Investing From Scratch.

If a lack of cash has kept you out of the market, here are three low-cost ways to get in

EXCUSES, EXCUSES, EXCUSES. WHEN IT COMES TO GETTING into the stock market, there always seems to be a hurdle or two in the way. Maybe you think it takes too much money to get started, say a lump sum on the order of $10,000. If not that, perhaps you're under the impression that you can't funnel regular payments into stocks or mutual funds like you can with a checking or savings account. Or (come on--you can own up to it) maybe it just seems too inconvenient to pick up the phone and arrange a trade with your broker every month or so.

If you've kept up with BLACK ENTERPRISE over the past year, you've seen us draw up a basic investment scheme most anyone can adopt. At its foundation is a safety fund, three to six months' worth of salary stowed away in a money market mutual fund where it can earn about 5% in interest. That way, in an emergency--say you leave your job for one reason or another--you'll have enough cash to cover expenses like the mortgage, food, car payments, etc. Then there's the stock market to conquer, the wealth-building vehicle par excellence that has historically rewarded investors an average annual return of over 10%. For first-time investors, mutual funds are a great entry point into the market. They offer instant diversity via portfolios of company shares handpicked by professional managers. And to top it all off, we haven't neglected stocks. After all, there are wonderful opportunities to save toward your dreams locked away in corporate shares, if you take the time to do a little research.

Which leaves one question we haven't yet answered. Say you're someone who hasn't got a crisp $7,000 to $10,000 at your fingertips, the minimum investment you'd need to get in the average money market or equity (stock) mutual fund and buy a few shares. Just how in the world do you even get started on one, let alone three projects?

Well, in the past, it was easier to revert to the excuses we listed above. But, in the interest of breaking through the obstacles lying between you and the Dow Jones Industrials or financial well-being for that matter, we've come up with three low-cost ways of starting you on your way. In the pages ahead, you'll see how as little as $50 can get you directly into the stock market. You'll learn how regular, steady savings build in mutual funds. And, you'll also see how, over time, you too can pack away enough cash to have a reliable cushion no matter what the future may hold.

STOCK BY STOCK

We'll start with what for many people would seem to be the most intimidating investment around: stocks. At first glance, taking a stake in a company by owning shares would seem to be a convoluted, rather expensive process. After all, you have to contact a broker, who buys shares for you, but at a sizable commission--anywhere from $19 to $60 for 100 shares. Factor in the expense, and you'd really need about $2,500 up front to make it worthwhile.

That's where direct stock plans (DSPs) and dividend reinvestment plans (DRPs) (also known as DRIPs) come in. Companies that offer DSPs and DRPs are essentially cutting out the middleman to give you a cheaper way of owning their shares. The companies offering either plan allow you to make steady, small purchases of shares and will often agree to make regular withdrawals from your checking or savings account, so you can build a position in a stock over time. Often enough, you can start up with little (say $50, $100 or $250) or no money. And, by buying shares directly from the company, you can save a bundle on brokerage commissions.

Although the names are similar, we prefer DSPs to DRPs. That's because DRPs often require you to buy at least one share from a broker before joining the company's plans. DSPs, however, let you skip the broker altogether and get your initial shares from company headquarters or through certain banks. Today, there are over 400 companies with DSP plans, including Sears (NYSE: S), WalMart (NYSE: WMT) and Merck (NYSE: MRK). According to Standard & Poor's, that number should bolt to about 1,000 by the end of next year.

Another feature of DRPs and DSPs is dividend reinvestment. In other words, should your company pay a dividend, any amount your account accrues over time can be reinvested in company shares. As we've said before in BE, dividends are not only a great source of income, they also help to guard a stock from the herky-jerky motion the market can go through. There's another plus: compounding. For example, look at the S&P 500 Index over the past 10 years. An investment of $1,000 in the index alone would have grown to $3,160 during the 10-year period ended May 31 of this year. But, plow the dividends back into your account, and that sum jumps a full 43% to $4,520 over the same time.

