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Smart investments for young professionals: whether you have $500 or $5,000, here are great places to stash your cash.

You've just pocketed an awesome graduation gift - the kind that folds. Or perhaps you scored a nice sales bonus at work. Maybe you even received a hefty tax refund from Uncle Sam. No matter what the source of the cash - whether it's a modest $500 or a meaty $5,000 - you now have the happy task of figuring out what to do with it. The Caribbean is calling ... you can taste that Pina Colada, smell the salty air, feel the palms swaying ...

Snap out of it. True, this kind of dough is enough to drum up some serious fun, yet not enough (not by a long shot) to allow you to declare financial independence and withdraw from the nine-to-five set. Still, if you cultivate your stash carefully, it can become a powerful tool to help you realize your dreams and financial goals. After all, "It doesn't really matter how much money you have to invest to begin with," says Don Phillips, publisher of Morningstar Mutual Funds, a Chicago-based mutual funds ranking service. "The trick is to get into the game."

Before you consider locking even a cent of your newfound nest egg away, however, make sure you have enough extra cash at the ready. Typically, financial advisers suggest keeping at least three to six months' worth of living expenses on hand to cover any unexpected financial demands. "To really make your money grow, you'll want to invest it someplace for several years," explains Lynn Ballou, a financial planner in Lafayette, Calif. "And because investing can be risky - a market may drop or dry up just when you want to cash out - you shouldn't do it with money that you may need to live on."

Where to park your funds, then, if you'll need them back in less than five years? The surest, safest places are bank certificates of deposit where, usually for minimum initial investment of a few hundred dollars or less, your funds are insured by the U.S. government for up to $100,000. Recently, rates for six-month CDs were about 3.10%. Care to up the ante with slightly more risk to your principal? Then consider short-term bond funds. Two winners are Babson Tax-Free Income-Short Term (recent yield: 4.43%; 800-821-5591) and Strong Short Term (taxable; recent yield, 7.33%; 800-368-3863). Both have minimum investment requirements of $1,000.

Beyond that, if you can commit your money for five or more years, you'll want to steer it towards faster-growing vehicles. In general, that means stocks: Over time, they've outpaced almost every other type of investment. Going back 50 years, for instance, equities gained an average of 12.6% per year, while corporate and government bonds and Treasury bills sputtered along at about 5%. Meanwhile, inflation (as measured by the consumer price Index) ticked up at an annual rate of 4.3% over the last half-century.

Thus, "if your (investment) horizon is long, the place to be is in stocks," says Ivan Thornton, a financial consultant at Shearson-Lehman Brothers in New York. "In fact given the way inflation cuts into your spending power, you can't afford not to be in them." The question, then is which type of stocks? And what are the best ways for young people to get into the market? Here are some suggestions.

You Have $500-$1,000 To Invest

If you're a novice investor, your first dive into the stock market should be a cool glide - not an icy splash. The best way to invest a small amount of money in stocks, then, is through mutual funds, which enable you to buy into a diversified portfolio of hundreds of stocks and bonds. Funds offer another advantage besides diversification: They're managed by expert stock pickers whose sole job is to follow the market.

The hitch? Many mutual funds have recently raised their minimum initial investments from $500 to $1,000, making it tougher for new investors to get their feet wet But there are two ways to buck the rules. The first is to open an individual retirement account in the fund of your choice: Some fund companies who impose minimums of $3,000 or more will accept IRA contributions of as little as $500. Aside from any 401(k) program that you may be eligible for at work, this is the best way to invest in funds, since earnings from both IRAS and 401(k)s accrue tax-free until you withdraw the money at retirement.

Cheryl Derricotte, 28, a consultant for the Seattle nonprofit housing developer Common Ground, is determined to revup her $30,000 salary through investments. On the advice of her financial planner, Oakland-based Cheryl Broussard, Derricotte began contributing $50 each month to an IRA. Derricotte plans to transfer the money to a socially responsible growth stock fund like Calvert-Ariel Appreciation, which avoids companies that invest in South Africa or sell weapons (minimum IRA investment, $1000; 800-368-2748). Another option is Pax World, a balanced fund which buys a mixture of stocks and bonds and steers clear of the gambling, liquor and tobacco industries (minimum investment, $250; 800-767-1729).

