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About investing.

ABOUT INVESTING

Q. How much cash reserve should I build up before starting an investment program?

A. Your investment programshould be based on your temperament. First, how much "guaranteed' money do you need to give you peace of mind? Peace of mind is a good investment, though it may take a lot of what I call "patting money.'

Second, how many people are dependentupon you? The larger their number and the greater their dependence, the greater are your needs for cash and cash equivalents.

Third, does your life insurance protectyour dependents if you die before you accumulate an estate that will provide for them? If it doesn't, you should not invest until you've taken care of this necessity.

Fourth, how soon will you needthese funds? If you'll need some funds soon, keep that amount in a money-market mutual fund; however, if you have time, you should consider investing in a well-managed stock mutual fund that belongs to a family of mutual funds. Invest a lump sum and add to it whenever you desire, or begin with a small sum and add to it monthly, quarterly, or whenever you have the funds to do so. Mutual funds, which can be redeemed at any time at their net asset value, can also serve as collateral to borrow against; banks usually lend around 70 percent of their market value. You then have liquidity whenever you need it, so your need for cash reserves is not as great.

Q. Is there a sure system for investing in the stock market?

A. The most nearly infallible approachI've ever found for investing in the stock market is to invest monthly in a well-managed growth mutual fund. Determine the amount you can comfortably save each month (not too comfortably or you might not save enough), then set up a bank draft so that the fund's custodian drafts your account each month and invests this sum in the fund you have selected. This procedure gives you a mathematical advantage called dollar cost averaging: You invest the same amount of money in the same security at the same interval. You're guaranteed to buy more shares at a low cost than at a high cost.

For example, let's say you invest$100 a month or a quarter in a stock or a mutual fund selling at $10 a share; you buy 10 shares. If the shares sell at $5 a share on your next investment date, your $100 buys 20 shares. If the share value at the next investment date returns to $10, your $100 again buys 10 shares. You have now invested $300, and you own 40 shares worth $10 a share, or $400. All you did was invest systematically, which guaranteed you'd always buy more shares at a low cost than at a high cost.

Q. What is a reasonable return on your money without subjecting it to a lot of risk?

A. The minimum return you shouldaccept, averaged over several years, is 12 percent compounded annually. A well-managed mutual fund should produce this total return or better. (The "rule of 72' reveals how long it takes to double your money at various rates of return. At 6 percent it takes 12 years; at 12 percent, 6 years; at 18 percent, 4 years; and at 24 percent, 3 years.)

Q. I have funds I want to invest for about five years and am trying to decide whether stocks or bonds would be best. Which would you choose?

A. If you choose your portfolio wisely,you should do well in either stocks or bonds. Money can be made in either; however, I think you need to be more skilled to succeed in the bond market.

My preference is stocks, although forthe past few years bonds have provided a "true yield'--meaning a rate of return greater than the rate of inflation.

Q. What is the most common mistake people make investing theirfunds?

A. To confuse two very similar words:"stability' and "safety.' Stability is the return of the same number of dollars, plus interest, at a specific point in the future. Safety is the return of the same amount of food, clothing, and shelter.

You can be stable and not be safe.For example, a certificate of deposit or a government bond may be stable, but if inflation reduces the purchasing power you gave up when you put your money ther, it was not safe.
COPYRIGHT 1987 Saturday Evening Post Society
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Copyright 1987 Gale, Cengage Learning. All rights reserved.

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Author:VanCaspel, Venita
Publication:Saturday Evening Post
Date:Mar 1, 1987
Words:735
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