Young Can Try Their Hand at Pay-as-You-Go Investing

A 23-year-old is about to start a job paying close to $30,000 a year and wants to start investing now but doesn’t know where to begin.

She’s on the right track. Money and time work well together. The more money invested while young, the more that time, compound interest and good management can increase it.

Now, $30,000 may sound like a lot for single people in their 20s, but taxes, rent, food and dressing for success take large bites. That doesn’t leave much for investing.

One inexpensive way to start young is to use “dollar-cost averaging” to buy mutual funds. Many mutual fund companies allow investors to make automatic purchases of shares for as little as $25 a month, which can be deducted directly from one’s bank account.

The advantage of dollar-cost averaging--consistently investing without regard to market conditions--is that the investor buys into all markets, up and down. Individual investors are notorious for their inability to correctly time market prices: They often buy stocks or mutual funds at their peak. By dollar-cost averaging, investments may be made at both the highs and the lows, but, over time, they should average out in the investor’s favor.

“Dollar-cost averaging is not going to make you rich,” said John Markese, director of research of the American Assn. of Individual Investors, “but, over time, it will give you diversification so that you are accumulating shares in all different markets.”

And, if you are going to do it, understand that you are seeking growth over time, not income. Don’t rush in and out of funds.

Often you can start making those investments without meeting the usual $1,000 or $2,000 minimum. Some companies may require that you meet the minimum through the monthly purchases. If you don’t, they will sell your shares and return your money.

“This program is aimed at the young person who might not have the $1,000 or $2,000 minimum right now, but wants to start investing,” said Jack Thompson, vice president of the Janus Group of Mutual Funds in Denver.

Thompson said more than 27,000 investors have signed up for Janus’ program since July.

Here is one example of how it can work. Eugene Agan Jr., director of marketing for the Ohio Company, which manages the Cardinal Funds, said a $100-a-month investment in a Cardinal growth fund from mid-1975 to the end of 1989--a total of 172 months or $17,200--was worth more than $59,000 in 1989.

Remember, it’s not like you invested $17,200 in 1975 and got back $59,000 in 1989; you could have made better investments than that. One hundred dollars was invested in 1975, and only the first $100 was invested for 14.3 years. The last $100 was in for only 30 days.

Markese cautioned that investors involved in small monthly purchases should avoid paying high sales commissions, which are up-front costs. Commissions, known as “loads,” can take as much as $8.50 for each $100 you invest, meaning you actually put in $91.50, not $100. “High sales commissions defeat the purpose of dollar-cost averaging,” he said.

Over time, that $25, $50 or $100 monthly investment will become a smaller percentage of your total holdings. As your income rises, you may want to increase the amount invested, so it stays in about the same proportion to your income.