"When you're young and just starting to invest, you need to look at more growth-oriented vehicles," says Broussard. The logic? Time - to rack up stellar gains like those cited above - is on your side. To achieve her financial goals, which include starting her own business, Derricotte plans to make monthly, equal payments into her mutual fund picks. Known as dollar - cost averaging, this investing tactic ensures that you're scooping up more shares when prices are low, and fewer when prices are up. As for her new attitude about investing? "I felt it was time to start taking my own money as seriously as I take the public's money," laughs Derricotte.

Another way to beat the steep initial minimum investment obstacle is by targeting fund groups with minimums you can afford. Several good funds will still let you in for $1,000 or less (regardless of whether you open an IRA with them); others waive minimums for shareholders who agree to make regular, automatic investments from their bank accounts. "That's why it doesn't take a lot of cash to get started," says Morningstar's Don Phillips. His growth-fund picks for budget-minded investors: Nicholas, which buys market leaders at depressed prices and is up 12.63% in 1992 (minimum initial investment: $500; 414-272-6133); Strong Opportunity, a growth-oriented fund that concentrates on solid, underfollowed companies and gained 17.35% last year (minimum investment: $1,000; 800-368-3863); and Twentieth Century Select, which lost 4.43% in 1992 but out-paced the Standard and Poor 500 stock index by 4.81% percentage points over the last 15 years by snapping up dividend-paying stocks in fast-growing industries (minimum investment in an automatic payment plan, $25 a month; 800-345-2021).

If You Have $3,000 To Invest

With $3,000 in your pocket, the fund universe widens considerably. "You can't beat 'em for diversification when you're talking about this much money," says Sheldon Jacobs, editor of The NoLoad Fund lnvestor in Irvington, N.Y. Respected fund families like Vanguard and Fidelity, which generally require minimum deposits of $3,000 and $2,500, respectively, now bob into view. In fact, the majority of funds are yours to pick from, particularly if you establish an IRA account when you invest the maximum IRA contribution (by law, the maximum IRA contribution, and thus the minimum set by some funds, is $2,000 per year).

Even better, you can easily afford to set up a couple of accounts. Suppose, for instance, that you invested your first $1,000 in a steady-as-she-goes total return fund such as Neuberger & Berman Guardian, recommended by planner Broussard, which looks for high-quality undervalued companies (up 19% last year; 800-877-9700). Now you want to diversify your portfolio further. Planner Sheldon Jacobs counsels adding to your selections by choosing funds with different investing styles.

For instance, you could put $1,000 into Stein Roe Prime Equities, a growth-and-income fund that buys high-quality, swiftly-growing firms and was up 10% last year (800-338-2550); another $1,000 into Babson Enterprise II, a small-company growth fund that looks for cheaply-priced stocks and gained 17.2% in 1992 (800-422-2766); and $1,000 more into Financial Industrial, a growth fund that concentrates on blue-chip companies with significant earning potential, up just 2.8% last year, but 42% in 1991 (800-525-8085).

Or, if this is your first foray into stocks, Jacobs recommends putting your whole $3,000 stash into Vanguard Index Total Stock Market, which attempts to mirror the performance of the stock market itself. As of a year ago last March, this fund was up 14.8% (minimum initial investment, $3,000; 800-662-7447).

If you're in the 28% or higher tax bracket, then you may want to shelter your money. Municipal bond funds are ideal for that purpose. For $2,500 you could get into Fidelity Advisor High Income Muni Bond Fund (800-522-7297), which holds multiple state bonds with top-notch ratings. This fund, exempt from federal taxes, was up 11.1% last year.

Also worth checking out are state municipal bond funds, especially if you're in such high-tax states as New York, California or Montana. The advantage is exemptions from both federal and state taxes.

Julia Young, 25, a customer service rep at Brian Unlimited Distribution Co. in Detroit, got into the stock game three years ago when she received stocks as birthday gifts from her aunt and uncle. "Investing has always seemed natural to me," she says. At the advice of her financial advisor, Gail Perry-Mason, Young has enhanced her portfolio (which includes EuroDisney and Pepsi) and has recently purchased three zero-coupon bonds for $1,000 apiece. She can expect to redeem each for $3,000 (for a roughly 8% return) upon their maturity in the year 2006. (See Personal Finance for more on Zeroes.)

