A couple of weeks ago, someone in our Start Investing community asked this question: "I've got just $500 to invest. Where should I put it?" It strikes me as an ideal question of the week.

I solicited suggestions from the regulars in the group. The answers reminded me of how the investment scene has changed. When I began writing about investing in the 1970s, stocks were not a good option for most small investors. They were best bought in a round lot of 100 shares, which many investors could not afford. And commissions ate into profits. So no-load (commission-free) mutual funds offered the best solution.

That situation has neatly flip-flopped, and now it's easier for the small investor to buy stocks. Indeed, MoneyCentral mutual-fund columnist Tim Middleton says, "Mutual funds are pretty unfriendly until you've got a few thousand bucks."

Many Funds Not Novice-Friendly

Over the years, most mutual funds have relentlessly raised their minimums because small accounts are expensive to maintain. Large accounts are much more profitable.

Now we're starting to see a split in the fee structure, too, with smaller accounts beginning to cost us more. Large shareholders -- and the financial advisers who represent them -- are demanding separate share classes with lower fees.

Vanguard Group

recently responded to that demand with its Admiral shares, offering reduced fees to those with substantial assets in Vanguard funds.

I think we can expect to see this trend continue. The other day I was talking with Don Phillips, chief executive at

Morningstar

, and he concluded that fund companies would be forced to give larger shareholders a better deal because that's the way their costs break down. If they don't, they will lose their most profitable customers to cheaper -- and maybe better -- alternatives, like separately managed accounts.

For years, I recommended

(VGSTX) - Get Report

Vanguard Star Fund as a good option for the beginning investor. The Star fund invests in several other Vanguard funds, including ones owning domestic stocks, bonds and international securities.

Some years ago, when Vanguard raised minimums to $3,000, it put a $500 lid on Star because John Bogle, then Vanguard chairman, thought it represented the best fund for beginners. But Star's minimum has been raised to $1,000. So that omits Vanguard altogether as a haven for our beginner.

Today, the fund company that comes up over and over again in our community as the best spot for beginners is

TIAA-CREF

. This is the teacher's pension company that has provided solid retirement products for teachers and college professors for years. A couple of years ago, TIAA opened its mutual funds to the public.

Tom Woodruff, co-host of MoneyCentral Radio Show and also a pension expert, says the draws are TIAA-CREF's low fees and solid performance. The minimum to open an account is just $250, with a $25 minimum for subsequent contributions. The consensus seemed to be that

(TIGEX)

TIAA-CREF Growth Equity is a good place to start.

Invest in Self-Education

Another suggestion that I liked was to invest the $500 in education. Community member "Freethinker" suggested a personal finance course at a local college. "Monkey with Darts" said he would buy investment books by Peter Lynch, John Neff, George Soros and the like. Personally, I'd opt for the course -- making certain that it isn't taught by a broker or someone with an agenda.

Finally, several participants including Tim, suggested individual stocks. For example, Andy said he would buy

Pfizer

(PFE) - Get Report

or

Exxon Mobil

(XOM) - Get Report

or

Intel

(INTC) - Get Report

in a stock dividend reinvestment plan (DRIP) or a direct stock purchase plan, which is designed for small investors.

"Seen It All B4" would buy three shares of

Human Genome Sciences

(HGSI)

and five shares of

Celera Genomics

(CRA)

. I note his particular picks because of his reputation in the community for fine stock picking, though I should add that biotechnology stocks such as these are considered high risk.

But it's Tim's solution that really intrigued me, I guess because I think of him as "Mr. Mutual Fund." He says he would open an account at

ShareBuilder.com and buy three stocks. Although he doesn't pick them for us, he says he'd buy one high-tech, one health care and one financial services stock. "That would give me immediate diversification, plus a laboratory to study investing," Tim says. Although Tim acknowledges that commissions would cut into his profits, that's not the most important issue to him. "Commissions aren't as important as the education," he says.

If, after several years of maintaining his investment program, he hadn't beaten the market, Tim says he would switch to a mutual fund. "If it leads to a lifetime of successful investing, it is the foundation of a literal fortune."

What to do with your first, investable $500 depends a lot on your individual goals, of course. But for my money, I'd go for the education and the stocks, probably in just the way Tim suggests. Making mistakes and learning from them is key to becoming a good investor longer term.

Three Stocks and a 'Spider'

But what if I were advising a novice -- let's say my mother, who's never made any kind of investment? No, let's pick my 36-year-old brother, Paul, to eliminate the time-horizon problem. Now, if Paul wanted to invest $500, I'd probably suggest a diversified mutual fund like the TIAA-CREF fund already mentioned or a market index like the

S&P 500

index. Although Paul wouldn't be able to buy the

(VFINX) - Get Report

Vanguard 500 Index fund because of the $3,000 minimum, he could invest his $500 in a Standard & Poor's Depositary Receipt, or SPDR (pronounced "spider"). The

SPDR Trust

(SPY) - Get Report

is the exchange-traded unit investment trust, which serves as a tracking stock for the S&P 500.

But if Paul insists on buying stocks and pleads for three picks, I'd tell him to buy

Novartis

(NVS) - Get Report

,

JDS Uniphase

(JDSU)

and

Charles Schwab

(SCH)

.

I'm not going to provide an analysis of these three stocks. I don't necessarily think they're trading at discount prices. But Tim suggested a health care, a tech and a financial stock, and I think these three are top players in those categories for long-term investors.

But note my qualifier for these picks. Three individual stocks can be a mighty dicey investment on their own.

Mary Rowland is the Start Investing columnist for MSN MoneyCentral. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She welcomes your feedback at

mctsc@microsoft.com.

At the time of publication, Mary Rowland owned or controlled shares of the following equities mentioned in this column: Pfizer, Intel and JDS Uniphase.

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