Automatic savings plans get to money before you do Mutual funds offer good place to start

February 02, 1992|By Jonathan Lansner | Jonathan Lansner,Orange County Register

It sounds so simple that it can't possibly work.

Regular, equal purchases of high-risk investments actually reduce the risk of owning such assets. They also get investors used to saving.

These often-preached, under-adopted wishes of investment professionals echo loudly these days because stocks run historically hot when yields on cash investments plummet.

Systematic savings plans are not new. But many investors have been introduced to the concept in recent years through expansion of various new self-directed retirement options in the workplace.

With improvements in electronic funds transferring, savers today can have money taken directly from their checking and savings accounts or from their paychecks and have it sent to money managers for investment. The money can be placed into everything from blue-chip stocks and speculative smaller issues to junk bonds and Treasury issues.

"It's one way to make the market's inherent volatility work for you," said Robert Freedman, chief investment officer of John Hancock Funds. "Even if prices go down, you're happy, because you're buying more shares. It reduces the emotional component to investing, allowing for more sensible decisions."

For most investors, mutual funds provide the simplest way to start such programs. Insurance-company annuities also offer periodic-purchase options but have tax consequences if money is needed before retirement. Also, some companies' dividend-reinvestment programs will let savers systematically purchase shares in the company.

Despite the ease of use and the strategic edge they can provide, systematic investment programs are just emerging from obscurity, investment company officials say.

Typically, 2 percent or less of mutual fund shareholders use systematic savings. But usage increased fourfold at Financial Funds since the summer and doubled at Scudder Funds in the past year.

The common user tends to be an older, goal-oriented saver, fund officials say. For example, Hancock Funds' typical systematic investor is an experienced fund owner in his 40s who is trying to put money away for retirement or a child's college education.

The amounts invested monthly are small, leading experts to guess that the investors are in for the long haul. GIT Investments says its average contribution is $228 a month; US Funds gets $135 a month, Hancock Funds gets $75 and Franklin Funds, $25.

"An automatic savings plan enhances a mutual fund's greatest benefit -- diversification," GIT Executive Vice President Charles Tennes said. "By investing monthly, you diversify the price at which you buy the shares, which is beneficial if share prices drop. Remember, however, that you are also reducing your potential return if the value of your investment skyrockets."

Automatic savings plans offer two prime benefits, discipline and dollar-cost averaging.

A secondary benefit is their diversity. Investment experts say they work well in buying high-risk bonds or commodity pools.

Many savers say they aren't able to stash away money on a regular basis. Often it's not that they lack the income -- they simply spend it as soon as they get it.

The savings plans, however, get to your money before you do. By hooking up a mutual fund to either your bank account or your employer's payroll system, investors can save before they have the money to spend.

The plans' real attraction, however, isn't forced savings. What really prevents thoughtful investing is savers' emotions. Too often they want to buy when the market is high, and panic and sell when markets are down. Through systematic purchases, investors avoid the temptations that market cycles generate. Plan participants may actually root for a slight market downturn in the days before the monthly purchase.

Regular purchases allow investors to dollar-cost average, a strategy that lowers the risk of buying at inopportune times.

By purchasing set amounts at regular intervals, a saver buys more shares at lower prices and fewer shares at higher prices. As long as stock prices rise over time -- and history says they do -- an investor should come out ahead through dollar-cost averaging.

"It takes the guesswork -- and the emotion -- out of investing," said Jeffrey Vinik, portfolio manager of Fidelity Growth & Income Fund.

The plans also offer an additional incentive: They are a way for those with tight budgets to get into stocks or bonds. If you promise to have small sums of money -- as little as $25 -- taken from your checking account monthly, many fund companies will waive hefty starting-investment requirements.

While these plans have been heavily promoted in the past, a lesser-known option could provide relief for savers shaken by tumbling money-market rates or for those with large sums of money coming out of conservative investments.

Many fund companies will set up regular transfers from one fund to another. Financial planners say this could be particularly useful for a saver thinking about rolling a retirement account from bank savings to mutual funds. Many investors in this camp are wary of throwing everything at stocks.

But fund bureaucracies and computer shortcomings can make this seemingly easy option tricky to accomplish. Check with a fund before investing to see how you can start regular purchasing.

Although an investor can call many funds and transfer money over the telephone, several companies require paperwork to begin systematic transfers. Others limit the funds in which such moves can be made. And some require that as much as $10,000 be in an account before automatic switches are made.

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