Hi Dr. Don, I am a freelancer in the motion picture industry. I am new to investing. I opened a Janus IRA account early last year, and it's taken a beating. I got in at $52.93 a share and today it's $33.95, but I am a long-term buy-and-hold investor. I recently heard about dollar cost averaging and started investing with blue-chip companies and an index fund. With company dividends to reinvest,I opened the following accounts: Citigroup, ExxonMobil, Hewlett-Packard, General Electric, Quaker Oats and Nasdaq 100 Trust Shares; and I am looking to open accounts with: AT&T, Coca-Cola, McDonald's, Philip Morris Companies, Sonic, Sun Microsystems and Wal-Mart Stores. On a dollar cost average investment of $20 each per week, I am looking at six weeks to start to see what I come up with, or roughly a $1,700 portfolio. What is your take on this type of low-cost approach? Too risky? Too conservative? Again, I'm not looking at an overnight thing, but at a long-term strategy starting with a limited amount of capital. I want to set up a portfolio making small investments in the top 50 of the S&P 500. What is the best route? I don't have the $2,500 to $7,500 upfront that many mutual funds require. Someone told me about Sharebuilder.com; could you explain it to me like I'm a 7-year-old? What I don't understand about it is when I put my money into Sharebuilder to invest in XYZ Company; do I automatically become a shareholder in XYZ Company? I think it's cool to get a dividend check. I've heard that most tech stocks don't pay dividends. Which companies don't pay dividends? Thanks for your insights, SR

SR,

A long-term investor really doesn't care for dividends because they slow down his progress. When a company pays you a dividend, they're giving you part of the company's profit. That's only right because as a shareholder you own a fractional piece of the company. Profits go to the owners and you're part owner. The problem is that the dividend is treated as taxable income. If all you plan to do with the dividend check is to reinvest it in the company that paid the dividend, it would have been far better for the company to just hold on to the profits and continue to invest them for you. Holding on to the profits should drive the stock price higher over time, and when you need the money, you can sell off part of your holdings and the investment gain will be taxed at the capital gains rate, which is lower than the rate you pay on ordinary income. (You have to hold the investment for

at least a year for the sale to qualify for the lower capital gains rate.)

When investing small amounts of money, transaction costs can really eat into your return. If you buy one share of a $10 stock from a stockbroker, and it costs you $8 to buy the share and $8 to sell the share, you'll have to see the stock move to $26/share before you can sell the stock and not lose money. A dividend reinvestment plan (DRIP) may be a less expensive alternative to using a discount broker.

I looked at the DRIP plan for

ExxonMobil. The company requires an initial investment of $250, with a $50 minimum on additional investments. It does not require that you own any stock in the company before joining the plan, and it doesn't charge a commission to buy shares in the plan, but charges a $5 administrative fee plus commissions (currently 5 cents a share) to sell shares in the plan. You buy in at the average price during the investment period and sell out at the average price during the investment period. I recommend that you go directly to a company's Web site when researching its DRIP. There is a lot of variation in DRIP plans, and you need to be aware of the transaction costs associated with each plan. For example,

General Electric's DRIP plan has a $7.50 initial fee and a $250 initial purchase requirement. Additional purchases can be made for as little as $10, but there is a $3 transaction fee. Automatic transfers have a $1 transaction fee.

Discount brokerage firms have been limbo dancing to see how low they can go, but some specialty shops have sprung up that allow you to buy shares, or fractional shares at even lower commissions. Two of the firms are

BuyandHold.com

and Sharebuilder.com. BuyandHold charges a $3 transaction fee, has a $20 minimum, but only trades stocks during two, one-hour windows during the trading session. Participating in an automatic investment plan reduces the transaction fee to $1.99. Sharebuilder offers similar services at a lower per transaction fee but trades stocks for its customers just once a week.

Again, transaction costs drive the returns. If you pay $2 to put $20 to work, that's a 10% transaction cost. Your transaction costs will be less when you sell the stock because you've aggregated shares over time. Paying $2 to sell a $2,000 position is a transaction cost of just one-tenth of 1%.

Dollar cost averaging is a method of investing in which you invest the same dollar amount in a stock on a periodic basis. When the stock is selling at a low price, you are able to buy more of the stock than when it is selling at a high price. Investors using this method don't try to time their purchases based on when they think the stock is undervalued, or avoid the stock when they think it is overvalued. By not trying to time the market, they can end up with more shares, at a lower average cost than they might have done by pursuing a more active strategy.

Index shares trade like stocks but represent an investment in a stock index. Investing in the Nasdaq 100 Trust is an example of buying a stock index by buying shares in a trust that invests in the index. If you buy a share of the Nasdaq 100 for $57 and it costs you $8 to place the trade with your discount broker, you've paid a 14% transaction fee, but own fractional shares in 100 stocks. If you buy a share of

iShares' S&P 500

index for $129, you've paid a 6% transaction fee but own fractional shares in 500 stocks. This approach will get you around the investment minimums required in many corporate DRIPs and provide the added benefit of increased diversification.

A new approach to investing outside of mutual funds is the portfolio sites springing up on the Internet.

Foliofn.com

offers investors a way to invest in a portfolio of stocks, using dollar cost averaging. A $295 annual fee covers unlimited transactions during their twice-daily trading windows. Foliofn has no account minimums or trading minimums. They will let you test-drive the site with a 30-day free trial where you can either invest funds or create a hypothetical portfolio. Why this site is particularly useful to you is that you could choose to design a portfolio that contained the stocks listed in your letter and dollar cost average your investment into that portfolio over time. Two competing sites,

Netfolio.com

and

Smartleaf.com

should be operational soon.

I like the exchange traded funds, or portfolio site approach to building your portfolio from scratch. The transaction costs will be similar to your DRIP program, but you'll have greater diversification, and managing your investments will be much easier than with a dozen DRIPs.

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Dr. Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at

portfoliorx@thestreet.com.