How the individual investor, who's on the rise again, can hope to cope

Sometimes it seems as if institutions, with their large bloc trades, dominate Wall Street during its roller-coaster price rides. But individual investors, many of whom jumped out of the market in the early 1970s, are coming back. The number of lone players reached a peak of 30.85 million in 1970. In the bear market that followed, many became discouraged, and by 1975 their number dropped to 25.27 million. For many, being out of the market may have been a good thing in those financially gloomy times.

The proportion of New York Stock Exchange stocks held by institutional investors --sion funds, and so on -- increased in those five years by a few percentage points, to 33.6 percent.

Last year the exchange showed the number of investors was up to 29.8 million. Just as important, the average age of investors had dropped dramatically, from 52 to 45 years old. That meant more would be around for a long time yet.

But the survey also indicated that the single investor's average wealth was down.

These younger, less wealthy investors, it is thought, may need a better understanding of the market, of industries, and of how to avoid too much risk. One solution is to turn to a broker, who will naturally charge a commission on each transaction, usually at least 2 percent of the value of the stock.

But there's an alternative.

Two years ago, Dr. James B. Cloonan, an economics professor at DePauw University and a former analyst, founded the nonprofit American Association of Individual Investors (612 North Michigan Avenue, Chicago, Ill. 60611) to help "the little guy."

The group, with more than 13,000 members already, finds kinship in one fact: "There is no central source of information that is not biased about investing," Dr. Cloonan says. "There is no way to know if you are being hustled by brokerage firms or by seminars."

The association does not advise members what stocks to sell or buy on Monday morning. "Too many investors try to make money by trading, tracking the market and getting caught up in the excitement of guessing day to day," he says.

"Too many transactions can destroy any marginal advantage -- it can eat up at least 2 to 4 percent. And you just can't be that much smarter than everyone else."

Instead, the association invites members and selected experts to share various approaches to building a tailor-made portfolio, including information on fundamental stock analysis and tax planning. "Everybody wants to see the individual be a stronger stockholder, but they do not get support," he adds. "In some ways, the deck is stacked against the individual. But it is possible to find advantages that will make him come out on top."

To go it alone in investing, the association provides members a monthly journal of strategies, an inexpensive education course, an annual conference of fellow investors, and a software program for home computers at prices it cost to produce them. Membership dues are $33 a year and tax-deductible.

Such services differ from the National Association of Investor Clubs, whose local chapters pool members' money for investment, mainly in growth stocks.

The American Association of Individual Investors has more than just investors in stocks as members. It also includes people interested in tax shelters, commodities, art collecting, bonds, real estate, and even foreign investments. A recent membership survey showed the average household income was $54,000, with about half the members using computers to aid investment and more than 15 percent women.

The first advice given members is to diversify, investing in differing stocks to reduce risk.

"The most obvious advantage over using a brokerage firm is that you can more easily target in on your own investments," says Dr. Cloonan, whose specialty is stock options. "The broker can often only pay back the averages of the stock market."

"If I managed a pension fund, I wouldn't make the same investments as an individual.

"In times of high inflation and high taxes, you can tailor a portfolio to your own tax bracket. And you can fit it to your level of risks, depending on your future needs. Institutions, when they invest, most often take a very short-term view."

Also, institutions go for large companies, leaving many small but often faster-growing companies for investment by more risk-prone individuals.

Individuals can also get in and out of a market quicker, whereas larger money managers move cautiously just because of the sheer size of their assets and effect on prices.

Many investment approaches are available to individuals which are generally not available to institutions. Many state laws, for instance, define the risk ("often inaccurately," Dr. Cloonan says) that institutions can take with various kinds of customers.

Rising interest rates and contradictory economic developments sent the Dow Jones industrial average down last week. It dropped 14.23 points to touch bottom at 971.72. Trading was light, with many institutions waiting on the sidelines, uncertain as to the direction interest rates would take.