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Indexing on a Shoestring

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The biggest excuse small investors make is always lack of cash. But sit back and imagine enjoying the diversification benefits and low cost of indexing for just $50 each month.

Though many index funds still require hefty upfront minimum sums, five companies now offer the chance to get into an index fund with absolutely no initial lump-sum investment. Happily, this means any mumbled excuse about needing to accumulate a chunk of startup investment cash is now null and void.

All you've got to do is commit to a monthly withdrawal from your bank account. For young investors or beginning investors, this inexpensive indexing is a great way to get started. Four of the companies set the monthly minimum at fifty bucks, while TIAA-CREF, which just opened its index fund, will let you in for just twenty-five dollars each month. What's more, TIAA is waiving part of its investment management fee through the year 2003.

Let's look at the performance records and expense costs of the funds offered by these five companies: American Century, T. Rowe Price, Strong, TIAA-CREF, and Transamerica. These companies' index offerings include traditional S&P 500 index funds, a Dow 30 fund and a Russell 3000 fund.

The S&P 500 index funds all own more or less the same top ten holdings, with heavy stakes in Microsoft, Exxon-Mobil, and IBM. Several of these funds were started very recently, so keep the inception date in mind as you compare performance notes and the percentage of fund assets in certain stocks. Because the market has been down for much of this year, the life-of-fund records for the newcomers will be less impressive.

Minimum Investment
Expense Ratio
1-Year Return
Average Annual Return Since Fund Inception
American Century Equity 500 Index
S&P 500 Index
$50/month automatic plan; min./$10K otherwise.
13.34% (since 2/26/99)
Strong Dow 30 Value
50% assets mirror the DJIA 30 stocks. Other 50% is chosen from Dow 30.
$50/month automatic monthly plan; Regular indiv. Account $2500/ IRA $250
16.61% (since 12/31/97)
Strong Index 500
S&P 500
$50/month automatic monthly plan; Regular indiv. Account $2500/ IRA $250
25.30% (since 5/1/97)
TIAA-CREF Equity Index Fund
Russell 3000 Index
$25/ month automatic plan/ $250 individual account
0.26% (reflects partial waiver through 7/1/2003)
-2.21% (since 4/3/2000)
Transamerica Premier Index Fund
S&P 500 Index
$50/month automatic plan
25.0% (since 10/2/95)
T. Rowe Price Equity 500 Index
S&P 500 Index
$50/month automatic plan; $2500 indiv., $1000 IRA regular plan
18.44% (since 3/30/90)


What should you look for in these numbers? Charles Carlson, who co-manages the Strong Dow Value 30 fund, which he calls an "enhanced index fund," says an investor should scrutinize fees and look at manager performance. "A lot of people think a monkey can manage an index fund," Carlson says, but he insists that's not true. "A lot comes up in managing cash flow and changes in the index."

A manager's decisions are one reason some S&P 500 funds do better than others, and that's where a fund's past performance compared to the benchmark is a good guide. But Carlson stresses that for the limited-cash investor, low fees are essential. In fact, variations in fees are the the other big reason similar index funds post different returns.

As for which major index to choose, Carlson says it depends on your other holdings. "If your 401(k) is in aggressive funds, then you might want a sedate index like the Dow or the S&P," he explained.

Carlson also likes the potential of an "enhanced index fund" like the fund he manages to outperform the benchmark, because the manager can put more cash into those stocks that look better than others. See our article on enhanced index funds for more information.

While the $50 plan may sound nice, can investors really achieve serious goals with just a $50 commitment? "Absolutely," says Carlson, author of "The Individual Investor Revolution."

"Yes, I think they can in two ways," Carlson explains. "If you start early enough, even if that's all you ever do, that can turn into a nice chunk of money. A 22-year-old who starts investing 50 dollars a month will have $319,000 by age 65, assuming a 10% annual return. If that investor waits until age 32, it would have to be $150 a month to get there."

"But the real power of this: people start to see the fruits of it. They start to get rid of their 17 cable channels, and it becomes $75 a month, then $100," Carlson explains. "The whole investing process becomes very infectious. That's how $50 a month makes you rich."

Index funds, in particular, offer "a low-impact way to get going, especially if you're not comfortable making investment decisions," Carlson says.

Not only do index funds often outperform actively managed funds, but they also present beginners and small investors with two important plus points. They're "low-cost and very tax-friendly," he adds. "Those are legitimately powerful tools."