Personal Business: INVESTING
BUYING STOCKS LIKE CLOCKWORK
If one of your New Year's resolutions is to invest cash that has been building up in your bank account, or if your goal is simply to begin saving regularly, there is an easy way to get started. At major mutual-fund families and brokerages, you can elect to sock away a certain amount at regular intervals, and the company will perform the transactions automatically. This disciplined style of investing has many advantages--some purely psychological and others you can count in dollars and cents.
In these uncertain markets, more investors are opting for "automatic" (or "systematic") investing plans. The Strong fund family reported a 25% increase in automatic transactions during 1994. But the programs are not widely advertised. "Small transactions tend not to be very prosperous for the money-management industry," says John Keefe, a consultant to the
financial services industry in New York. But, for investors, they can provide a painless way to build up hundreds of thousands in their accounts.
The foundation of any such program is dollar-cost averaging--the idea that when you invest a set amount, say $100 a month, you buy more shares when prices are low and fewer when prices are high. This cuts your average cost per share and allows you to profit from volatility in a stock market that historically trends up. "The potential reward is greater than people realize," says Stephen Savage, editor of Value Line Mutual Fund Survey.
When you follow this method, you don't have to lose sleep over market slides, knowing that your dollars are going further. You also don't have to worry about moving all your money in just before a crash. Plus, removing emotion from decision-making greatly improves chances that you will still plug money into the market when it's on the way down. Besides, it's more convenient than mailing in checks every month.
For people who are just starting to save, the automatic plans have obvious merit. Companies will withdraw small amounts of money from your paycheck, bank account, or money-market fund and use it to buy fund shares. You may not even really miss the extra cash.
Some fund companies waive their minimum initial investment requirements for systematic investors. Janus, T. Rowe Price, and Strong, to name a few, waive minimums of $1,000 or more if you agree to invest at least $50 up to twice a month or just once a quarter. At discount brokerage Charles Schwab, all funds in One Source, a network of no-load funds sold for no transaction fee, have a $100 minimum for automatic investors. You can cancel the program anytime, but if you haven't reached the minimum initial investment, you'll need to add more to the account or liquidate your holdings. These programs are an ideal method for making monetary gifts to children, and some fund companies have special college-savings programs set up this way.
But automatic investing also can be useful if you have a large sum to invest, particularly if you are newly liquid because you sold a business, gained life-insurance benefits, or received the proceeds of your 401(k) plan, says Martin Jaffe. He is chief operating officer of Wood, Struthers & Winthrop, the investment-management subsidiary of Donaldson, Lufkin & Jenrette. Lump-sum holders tend to be very concerned they will invest all their money just before the market crashes. Automatic investing helps them ease in.
One tried-and-true method is to put the balance in a money-market fund and gradually have set amounts transferred into stock and bond funds over the course of a year. A more conservative option is to buy a series of bonds with consecutive maturity dates--Jaffe recommends an average maturity of five to seven years--creating a bond "ladder." Then you can use the coupons as they come in to buy stocks. "You'll never have less than you started with, and in three years, you could have 25% to 30% of your money in stocks," says Jaffe. Mutual-fund companies also have programs where just the interest from a money-market or bond fund can be swept into equity funds.
If you have a large lump sum to invest, your returns would be better most years if you plunged it into the market right away rather than averaging it in over the course of a year, according to a 1993 study by finance professors at Wright State University. But in years with declines, you would have done better to put it in gradually. "After all," says WSU professor Richard Williams, "in most years, the market goes up."
Even people who have carefully structured investment portfolios may want to incorporate automatic investing. If you rushed out of bonds when rates started to rise, you may want to reenter the market gradually to take advantage of higher rates. You can do this either by transferring cash into bond funds or by gradually switching from an equity fund into a bond fund. "We've been recommending dollar-cost averaging into the bond market for a while now," says Ian MacKinnon, Vanguard's head of fixed-income investing.
Most fund companies and brokerages also offer systematic withdrawal. By requesting that a certain amount be redeemed and sent to you in cash each month, retirees can turn equity holdings into regular income. Keep in mind, though, this forces you to do the reverse of dollar-cost averaging. To receive the same dollar amount, you will end up selling more shares when prices are low and fewer when prices are high.
You still should keep an eye on your fund when you invest automatically. While you don't need to monitor daily price changes, make sure the fund's performance is in line with its peer group and that no major changes in management have been made. But don't halt the program if the market starts to slide. As long as you stick with it, automatic investing can be a great way to impose investment discipline in the new year.
Some Automatic Investing Strategies
IF YOUR NEW YEAR'S RESOLUTION IS TO START SAVING Have $50 or more withdrawn from your checking account each month and
invested in a mutual fund. Many fund companies have no minimum balance requirements for automatic investors.
IF YOU'RE AFRAID OF PLUNGING A LUMP SUM INTO THE STOCK AND BOND MARKETS ALL AT ONCE Place the cash in a money-market fund and have set amounts transferred into a series of funds each month over the course of a year.
IF YOU WANT TO EASE INTO EQUITIES Have the interest from your bond or money-market funds automatically swept into stock funds. Or buy a series of bonds with consecutive maturity dates (a bond
"ladder") and invest the coupons in stocks.
IF YOU FEEL YOUR PORTFOLIO IS OVERWEIGHTED IN ONE AREA Rather than sell all at once, set up a program to transfer a small sum each month from, say, a stock fund to a bond fund.By Amey Stone