Investing on the cheap
October 6, 1998: 10:22 a.m. ET
Not everyone has $10,000 to invest, but no need to be left out of the market
NEW YORK (CNNfn) - Fund managers and other Wall Street players may have billions of dollars to throw at the market, but for many others, a $2,000 investment can strain their finances.
Low incomes or just the nature of their jobs give many a disadvantage in the investment marketplace.
Many lower-wage workers, freelancers and consultants don't have access to company retirement plans, such as 401(k)s, which not only give workers a good, gradual way to invest, but often include a partial match of any employee contributions.
Brokerage houses and many mutual funds can also take a dim view of those who have little money to invest. Some brokerages won't let you buy just one share of stock while many mutual funds have minimum investments of $3,000 to $5,000.
However, for those with limited means but an unlimited desire for investing, there are ways out there to make a little money work a little harder.
Lightening the load
Just because you don't have a lot of money and can't get into funds through a 401(k) doesn't mean you have to give up on one of the best ways to invest.
No-load funds -- funds that don't have a sales charge -- are a way to enter the mutual fund arena without a broker skimming some of your investment dollars off the top.
Unlike load funds, which are bought through brokers, no-load funds are bought directly from the fund companies themselves. When you've only got around $100 a month to invest, you don't want any of that to be spent on sales charges.
No-load funds, though, aren't the perfect answer for everyone with just a few dollars to investing, according to Sheldon Jacobs, editor of the No-Load Fund Investor newsletter.
He said that the average minimum investment for no-load funds is in the $2,500 range, with many even higher than that.
But don't give up. No-load funds with much more manageable minimum investments of anywhere from $1,000 to $250 do exist. Some of these include:
$1,000 minimum investment.
- Legg Mason Value Trust (LMVTX), a domestic growth fund with a five-year annual return of 23.78 percent.
- Reynolds Blue Chip Growth (RBCGX), a domestic growth fund with a five-year annual return of 20.04 percent.
$500 minimum investment.
- Nicholas fund (NICSX), a mid-cap fund with a five-year annual return of 15.15 percent.
- AARP Growth and Income (AGIFX), a large-cap fund with a five-year annual return of 15.35 percent.
$250 minimum investment.
- Pax World Fund (PAXWX), a balanced domestic fund with a five-year annual return of 13.81 percent.
- Strong Total Return (STRFX), a large-cap growth fund with a five-year annual return of 13.27 percent.
Once you get past the minimum investment, many of these funds favor the smaller investors. Often these funds will require any additional investments to be only somewhere in the $50-$100 range
If you're attracted to a no-load fund with a higher minimum investment than you currently have to spend, Jacobs said there are ways to get around the problem.
"Many of these funds say that if you start an automatic investment program which deducts an amount from your bank account every month and invests it in the fund, they'll waive the minimum investment requirement," he said.
Even if you have $1,000 a year to invest, you have some of the same advantages of someone who sinks $10,000 into the stock market annually. Most notably, both of you have the power of compounding on your side.
For example, if you invest $100 a month and reinvest the dividends with a 12 percent rate of return, you'll end up with $98,925.54 in 20 years, almost $75,000 in profit on an investment of $24,000 over that period.
If your goal is more short-term, such as a down-payment on a house, you'll still get some help by investing. Investing $1,000 a year for five years with an 8 percent annual return will garner you $7,347.69, or almost $1,500 in profit.
Both types of investments require you to set goals and take stock of your own ability to deal with risk and loss before you decide whether to put your money into a growth fund or a safer bond fund.
"A young person who doesn't need the money for years and years can be quite aggressive. If they're saving for a house they should probably be more conservative," said Jacobs.
Penny wise, penny foolish
The situation becomes much more difficult for smaller investors who don't want to buy into mutual funds and instead want to pursue purchasing individual stocks.
An investor with $100 or less to spend each month on stock may be tempted to pursue only the lowest-cost stocks, and of these the cheapest are the penny stocks.
People disagree about what constitutes a penny stock. Some say those that trade at less than $5 per share are penny stocks, others use the more traditional definition of less than $1 per share.
No matter how you define it, penny stocks are a controversial way to invest and their low cost should not lead smaller investors to believe that they behave the same as the Dow stocks.
Penny stocks, said George Schlieben, publisher of the Global Penny Stocks newsletter, are highly speculative and can fluctuate wildly.
Their prices can also be manipulated by unscrupulous larger investors. Because of the lower share price, large blocks can be bought and sold, yanking the price around for their benefit.
"I don't think anyone should devote more than 10-15 percent of their total portfolio to highly speculative stocks," said Schlieben.
"My candid advice would be not to go into these situations unless you have your eyes wide open and have some kind of experience with penny stocks."
If investors want to move up a level to stocks in the $5 to $15 range they still face paying brokerage fees. Full-service online discount brokerages such as e.Schwab charge $29.95 per trade, almost one-third of a $100 investment.
While some cheaper online brokers such as Suretrade only charge $7.95 per trade, it still constitutes a large chunk of the money put up by a smaller investor.
Dividend reinvestment plans are becoming an increasingly popular way for investors with little money to buy into some of the bigger stocks one share at a time.
Under these plans, known as DRIPs, someone who owns a single share in a company such as Procter & Gamble (PG) can buy additional shares directly from the company without paying a broker fee.
Even better for investors with limited means, many of these same DRIP companies are beginning to offer the first share -- which you would usually have to buy from a broker -- directly to smaller investors as well, allowing you to sidestep brokerage fees altogether.
Much information about DRIPs is available online, including the DRIP Investor and DRIP Central. Sites such as Netstock Direct and the Society for Direct Investing offer lists of companies which offer their shares directly to you.
No matter how you're thinking of investing, said Jacobs, smaller investors shouldn't be looking at the stock market as some kind of "get rich quick" jackpot that will change their lives overnight.
This may be a hard lesson for those of limited means who are yearn for a stronger financial situation for themselves and their families.
"It's not so much how much you have as whether you need it," he said. "If the bill collector is coming dunning, then you don't need to be in equities."
-- by staff writer Randall J. Schultz