In another smart move, Young also contributes about $200 each month to a capital appreciation-fund IRA (AIM Constellation, up 15% last year; 800-347-1919). Total value of her nest egg to date: about $7,000. Young, who earns about $20,000 a year and considers herself a conservative investor, says her monthly investments are no sacrifice. "I'm saving for my old age," she quips. "Starve now, live it up later."

When You Have $5,000

With this much money to invest you can afford to branch out even more. Consider doctors Michael and Karin Ashwood, 37 and 31, of Brookfield, Conn. The Ashwoods have already invested about $60,000. And their comfortable six-figure income made it possible for them to recently buy a new home. Still, saving for the future is paramount. Aside from funding their retirement (via an IRA and pension plans at work), the Ashwoods intend to pay for the college education of their seven-month old son Gabriel. "We're planning to send Gabriel to public school, but we might change our minds," says Michael. And that's just for starters. "Karin," he adds, "is pregnant again."

The Ashwoods have about $5,000 earmarked for mutual funds, and their financial planner, New York City-based Ian D. Quan-Soon of I.Q. Financial Services, recommends that the couple continue to invest for growth. Where to put it? Probably the best answer is overseas, says Quan-Soon. Once you've covered the U.S., experts say, its a good idea to diversify further by looking abroad - and now may be one of the best times to do so.

San Francisco fund guru Kurt Brouwer, of the financial advisory firm Brouwer & Janachowski, Inc. recommends two international funds. Harbor International, one of his picks, has the highest five-year returns of any foreign stock fund (16.16% on average, according to Morningstar Mutual Finds, 800-422-1050). Lately, it's invested mainly in Europe and emerging markets such as Argentina and Chile (minimum initial investment, $2,000; 800-422-1050). "Europe is where the action will be for the next decade or so," he wagers. Financial Strategic European, Brouwer's other favorite, seeks out undervalued sectors such as banks and insurance firms. It's gained an average of 7% over the past five years, but Brouwer expects it to be an even bigger winner over the next five (minimum inital investment: $1,000; 800-525-8085).

If you feel truly daring, you might even consider a little stock picking yourself by participating in so-called dividend reinvestment plans, or DRIPS. About 900 companies, many of them blue-chips, waive brokerage firm commissions and even allow you to buy fractions of shares, when you invest directly with them. The catch is that you must plow all periodic income payments (dividends) back into your account

"With $5,000, you can start accumulating positions in about 10 good companies through DRIPS," points out Charles Carlson, the editor of Dow Theory Forecasts and author of Buying Stocks Without a Broker His suggestions: energy giant Exxon (recent price, $65), and health care manufacturer Abbott Labs (recent price, $28), which Carlson labels as "undervalued, with good growth prospects."

Gregory Weiss, associate editor of Investment Quality Trends, the La Jolla, Calif.-based stock newsletter, suggests that first-time stock pickers take a look at utility DRIPS. These stocks pay handsome dividends and, as Weiss points out, "it's so important to consider dividend yield when you're starting out because they provide a safety net should the stock price drop."

Specifically, Weiss recommends Texas Utilities (recently $44, yielding 6.7%), the largest utility in the Lone Star state, which has increased its dividends for 46 years running; and Allegheny Power, ($50, 6.2% yield), which has consistently boosted its dividends for 30 years.

Make no mistake: Since individual stocks are much more volatile than funds, DRIPs aren't for everybody. In fact, many investment advisers suggest sticking with mutual funds altogether unless you've got $20,000 or more to play with. On the other hand, "DRIPS can be a great way to get introduced to the stock market," says financial planner Lynn Ballou, who recalls her own first investment - public Service Co. of Colorado's DRIP. "Owning it taught me a lot," she says. Better still, "My husband and I just added on to our house with part of the earnings."

Talk about investing from the ground up.
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Vreeland, Leslie N.
Publication:Black Enterprise
Date:Jul 1, 1993
Words:2351
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