INVESTMENTS: STARTING SMALL. Little sums now, big portfolios later

FOR many people, building an investment portfolio must seem like trying to fill a bathtub with a teaspoon. They're working with such small amounts of money that building up to a respectable figure is a tedious process that seems to take forever. Yet, there are effective ways to invest small amounts of money. The choices and potential for growth aren't as great with $1,000 as they are with $50,000, but the options do exist and there are more of them than there used to be. The small investor, who has been rather neglected until recently, is getting some attention.

``I don't think the first-time investor has been as neglected as the small investor,'' says Nancy Dunnan, a financial writer and author of ``How to Invest $50-$5,000'' (Harper & Row, New York. $5.95.) ``The small investor has been neglected for a couple of reasons. First, the potential amount of money for investing is limited. Second, the amount of risk is limited. After the first level of options, they begin to increase the risk.''

There's a third reason financial service companies haven't paid much attention to the small investor, Ms. Dunnan notes. ``This is simply a less jazzy group to deal with.'' A company can present investors with a lot more options if substantial amounts of money are involved. The commissions are bigger, too.

Even some recent changes in the financial services marketplace have not specifically helped the small investor. ``I don't think the discount broker was invented to help the small investor,'' she says. Discount brokers, like their full-commission colleagues, still get the bulk of their business from ``big'' investors with $10,000, $20,000, or more. The avenue of mutual funds

For a while, mutual funds took over much of the responsibility of servicing the small investor, and they still handle the bulk of that load. ``Mutual funds have certainly provided the unsophisticated investor with an avenue to play the market,'' Dunnan says. ``But now the problem is that selecting mutual funds is becoming more tricky. There are more funds than stocks on the New York Stock Exchange and the different kinds of loads complicate the picture even more.''

``The industry is paying more attention to the small investor than it used to,'' says Eben Dobson, a financial planner with IDS Financial Services in Minneapolis. ``But it's still not enough. There are more profitable things they can do with large investors.''

Despite the neglect on the part of the financial services industry, there are effective ways to invest small amounts of money. Some of those options are discussed elsewhere in this section, but before trying one of them, the new investor has to have some kind of overall strategy. Mr. Dobson sees the development of the strategy in three stages: getting a plan, finding financial products that fit that plan and the overall economic situation, and maintaining the flexibility to move any or all of the money from one investment to another while paying little or no sales charges.

People do not have to be too specific about the plan, however. Too often, Dunnan says, someone who is told they should have a plan thinks this means saving for a new house or home improvements, furniture, college bills, a big vacation, or retirement. This works for many people, she says, but there's nothing wrong with saving and investing simply to have more money.

Keep the goals realistic

``Accumulating capital, that should be the first goal,'' she says. ``If you don't have a goal, you probably aren't going to reach it. But the goal shouldn't be so far away that you're discouraged.''

A reasonable starting goal is to aim for three to six months take-home pay in a savings account for emergencies. ``Most people don't have that,'' Dunnan says. Even if you already have an emergency fund, it's nice to have additional money on hand in case something unexpected comes along: a chance to join some friends on a vacation trip, a sale on new living room furniture, or a good investment opportunity.

And while people should still save for retirement, the post-retirement plans for many people have changed.

``The old view of retirement, that is, taking the gold watch and going off to sit somewhere, has changed,'' Dobson says. ``Now retirement is more like leaving one career and going off to another.'' If this is the case, extra savings might be needed to finance the new business venture.

In developing an investment plan, it's a good idea to, as the experts say, ``start with what you know.'' But don't stay with it. As your knowledge and expertise increase, and you become more comfortable with slightly higher levels of risk, you will move into more sophisticated investments.

This was the pattern with mutual funds. When money market funds were paying 15 and 16 percent yields in the late 1970s and early '80s, savings accounts were still paying just 5 percent. That's when many people took their first steps out of insured accounts into the relatively easy-to-understand money market fund.

Once they understood and felt more secure in money funds, these people moved to other types of mutual funds as yields on money funds declined. Many started with government-securities funds or bond funds, then moved to various kinds of stock funds, including technology, international, precious metals, and index funds.

Since most mutual funds have a minimum investment requirement of $1,000, it's fairly easy to participate in these investments with a small amount of money. A few funds have even lower minimum starting levels, letting investors in for $250 or $500.

Invest in a company you know

If you want to invest in a company directly, start by ``investing in a company you're familiar with,'' Dunnan says. ``Maybe the company you work for issues stock and you can buy it. That will heighten your interest in the company, and you'll get the annual reports and can go to shareholder meetings.

``Or, it may be a company whose products interest you. If you have an Apple computer or buy Liz Claiborne clothes, you may be interested in their stock.''

Whatever you invest in, be it stocks, bonds, mutual funds, or real estate, keep these words clearly in mind when reading advertisements or listening to sales pitches: ``Past performance is no guarantee of future returns.'' That phrase is used so often, it's almost overlooked, but it simply means that you can lose all or part of your money.

There is, in truth, no such thing as a ``no risk'' investment, even with a long-term certificate of deposit. If your money is tied up for five or ten years, inflation could go up a rate exceeding what the CD is paying. So when you cash in the CD, you've lost purchasing power, which is another way of losing money.

The best way to minimize this risk when interest rates are rising - as they have been recently - is to buy short-term CDs. Keep maturities at six months or less so when they mature, you can move into a higher rate with the new CD.

When rates start heading back down, you can lock in a higher rate with a longer-maturity CD, but considering the volatility of interest rates lately, you still may not want to ``go out'' more than 2 or 2 years.

Fluctuating interest rates also affect bonds, once considered ``safe'' investments. With bonds, the longer maturity you get, the more sensitive they are to interest rate swings. If interest rates go up, the price of your bond goes down, because investors don't want to pay as much for a bond with a lower yield. So if you have to cash in the bond before it matures, you could come out behind.

On the other hand, if overall interest rates go down, the value of your bonds will rise, but your return may not be as good as you could get elsewhere.

Protection with diversification

The best way to protect yourself against these risks - including, of course, the risks of the stock market - is to diversify. The easiest way for a small investor to diversify is probably through a mutual fund. Mutual funds offer automatic diversity by pooling your money with that of other investors to buy shares of many, sometimes hundreds of companies.

Since many studies have shown that no-load funds perform about the same as load funds, and if you can only invest $1,000 or so, you're probably better off with a no-load. If a fund has an 8 percent load, that $1,000 investment immediately drops to $915 after paying the commission. If you must have the help of a broker or financial planner, ask about ``low-load'' funds where the commission is only 2 or 3 percent. And look for funds that don't have ``back-end'' charges that penalize you for getting out in the first four or five years.

Finally, remember that starting small in the investment game does not mean you have to start badly. Take the time to learn more about the investments that interest you, read magazines, newspapers, and books on aspects of investing that interest you. Also read the reports you receive in the mail and look for diversified ways to move into riskier, but potentially more rewarding, investments.

``I watched my mother do that,'' Dunnan says. ``She started with a government securities fund. She read the literature, and learned as she went along. Now, she's got money in a high-yield junk bond fund, and she's talking about international funds. It wasn't as difficult as she thought.''