Financial Planning: A Midyear Guide 1987 : part one: Planning Ahead : The ABCs of Good Planning

Times Staff Writer

Financial planner Lawrence A. Krause sometimes borrows an assessment from Yogi Berra to give advice to anyone seriously considering taking command of his or her own financial life.

"If you don't know where you're going," he quotes the baseball great as saying, "you'll probably wind up someplace else."

So, Krause and other financial planners advise that you decide what you want to accomplish with your investments before you make them.

And be specific when you set your goal.

"Most people would say: 'My goal is more ,' " said Donald T. Levy, director of the tax department in the Los Angeles office of Laventhol & Horwath, the nation's ninth-largest accounting firm. "That's tough to plan for."

Being specific requires discipline and self-knowledge, because what you really are doing is making fundamental choices about what you want in life.

If you are 45 years old, for example, and decide you want to retire in 10 years with an annual income equal to what you earn now, you have to realistically confront your prospects. Try asking yourself these questions:

Is it possible to achieve your goal?

What will you have to sacrifice?

How big a risk will you have to take?

Are you prepared to lose?

Personal financial planners say that often they have to act as "financial therapists" as well as investment counselors for their clients, probing psyches as well as pocketbooks in tailoring portfolios to their clients' wishes and needs.

In deciding where to urge clients to invest money, professional planners have thousands of options. A host of new financial products comes into the market every month.

But in the broadest sense, there are only two categories of investments: relatively safe investments with lower yields and relatively risky investments that can shoot up in value--or slide.

Most personal financial planners suggest a blend of safe and risky investments as a means of achieving slow and steady growth.

They are advocates of diversification, not get-rich-quick schemes, noting that if they knew how to get rich quickly, they would probably be relaxing somewhere, enjoying their money rather than trying to sell advice to you.

That advice doesn't come inexpensively. Most of their clients earn upward of $80,000 a year and pay fees ranging from $75 to $200 an hour. Whether you're in that league, however, you can do a lot of effective planning on your own, they say.

Here are some of their guidelines:

Prepare a balance sheet.

Write down the value of what you owe and compare it with the value of what you own. The result is your net worth. It is tough to skip this first step, because it is undeniably helpful to know where you are before you decide how to get to where you want to go.

Figure out where your money goes each month.

Sit down with your checkbook and your charge card receipts, and write down in detail how you spend your money and how much you've got left--or could have left, if you alter your ways--at the end of every month.

What is left, or what could be left, is your money to invest.

It should be at least 5% of your gross income; 10%, if you possibly can.

Before deciding where to make your very first investment, consider your vulnerability.

Personal financial consultants recommend that you secure health, disability and life insurance as part of a reserve package that includes enough cash--or investments readily convertible to cash--to cover three to six months of your living expenses in the event of trouble, such as loss of your job.

For these liquid investments, which can include bank offerings such as money-market accounts and certificates of deposit, shop around for the best interest rates.

Also, consider making a will, if for no other reason than to name a legal guardian for your children in the event of the deaths of you and your spouse, said Roy Weitz, executive director of the American Assn. of Personal Financial Planners.

Once you've planned for the worst, it's time to give serious consideration to buying a house, or at least to saving up enough money for a down payment, some planners say.

"If somebody were coming into our office, we probably would lean towards designing a plan emphasizing a home purchase prior to the more esoteric investments," said Levy of Laventhol & Horwath.

His colleague, Philip Kavesh, who heads the firm's local personal financial planning division, cited some of the advantages of home buying. He identified tax benefits--mortgage interest is deductible--and both safety and the potential for growth if the house is well-valued.

In branching out after you have established a reserve fund--and perhaps bought a house--your age comes into play along with your goals in deciding where your investment dollars should go.

When you are young, you can afford to make more mistakes simply because you have more time to earn back the money you might lose. You can also afford to wait out market cycles.

So, all other things being equal, financial planners recommend more risk for the young.

In making his recommendations, Weitz divides investments into "loan" and "own" categories.

An example of a loan investment is a bond. You're lending some entity--a corporation or the government--money in exchange for periodic interest payments. At the end of the loan period, you get back your principal. But you have no real potential for growth, Weitz said.

"When a financial planner thinks of growth," he said, "he is thinking of after-tax and after-inflation growth. So what you get with a Treasury bond, for example, is that maybe after taxes and inflation, you break even."

On the other hand, such investments are "the best way to avoid the risk of losing your money," Weitz said.

An "own" investment is one in which you have an equity interest in something--typically a piece of real estate or stock in a corporation.

Weitz suggests that a portfolio for someone in his early 30s should be composed of about 70% "own" investments and 30% "loan." He suggests a 50-50 balance around age 50, and a shift to 30% "own" and 70% "loan" during a person's later years.

Mark G. Walton, a partner in Cutler, Walton Financial of Beverly Hills, takes a slightly different approach. He divides investments into three categories: high growth-oriented investments; investments that feature small growth and a small income, and safe, liquid investments. But the principle is the same.

Walton recommends that a young person put about 40% of his funds into high-growth investments--for example, in stocks of growing companies or interests sold by limited partnerships in leveraged real estate. He recommends putting another 40% into the small-growth and income area, noting that certain limited partnerships and mutual funds specialize in offerings that pay an income of from 2% to 5%. He suggests putting 20% into safe, liquid investments, such as certificates of deposit and money-market funds.

For a middle-aged person, he suggests a 25%-45%-30% split. And for a retirement-age investor, he recommends a split of 10%-30%-60%.

Invest in things that you know and are comfortable with.

You can increase your knowledge easily at a public library. The Value Line Investment Survey, for example, publishes weekly updates of its investment advisories that cover 1,700 common stocks. Standard & Poor's publications and Moody's handbooks offer background on thousands of firms.

For investors getting started, or without the time or interest to monitor market developments in detail, many planners suggest

investing in mutual funds, where your money is pooled with that other investors and investment professionals make the decisions.

Many business- and investor-oriented magazines, such as Forbes and Money, regularly provide guides to the best-performing mutual funds. Even Consumer Reports, in between rating electric lawn mowers and house paint, ranks the funds. It noted in its June issue that "for the small investor, the best way into the stock market is through a mutual fund."

Finally, it is important to try to keep your emotions out of your investment decision making.

Walton said one way to do this is to set profit and loss guidelines for an investment in advance. Once your investment hits that profit or loss mark, sell it, or at least force yourself to coolly reevaluate it, as you would any new investment, Walton said. Don't hang on just to see how far it goes.

But you needn't be so cool that you take all the fun out of investing, said Krause, author of a forthcoming book, "Sleep-Tight Money."

"We all want to get rich quick, skip the middle ground--the thing called waiting," Krause said. "That's why the lottery is there. . . . We use the philosophy: Make big mistakes with little amounts of money."

Krause said that while there is widespread agreement that diversification is good, there is no magic formula for it. He said he has one client, a retailer, who diversifies by keeping one-third of his money in his own business, one-third in real estate investments and one-third in liquid assets. "It's not sophisticated," said Krause. But that's not what's important. "It's reasonable. And it works."

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