A balanced, go-slow approach could ease this investor's fears

Your Money

September 11, 2005|By Humberto Cruz

Q. I am a single, 32-year-old female and know I should be investing in stocks for my long-term goals, including retirement. I've managed to save $30,000, but I keep it all in the bank because I am afraid to put the money into stocks or mutual funds. How can I overcome this fear? Do you have any suggestions for me?

A. From the many letters and e-mails I get, I assure you that your fear is not uncommon. And after the 2000-2002 bear market, a healthy respect for risk is not a bad thing.

Your e-mail tells me you understand that if you invest too cautiously you may not accumulate the money you need to meet your goals.

I will offer a few ideas:

First, start slowly. Invest a little at a time, such as taking $1,000 from your savings every month to put into the market.

This "dollar-cost-averaging" technique won't guarantee you a profit and may not make you as much money as investing the $30,000 at once. But it will avoid the risk of putting it all into the market just before a big decline, and it guarantee you will be buying more shares when prices are down and fewer when prices are up.

Invest in no-load, low-cost, diversified stock mutual funds.

No-load, low-cost mutual funds are arguably the best vehicle for this purpose because you can get broad diversification while investing relatively modest amounts each month without brokerage commissions or purchase fees. To learn about funds and search for those that require small investments to get started, check the Web site of the Mutual Fund Education Alliance at www.mfea.com.

If even this go-slow approach makes you nervous, start with a "balanced" fund rather than a stock fund. Balanced funds typically split stock and bond holdings about 60-40.

Many financial advisers insist you are better off setting and controlling your own allocation - for example, putting 60 percent in a stock fund and 40 percent in a bond fund, or whatever other percentage you decide.

With a balanced fund, you see only the relatively modest price fluctuation of that fund. With separate stock and bond funds, you become aware of the greater volatility of the stock fund.

Some investors, even if they know better intellectually, lose sight of the overall picture and find themselves losing sleep over the volatile part of their portfolio. That happened to a client of Sam X Renick, a former financial adviser and the founder of The It's A Habit! Co. in Los Angeles, which produces and sells books, music discs and other products designed to encourage children to save.

Coincidentally, this woman decided to put $30,000 into the market, the same amount you have. But even though the $30,000 in this case represented a small fraction of her net worth, "it became the entire focus of her attention and would actually get her sick watching it go up and down," Renick said. "After a few months, we got her out of the market. Psychologically, physically and emotionally, it just wasn't right for her."

Two other approaches might make more sense once you have accumulated a bigger nest egg:

One is to keep your current principal safe and invest only the interest. At 3 percent interest, a rate many federally insured banks are paying, your $30,000 would generate enough interest to satisfy the minimum monthly investment required by some mutual funds in lieu of a larger initial investment.

Or you could set up your investments so that at the end of a specified period you'll have at least your original principal.

For example, you could take $24,658 out of your $30,000 and buy a five-year certificate of deposit paying 4 percent a year. Use the remaining $5,342 to invest in a diversified stock mutual fund. Even if you lost your entire fund investment (barring the end of the world, that would be just about impossible), the money in the CD would have grown back to $30,000 in five years.

Humberto Cruz is a columnist for Tribune Media Services. E-mail him at yourmoney@tribune.com.

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