MIDYEAR REVIEW OF INVESTMENTS AND PERSONAL FINANCE : Investing: the Important Thing Is to Ante Up : Novices Can Cut Risk by Seeking Advice

I’ve been caught up lately in a range of conversations about money.

It came to a head during a Sunday poker game with some friends. Kelly, a first-time player, was cleaning the table, so she placed a call to say she wouldn’t be making it to her first day of work at the lap-dancing bar.

After the call, Kelly told us that she had hit bottom, financially speaking. Living on ketchup and pepper sandwiches, she was willing to get down and dirty to make a couple hundred bucks a day.

The idea was too overwhelming for the poker-playing crowd. But my instinct was to urge Kelly to invest her tips and pull herself out of poverty and the lap-dancing life.

It only takes a couple of hours a week to set up and maintain an investment plan. And with her gambling skill, she would probably enjoy playing the markets.

On the other end of the financial spectrum sits my poker mate Ethan, who’s 25 and has $170,000 stashed away. Ethan has been making a really good salary, including stock options, as a software marketer. He also has an inheritance and is tight with his spending ($350 on rent, a circa 1975 Toyota and dinners of leftover spaghetti).

Ethan revealed that having so much money is a hassle at times. Each week he must re-evaluate his portfolio, making adjustments to his stocks, bonds, CDs, 401(k)s and IRA holdings. Neglecting this task, he sighed, could mean losing a lot should the market turn south.

I also had a conversation during the week with a stock fund manager named Doug. To invest in Doug’s fund, investors must write him a check for at least $500,000, on which he collects a fee of 2% annually.

Since Doug started the fund a year ago, investors have seen their assets more than double. Doug is a knock-’em-dead investor, because he sticks to one industry--information technology. He knows it cold, having spent the last decade involved in it, and he has the time, money and license to investigate potential investments.

The lesson learned from the Dougs of the world is that if you have a hoard of money, it’s a good idea to go to an expert to invest it for you.

For young people just starting an investment plan, it’s less clear whether to seek help or go it alone. As responsible as people like Ethan may be, without guidance they’re bound to learn some hard lessons about the market from Doug and friends.

On the other hand, the financial advice available to people such as Kelly, who have lower incomes, is often biased, limited or incompetent.

So I called my aunt, Christine, who teaches personal finance in Tucson. She told me that once people have more than $20,000 in savings, they ought to find a financial adviser. The reason: Most people aren’t clear about their financial objectives and risk tolerance. They need someone to ask them the sobering questions that most of us avoid confronting.

The best way to find a financial adviser, Christine said, is through referrals, followed by interviews to make sure you’ll get along. The big problem is that a lot of people who claim to be advisers actually are salesmen--stockbrokers, for example. Still, for people like Ethan with a substantial bankroll, advisers may be a costly necessity.

Charges for professional investment managers vary, but Doug’s 2% per year is typical--that’s $500 on a $25,000 account.

For most new investors--the Kellys and others without much cash--the best first stock investment is probably a mutual fund. The generic brand is an index fund, which replicates a stock market index such as the Standard & Poor’s 500. The benefits are that you don’t pay the fund company a big fee for managing your money, and the funds are diversified across industries and through time.

Then there are the thousands of actively managed stock mutual funds, whose managers try to beat the market. There is an array of philosophies, but younger investors can probably bear the risks of more aggressive growth funds. Investors who are working in an industry whose growth they find attractive may want to invest in it, say through a specialized sector fund.

Beware, though, of inconstant high-fliers. Too many people look to Money magazine’s hot mutual funds listing when choosing a fund. Chances are these funds have peaked. It’s best to look at funds with consistent performance over five years. But choosing a fund is akin to picking the best carton of milk among the hundreds on the shelf. You need to sniff around to avoid the curdled ones, then choose one blend with the right fat.

Many mutual funds can be bought by calling their toll-free numbers listed in business magazines and newspapers. Another option is to get fund information from America Online, CompuServe or other on-line computer services.

Some investors may want to choose their own stocks, most bought cheaply through a discount brokerage. Ethan’s strategy is to buy stock in companies whose products he likes, such as Ben & Jerry’s. The problem is that almost everyone likes to eat Ben & Jerry’s ice cream--and, along with Ethan, many of them have purchased its stock, driving the price up. Sure enough, the stock price came back down to earth, and Ethan got squashed. He had bought shares at $30; the price is now about $14.

Indeed, the most common mistake that market novices make is to feel married to a company. It’s best to set a price goal--and sell when the company achieves it. If the firm sinks, keep in mind that this isn’t the only stock on which you can regain your losses.

To support investment decisions, you can obtain research on companies through retail brokerages or get brokerage reports free from the investor relations departments of companies that catch your eye.

Still, your best investment may take no research at all. An office intern recently asked for my stock recommendations. I ticked off a couple of companies, but then backtracked to ask a few questions: How much extra cash did he have? Did he have any debt? What were his financial goals? It turned out that the intern owed $1,200 on a student loan, $5,000 on credit cards at 18% interest . . . and he wanted to get rich. I told him the smartest move would be to pay off his bills before playing the market. Reducing this debt is equivalent to making an 18% return, which would be hard to achieve without taking a risk in the market. Also, he wouldn’t have to worry about maxing out his credit card and being embarrassed at restaurants.

Back at the poker table, I minimized my return--and my risk, as well. The tally: down $8.50 in dimes and nickels. I know that if I plan well, there will be other losing nights.