Small Stake, Smart Moves
You don't always need a six-figure portfolio to get the most out of a stock strategy. Here's how you can jump in for less than $5,000
(MONEY Magazine) – Over the past year, I've outlined a variety of timely stock strategies. Some have focused on specific industries, such as financial services, energy and pharmaceuticals. Others have been broader, favoring giant companies that offer rapid earnings growth, or stocks that pay generous dividends.
After these stories appear in this magazine or on Money.com, I inevitably receive e-mails in which readers say, "I'm interested in your strategy, but how can I implement it if I have only a few thousand dollars to invest?"
Good question. Many strategies work best if you own half a dozen different stocks. If you buy in the usual 100-share lots, you need $50,000—and preferably $100,000—to put together a well-balanced portfolio that includes several strategies. Buying fewer than 100 shares at a time usually results in higher commissions and other costs.
Sometimes mutual funds offer an easy alternative. But there are strategies for which no fund has exactly the right stocks. Or if you can find one, its fees may be excessive. There are, however, ways that you can implement most strategies with less than $5,000.
If there's a particular company with businesses so diversified that it can represent an entire industry, you may be able to rely on a single stock. Citigroup (C), for instance, is a good proxy for the undervalued financial services sector. The company is a leader in banking, insurance and brokerage, and it trades at 11 times its estimated 2005 earnings. In late December, you could buy 100 shares for around $4,660.
Even a single stock, however, may easily put you over $5,000. ExxonMobil, ChevronTexaco and ConocoPhillips cost from $5,110 to $8,800 for 100 shares. So if you want a representative oil stock, your best choice is Marathon Oil (MRO), which trades at a price/earnings ratio below 10, pays a 3% dividend and costs about $3,710 for 100 shares.
In the drug sector, the choices are even more difficult. Johnson & Johnson puts you at $6,310 for 100 shares. Pfizer and Merck are cheap enough, but both companies face problems with their arthritis painkillers, which appear to increase the risk of heart trouble.
Where there's no convenient single-stock choice, you can generally turn to funds, both open-end and exchange-traded types. If you want stocks that pay ample dividends, take a look at T. Rowe Price Equity Income (800-638-5660). There's no broker's fee, and the fund's annual expenses are below average. The minimum initial investment is $2,500.
An index fund will usually have lower expenses than a managed fund. The story on page 53 makes the case for keeping 10% to 15% of your money in foreign stocks. One way to do that is through Vanguard European Stock Index (800-851-4999). Its expenses run only 0.32% a year. Minimum initial investment: $3,000.
In some cases, no suitable open-end fund is available. If, for example, you want to invest in the largest technology stocks because as a group they are undervalued for the first time in a decade, consider the Technology Select Sector SPDR (XLK). This exchange-traded fund, which I own myself, holds the 90 or so tech stocks in Standard & Poor's 500-stock index. Annual expenses average a low 0.3%, although you also pay broker commissions. Recently, 100 shares cost $2,150.
It's easy to put together a smart six-figure portfolio, but most of the time you can find a way to implement your strategy with a lot less money.