ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, November 18, 1996 TAG: 9611190031
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
IF you are getting serious about saving money, and you have managed to scrape together $1,000, don't feel locked out of the investment market. Instead, ask what should you do with it?
As usual in the financial world, the answer is that your course of action depends on who you are, your age, your other assets and your investment horizon.
John Parrott, a certified financial planner with Wheat First Butcher Singer in Roanoke, said you should think of investing as a pyramid. And if you are just starting out, you are at its base.
Parrott would want to know what your other assets consist of. Do you, for instance, own a home? Do you have all of your insurance protection in place? Do you have an emergency fund of highly accessible cash, meaning you could live for three to six months in case of an emergency or job loss?
All of those expenses of daily living are your base before you have money to invest.
The second step, Parrott said, is to contribute regularly to your retirement plan at work, especially if your employer will match what you sock away.
"Do not get stampeded into the stock market," Parrott warned. You have to take care of these basic needs at the base of the pyramid before you even think of investing money.
If, however, your hoard of cash is really discretionary, he would invest in a mutual fund. Which fund you choose would depend on your age and your tolerance for risk. That means you can go for more aggressive growth if you are young and if you can sleep at night if your principal slips from time to time.
But you don't invest on a one-shot basis. Parrott said you should do some dollar-cost averaging in handling your fund. That means you should make regular contributions, whether that's monthly or quarterly, regardless of whether the market is up or down.
If the market is rising, you will feel good about investing more money. If the market drops, on the other hand, you will buy more shares for the same amount of money against the day when the market goes up again.
Most people who come to Parrott want to invest "in reverse. They want to hit the top of the pyramid first" by going for the highest risk.
The way to build for the future, he said, is to invest regularly over the long term, layer by layer.
Mike English, manager of the downtown Roanoke branch of First Union National Bank of Virginia, said the decision on what to do with $1,000 is "a hard one. It depends on the person."
If you have only $1,000 and no other assets, English said, the money has to be safe from risks you can't control. He would in that instance simply put the money in a certificate of deposit for a term of no more than a year. You can earn 4 percent to 5 percent on such a move.
That is particularly true, he said, if you are saving the money, for example, to buy a house a few years up the road. If you invest in the market with such a short time frame, English said, the market could dip just at the time you need the cash.
If you have other assets and really don't need that money soon, English said, he would invest it for the long term. That means buying shares in a mutual fund which, based on history, will give you the greatest return over time.
He advised that mutual funds were never meant to be a short-term investment for, as an example, three years or less because you could lose some of your principal.
English recommends mutual funds for people investing for seven to 10 years, giving them "a chance to weather out the storms." A thousand dollars is, however, too little money to invest directly in the market.
Ben Powell, manager of the Roanoke office of Dean Witter Reynolds Inc., said he would advise most people to invest in some type of mutual fund if the $1,000 is really discretionary money. You would choose the mutual fund that best suits your ability to tolerate risk.
He said $1,000 is "pretty much the minimum" for investing in most mutual funds. Few funds would accept a lesser amount as the initial deposit.
Powell, too, recommended adding to the mutual fund on a monthly basis if at all possible. By dollar cost averaging, he said, that small nest egg can really begin to grow into a meaningful investment.
LENGTH: Medium: 82 lines ILLUSTRATION: GRAPHIC: Robert Lunsford. color.by CNB