Investment beginners should focus on education, risk

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times, published May 7, 2000

Q. I think there are a lot of people out there in the same shape I am. I am 43 years old and an average working person. I have no one else to talk to about this matter that has me very worried. What can I do to get the most out of my investment dollars? I would like to have my retirement in good shape in 20 years. I have about $100 to $150 a week to invest. What would be a good way to do this without a lot of risk?

A. You are not alone. The world of investing seems very mysterious and frightening to many people. You can change that by gaining knowledge and experience.

Many people think only of one type of investment risk: the chance of losing their money. But there are other risks, too, such as the risk of not having enough income in retirement. Part of investing is learning what risks are out there and how to manage them so you can aim for higher returns and still sleep at night.

For the average working person, the best way to invest is through an employer's retirement savings plan. Often the company matches contributions, which is a deal you shouldn't turn down. As a bonus, many retirement plan providers produce good printed materials explaining investments and risks in ways that are easy to understand.

But even if your employer does not offer a retirement savings plan, you can create your own. Any worker can put aside $2,000 a year in an individual retirement account and put extra savings in a regular taxable account.

If you are on your own, you will have to make an extra effort to learn about investing. You could start by visiting the public library or a bookstore or doing research on the Internet, where mutual fund Web sites offer a lot of educational resources. One beginner's book I like is Let's Talk Money: Your Complete Personal Finance Guide by Dee Lee and David Caruso. Avoid books that promise instant riches.

Most beginning investors are better off investing in mutual funds rather than individual stocks. One of the best funds for beginners is an index fund that tracks the Wilshire 5000 Index. These "total market" funds go up and down with the market but are less risky than funds that make big bets in one area.

Both Vanguard, (800) 871-3879, and T. Rowe Price, (800) 541-8803, offer total market funds with a $1,000 minimum investment in an IRA. T. Rowe Price waives the minimum if you sign up for automatic transfers from your bank account of at least $50 a month. A fund like this is a good way to stick a toe in the water while learning about investing.

A similar option is the TIAA-CREF Equity Index Fund, which tracks the Russell 3000 Index. Minimum investment is $250 or automatic transfers of at least $25. Call (800) 223-1200.

When you have more confidence and a nice-size portfolio (say $50,000), you can start to diversify. Most investors should have a mixture of stocks (either stock mutual funds or a diversified group of individual stocks), bonds and cash-type investments such as CDs and money-market funds. Be sure to stick with high-quality investments.

Good luck to you.

Q. I am 73 and have both an IRA and an annuity, both of which did well last year. I have been thinking of taking money out of my IRA at the end of the year and transferring it to my annuity. My taxes are low. I paid only $400 last year. Would you suggest doing something different?

A. Yes. If your taxes are low, don't invest any more money in annuities.

I assume that "taking money out" of the IRA refers to your required minimum withdrawals. I suggest that you put it in a taxable investment. If you were considering a fixed annuity, choose a high-yielding bank certificate of deposit. If you were considering a variable annuity, choose a diversified stock mutual fund.

Since you do not need the tax deferral an annuity offers, why pay higher expenses and/or surrender charges?

Online Money Map

Looking for high-yielding certificates of deposit or low-interest credit cards? Check out iMoneyNet Inc., a new site created by the merger of IBC Financial Data and the Bradshaw Financial Network.

-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to huntley@sptimes.com by e-mail.

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