cash. The fund has returned an annualized 13.8% over the past decade. For investors willing to take more risk, the stocks known as real estate investment trust, or REITs, offer high yields and a shot at capital appreciation. Operating a bit like mutual funds, REITs pool investors' cash to buy properties or mortgages. After the real estate slump of the late 1980s, REIT prices have rebounded 68% since 1990. Robert Frank, REIT analyst for the Baltimore investment bank Alex. Brown & Sons, expects the rally to last another three to five years as the shell-shocked property market continues to improve. Among Frank's current favorites: United Dominion Realty Trust (UDR; NYSE, $13.25), which owns apartment complexes in the Southeast; Developers Diversified Realty Corp. (DDR; NYSE, $25.75), which operates 56 shopping centers in the Midwest and Southeast; Weingarten Realty Investors (WRI; NYSE, $39.75), which owns apartment complexes in the South; and Health Care Property Investors (HCP; NYSE, $28.25), which operates long-term-care and rehabilitation centers in 30 states. If you are willing to take a flier with 10% of your portfolio or so, you might consider loading up on three or more single-country closed-end funds. These are essentially mutual funds whose shares are traded on an exchange like a stock and whose assets are concentrated in one foreign country. Smith Barney closed-end fund analyst Michael Porter favors funds whose shares are trading at or below the net asset value of the underlying portfolio. In Europe he suggests Growth Fund of Spain (New York Stock Exchange, $9.50), which recently traded at a 3% discount. Among emerging markets, Porter likes First Philippine (NYSE, $12.75), which recently traded at a 15% discount, and the Argentina Fund (NYSE, $10.75). The latter traded at a premium of as much as 30% in the fall of 1991 but has recently sunk to 10% above par. While that is a steeper premium than Porter normally likes to pay, he thinks the fund could soar again as the Argentine economy clips along at a 4% to 5% growth pace over the next few years. If you prefer to research individual companies rather than bet on whole markets, think about investing in individual foreign stocks that trade on American exchanges as ADRs (American Depositary Receipts). Vivian Lewis, editor of the newsletter Global Investing, likes the $2 billion (revenues) Spanish bank Banco Santander (STD; NYSE; $46.75). Lewis expects earnings to grow at a 12% to 15% annual rate as the Spanish economy emerges from recession late this year or early in 1994. She is also high on the $31 billion telecommunications leader Alcatel Alsthom (ALA; NYSE, $23.25), France's second largest company. As France emerges from recession, the company's stock could rise by as much as 25% over the next 18 months. Newsletter editor Dessauer fancies another telecommunications giant, $5.9 billion Cable & Wireless (CWP; NYSE, $34.75). The company's Mercury division -- the British equivalent to MCI -- has secured 20% of the British phone traffic to the U.S., Germany and France, as well as 30% of calls to Japan. Dessauer thinks the company's shares will shoot up 25% by the end of this year. He expects almost as much gain from $39 billion Nestle, the world's largest food company. Dessauer expects the Swiss giant's shares to rise 20% by | the end of 1993. Currently, the company's ADRs are traded over the counter in the U.S., but Dessauer expects the Nestle ADRs to list on the New York Stock Exchange within a few months. Most important, perhaps, Nestle derives just 2% of its sales from its home country, with the rest coming quite literally from around the world. With the outlook for stocks so uncertain today, an investment that can spread your risks around the globe may be the smartest bet of all.
CHART: NOT AVAILABLE CREDIT: Sources: Morningstar Inc.; Lipper Analytical Services; fund companies CAPTION: Take the Plunge With $1,000 Begin by socking away cash for emergencies in a money fund, and then put your cash to work in stock and bond funds. Given today's low money-market yields and risky securities markets, experts say these 12 funds are right for the job. All are distinguished by solid returns, comparatively low risk and modest expenses.
CHART: NOT AVAILABLE CREDIT: Sources: Morningstar Inc.; fund companies; Institutional Brokers Estimate System; analysts CAPTION: Spread Your Risks With $5,000 Once you have a core portfolio of high-quality U.S. stock and bond funds, use your next $5,000 to diversify into more aggressive funds. With domestic blue chips at near-record highs, these foreign stock funds and small-company portfolios show special promise. You can also afford to invest in the undervalued individual stocks cited below in efficiently priced 100-share round lots.
CHART: NOT AVAILABLE CREDIT: Sources: Morningstar Inc.; fund companies; Institutional Brokers Estimate System; analysts CAPTION: Juice Up Your Gains With $10,000 or More If you're wondering what to do with $10,000 or more, chances are you already have a sizable portfolio and simply need to shift assets around to maximize your returns. The choices in this table are ideal if you want to buck today's low interest rates and increase income safely or reach for heftier capital gains in re bounding foreign-stock markets.