Sounds too easy to be true? One person who isn't scoffing at direct share purchase plans is William E. Thomason, 33, director of portfolio management for Parnassus Investments, a San Francisco money management and mutual fund company. "That's how I got my start, in the market," says Thomason, who grew up in Detroit. When he was a teenager, his mother encouraged him to read up on stocks and the market. Eventually, he began calling up companies to get prospectuses and stumbled across DRPs. "I started with companies that I, as a teenager, would know," he recalls. "First off, I put in $25 a month into Coca Cola (NYSE: KO). I got my stock certificate in the mail, and I was on my way."

In no time, Thomason had a burgeoning portfolio on his hands, one with stakes in McDonald's, Wrigley's, Detroit Edison and AT&T. And even after he got a degree in public policy and finance and went into the high-finance world of money management, he never left his direct purchase plans behind. In fact, he still owns Coke and has set up accounts with Lucent Technologies and a number of other corporations. When he got married four years ago, he enrolled his wife in Intel's direct purchase program.

You might be asking yourself: so with hundreds of companies to choose from, what are a few direct purchase plans that look good for the long haul? We asked Joseph Tigue, managing editor of Outlook, an investment advisory newsletter published by Standard & Poor's, for a portfolio of five solid companies with DSPs. His suggestion, along with contact numbers for applications and information: entertainment giant Disney (NYSE: DIS) (800-948-2222); Exxon (NYSE: XON) (800-252-1800); General Electric (NYSE: GE) (800-786-2543); Lucent Technologies (NYSE: LU) (888-582-3686) and a Southeast bank, Regions Financial (Nasdaq: RGBK) (800-524-2879).

There are dozens of others to choose from and a number of ways to find out whether a stock that has piqued your interest offers a direct purchase program. One way, albeit hit-or-miss, is to call a corporation's investor relations department. We'd suggest you check into two resources. First off, on the Internet, Quicken (www.quicken.com), tine personal finance software maker, has a web page devoted to DRPs and DSPs. Another good resource is the Directory of Dividend Reinvestment Plans ($39.95), published by Standard & Poor's.

A FOOTHOLD IN FUNDS

Mutual funds offer programs that are quite similar to direct investment plans. Automatic investment plans, as they are often called, require a minimum initial investment as long as you agree to have a set amount withdrawn from your checking or savings account. Just ask Robert Crenshaw Jr., 46, of Walnut, California. A salesman for a company that makes dialysis machines and supplies, Crenshaw got the investment itch back in 1981. He signed up with the Janus Venture Fund, agreeing to have $100 a month tapped from his checking account. Whenever he got a raise at work, he increased the amount, eventually bringing on two additional funds, the Invesco Industrial and American Century's Ultra Fund. He's stuck to it, funneling a steady $100 a month to each fund. The result: Crenshaw has over $60,000 stashed away in the three funds and by reading up on prospectuses and annual reports, he's becoming something of an investment whiz in his own right. "I started off slowly, but this was a great way to pick up on the market over time," he says.

Choices? There are literally thousands of equity funds that offer a low minimum initial investment to open up an automatic withdrawal plan. If you can start with $500 and agree to a regular sum invested monthly, there are 3,330 funds to accommodate you, according to Morningstar, the Chicago firm that tracks mutual funds. At an opening investment of $250, there are 3,067 funds; at $100 the list is still some 2,763; $50 narrows the list to 2,048; and no money down still gets you a selection of 100 funds altogether. That's compared with the usual minimum initial investment of $1,000 to $2,500 many retail funds require.

A quick note to help keep things clear: many funds will lower the entry investment you're required to pay for an IRA to $100. In this article, though, we'll keep our sights on funds that lower the bar outside of IRAs.

That said, we called on Morningstar to run a screen on the 6,133 equity funds it follows to select the best that require a minimum initial investment of $250 or less if you agree to regular deductions from your savings or checking account. We looked for funds that don't require you to pay load fees, and ranked the winners according to three-year average annualized returns (see chart, "Top Performers at a Low Price").

