A lot of experts consider the little guy an endangered species on Wall Street these days.
Last year, for example, small investors accounted for only 18 percent of New York Stock Exchange trading volume. Small wonder, with all the chatter about big institutions dominating the market and computers making decisions. Memories of the crash also linger.
The average Joe`s confidence hasn`t exactly been buoyed by the fact that Michael Milken, the junk bond king of Drexel Burnham Lambert who was indicted on insider-trading charges, was able to earn $550 million in one year.
Yet, despite all this, methodical investment of at least a portion of an individual`s money in stocks remains one of the best ways to increase assets over the long haul.
In fact, given the twists and turns of the modern market, long-term investing is just about the only type of stock investing most individuals should contemplate.
”Don`t spend time worrying about inflation, the economy or market movement,” advised Thomas E. O`Hara, chairman of the board of trustees of the National Association of Investors Corp. ”You`ll make money if you disregard all that and just invest in well-researched stocks on a regular basis, reinvesting your earnings.”
The numbers seem to bear him out.
Over the last 65 years, the compounded annual return for stocks invested long-term is 9.5 percent, versus 4.5 percent for quality bonds and 3.3 percent for Treasury securities. The compounded annual return for long-term investment in stocks of smaller companies was an even more impressive 12 percent. Average inflation was 3.3 percent.
In addition, a study of mutual funds by professors at the University of Calgary in Canada found that funds simply choosing stocks of good companies and investing long-term had a much better chance at good performance than those actively playing interest rate and industry group trends.
”People`s first big mistake is that they go with the most popular stocks of the moment and pay too much,” O`Hara said. ”Then they get out too soon.” Company stock investment plans and dividend reinvestment programs are great ways to build a portfolio, sometimes by tossing in as little as $25 to $50 a month.
A good way to learn about the market is an investment club. It draws folks together for discussion and a monthly pooling of money, with $3,000 or so the average club pot. The National Association of Investors Corp., 1515 E. Eleven Mile Rd., Royal Oak, Mich. 48067, has 6,964 clubs and 134,000 members nationwide. The number of clubs peaked in 1970 at 14,000, later falling to 3,200, though there have been steady gains in the 1980s.
The organization recommends investing 25 percent in stocks of smaller companies ($200 million to $500 million annual sales), 25 percent in giant companies ($3 billion or more in sales) and the remaining 50 percent in ”in- between” companies.
Its selection criteria are: the firm`s sales record, preferably doubling over the prior five years; earnings per share, also hopefully double; and price, with a higher price-to-earnings ratio than five years earlier.
The most recent monthly Investors Corp. ”recommendation for study” is Upjohn Co. Choices in past months included Dover Corp., Dow Chemical, Apogee Enterprises, Philips Industries, Georgia-Pacific, Sea Containers Ltd., Digital Equipment, American International Group and EG&G Inc.
”While I believe stocks offer the most opportunity for individual investors, they`ll want other solid holdings, such as real estate, and must decide how much money they want to subject to risks of the market,” O`Hara said.
Cost of National Association of Investors Corp. membership is $30 annually for the club, plus $8 per member. Members get a monthly magazine and the opportunity to invest in some stocks at lower commission.
There`s a fidelity bond for $25,000, just in case a club member runs off with the group`s money. Don`t laugh. Over the years, more than 30 cases of such theft have occurred. In one case, a member siphoned $250,000 out of a club`s account, but, since the club`s membership had lapsed, nothing could be recovered.
Individual Investors Corp. membership is available for $31, entitling the member to all benefits of club membership, except for the fidelity bond.
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Andrew Leckey`s column appears Sunday, Monday and Thursday.
