Here's What You Need to Know to Get Started

By RUSS WILES

Oct. 9, 1994 12 AM PT

RUSS WILES, <i> a financial writer for the Arizona Republic, specializes in mutual funds. </i>

Carole Glenn’s short foray into mutual funds appears to be over.

The Fountain Hills, Ariz., resident had the tough luck to purchase two bond funds last September, right about the time when interest rates were bottoming. When rates started pushing higher, the funds’ value dropped. She figures she lost about 6% on the two investments.

“I wound up selling the funds and putting the money back into CDs,” says Glenn, swearing off any further investment adventures.

While she blames her broker for not keeping her informed about the funds’ slide, she also admits to not doing enough research on her own, and for not knowing where to turn for such assistance.

She isn’t alone. Despite the much-ballyhooed growth in the mutual fund business, only about one in four households owns any fund investments, and it’s likely that a much smaller percentage could describe what they own in any detail.

This column is dedicated to people who don’t know where to turn for simple, understandable investment help--or how to proceed. It provides several suggestions for learning the basics.

Even if you later turn to a broker or financial planner for help, it still pays to have some investment knowledge and experience in your corner--if only to better evaluate a professional’s advice.

You should start your learning effort by picking up a beginner’s booklet on mutual funds and investing.

A good example is “Directing Your Own Mutual Fund Investments,” from the Mutual Fund Education Alliance ((816) 471-1454; 1900 Erie St., Suite 120, Kansas City, MO 64116).

The booklet costs $15 alone or $17.50 when purchased with the “Investor’s Guide to Low-Cost Mutual Funds.” Pay extra for the combination, as the guide is full of phone numbers and performance results on 750 no-commission funds.

At 41 pages, the booklet can be easily read within two hours. It provides the basics on fund benefits, types of funds available, reading a prospectus, understanding price tables in the newspaper and more.

Most fund companies also offer capable guides--usually free--for beginners. For example, Fidelity Investments’ “Getting Started With Mutual Funds,” is a 21-page booklet ((800) 544-8888) that explains what mutual funds are. The T. Rowe Price “Personal Strategy Planner” ((800) 638-5660) provides a good discussion of risk, diversification and the importance of time--key underpinnings for any investment program.

The time needed to read the Fidelity and T. Rowe Price booklets: 30 to 60 minutes each.

Next, you should order a few prospectuses from different mutual fund companies, or pick up some at a local brokerage office. The idea is to become familiar with these documents, which include many key facts that investors need to know, along with reams of dry prose that beginners will find confusing and even advanced investors consider tedious.

Don’t try to read prospectuses from cover to cover. All you need to learn is how to scan for the most critical facts. At a minimum, you should be able to identify the fund’s objective (income, appreciation, price stability or some combination), the type of investments it normally owns, any sales charge, annual operating expenses, minimum investment amount, and procedures for selling or redeeming shares.

The risk section is worth a look, but don’t get hung up on all the disclaimers, as fund companies disclose all sorts of likely and imagined threats to protect themselves from legal liability.

Time required to glean the key points from a prospectus: 15 minutes to an hour or more.

Once you understand the investment basics and know how to locate essential fund information, track the progress of several funds in newspaper tables.

The daily changes in a portfolio’s price or net asset value (abbreviated as “NAV”) are expressed in cents per share. After a few weeks, you should notice that mutual funds don’t fluctuate all that fast. The Mutual Fund Education Alliance’s booklet, among other publications, explains the handful of notations and terms listed in newspaper tables.

Time commitment to track a few funds: five minutes a day, a couple of times a week.

Eventually, you will want to practice with some real funds and real cash, perhaps spreading a few thousand dollars among a stock, bond and money-market fund, in roughly equal proportions. Or, you can put it all in a single conservative fund owning both stocks and bonds (see the accompanying chart for examples).

Although you will face the real danger of dropping some cash in this exercise, the learning experience hopefully will prove valuable. Besides, there’s little chance of losing much money in a hybrid stock-bond fund, assuming you give it at least a couple of years to perform.

Even a portfolio of 40% stocks, 40% bonds and 20% cash would have suffered just seven down years since 1950. The average loss would have been 3%, and the worst annual setback, 7.2%.

Because stocks, bonds and money-market investments march to their own drummers, a hybrid portfolio provides more return potential without much additional risk compared to leaving it all in the bank.

The time commitment here might range from two to five years.

What beginners need to remember is that mutual funds are not all-or-nothing speculations. Because they are diversified by nature, funds may fall in price but they won’t lose their entire values. If anything, funds are much more likely to rise over time than to decline.

And once you have taken a start with an investment plan, you will want to keep adding to your knowledge by scanning fund-related books, newspaper articles and magazine pieces.

Time needed to read future installments of this column: 10 minutes or so a week.

Good Funds for Beginners Novice investors may want to consider some of the following mutual funds, all of which have delivered smooth rides for shareholders while maintaining some stock market holdings. None of these funds has suffered a full-year loss during the 1990s, though several are down modestly so far in 1994.

* Dodge & Cox Balanced

(415) 434-0311

Five-year return: +10.7%

Max. sales charge: none

* Evergreen Foundation

(800) 235-0064

five-year return: N/A

Sales charge: none

* Fidelity Asset Manager

(800) 544-8888

Five-year return: +12.5%

Sales charge: none