One fund group that didn't make our screen but is still worth mentioning is TIAA-CREF (800-223-1200). Known for its management of teachers' retirement funds, last year TIAA-CREF finally opened up retail funds catering to individual investors like you and me. As an institutional investor, TIAA-CREF has a very solid reputation. Furthermore, it takes only $250 to open up an account in any one of its stock mutual funds.

SAFEKEEPING

We've saved money market mutual funds for last. That's in no way to detract from their importance. Most financial planners will tell you they're a great way to set up a high-octane checking account where you're actually paid an substantial amount of interest--5% or so, compared with the puny 2% or less that commercial banks extend you for your savings--to keep your money. And better still is the fact that money market mutual funds are liquid: you can draw on your principal by check if necessary.

If you're starting from scratch, take heart that you can get into a money market mutual fund, like TIAA-CREF, for an initial investment of $250 or less. To gather up a list of general purpose money market funds that have low starting investments, we called on IBC, an Ashland, Massachusetts, firm that tracks the industry. We came up with five requiring $500 or less to get in (see chart, "Affordable Investment Options"). The winner: again TIAA-CREF's Money Market Fund outranked the competition with a yield of 5.46%.

AN EXCUSE-FREE 1999

We may have listed them separately. Still the three--DSPs, low minimum mutual funds and low minimum money market mutual funds--can be combined to set up a solid foundation in a beginning portfolio or to shore up a group of stocks and mutual funds you might already own.

In the words of Crenshaw, who's been a religious investor for 17 years: "If you're in the market, you have a 50% chance of succeeding over the long term despite ups and downs; if you stay on the sidelines, you have a 100% chance of failure."

RELATED ARTICLE: MONEY MARKET

Affordable Investment Options

The following let you in for a low initial investment, provided you invest regularly.

                                          Minimum
                              Interest    Initial      Telephone
Fund                          Rate(*)    Investment      Number

TIAA-CREF Money Market Fund    5.46%       $250       800-223-1200
Van Kampen Reserve Fund        5.29         500       800-421-5666
Nations Prime Fund             5.22         500       800-321-7854
Pacific Horizon Prime Fund     5.21         500       800-346-2087
GE Money Market Fund           5.18         500       800-242-0134

(*) Seven day compound interest

Source: "IBC's Money Fund Report," Ashland, Massachusetts (www.ibcdata.com)

RELATED ARTICLE: EQUITY FUNDS

Top Performers at a Low Price

The following funds let you in for a low initial investment, provided you invest regularly. We ranked them according to three-year average annualized returns.

                           3-Year Avg.           1-Year
                           Annualized            Total
                          Total Return           Return
Fund                    (8/31/95-8/31/98)   (8/31/97-8/31/98)

Dreyfus Appreciation         23.69%              10.36%

American Century
Income & Growth              22.14                7.54

American Century
Equity Growth                22.03                5.96

U.S. Global Investors
All-American Equity          21.96                9.96

Dreyfus Basic
S&P 500 Stock                21.57                7.76

                               YTD               Minimum
                              Total              Initial
                             Return            Investment
Fund                    (1/1/98-8/31/98)

Dreyfus Appreciation           3.43%               $100

American Century
Income & Growth               -1.33                  50

American Century
Equity Growth                 -3.17                  50

U.S. Global Investors
All-American Equity            2.35                 100

Dreyfus Basic
S&P 500 Stock                 -0.59                 100

RELATED ARTICLE: DSPs/DRIPs

Going Direct to the Source

Direct purchase plans are offered by so many companies. To help whittle the number down to a more manageable size, check first at the Quicken Website (www.quicken.com).

Also look at the "Directory of Dividend Reinvestment Plans," published by Standard & Poor's ($39.95; 800-221-5277).

And finally, Joseph Tique's selection of DSPs for the long haul:

Disney (NYSE: DIS)                  800-948-2222
Exxon (NYSE: XON)                   800-252-1800
General Electric (NYSE: GE)         800-786-2543
Lucent Technologies (NYSE: LU)      888-582-3686
Regions Financial (Nasdaq: RGBK)    800-524-2879