Q: I am 19 years old and have $7,000 that I would like to invest. I don’t need the money for a couple of years. I think I should put $5,000 of it in a mutual fund and the rest in shares of stock with medium risk levels. Does this make sense? -- S .F .
A: Your first step is to carefully evaluate whether you really have money to invest--or merely an opening deposit for a savings account from which you can draw when you need to. If you are going to need this money in less than three to five years--the minimum time for any mutual fund to pay off--you might well be better served to simply open a money market account that will earn you a decent interest rate while giving you direct access to your funds. In other words, just play it simple. Go for liquidity and convenience.
However, if you can wait at least three years before touching your money and you really feel this $7,000 is money you can afford to “invest,” which also means “lose” in all too many cases, then you should carefully evaluate a variety of choices.
Mutual funds are certainly one of those. Study them, not just for their historical returns, which are reported for the top winners and losers every quarter in this newspaper and other financial journals, but for the fees they charge when you open your account. In some cases, your fund will have to perform spectacularly well very quickly to repay you the upfront purchase costs charged by some of the funds. You may be well advised to consider only “no load” funds, that is, funds that do not assess fees when you open your account.
There is a vast array of information printed almost every day about mutual funds and their performances. At the very least, you can buy or check out at your local library one of the many magazines specializing in investing and personal finance. Take a close look at Barron’s magazine. Every three months, it publishes the Lipper Gauge, a ranking of 700 to 800 mutual funds according to a variety of indexes prepared by Lipper Analytical Services, one of the nation’s best known and most respected mutual fund rating services. The next such issue is scheduled for mid-February. Similar exhaustive rankings are also published by Business Week and Forbes magazines throughout the year.
What about the stock market? Well, it certainly offers you direct access to your money. But with the economy in its current downturn and business so skittish, it’s not going to be easy picking a safe stock with a predictable, let alone handsome, return. However, if you’re not frightened by the current economic ills, you should try to determine which business sectors do well in recessionary times and pick well-positioned companies within those industries.
There’s ample help for this endeavor. First, there’s the time-honored maxim: Companies that make or sell things that people can’t do without tend to perform better in a recession. According to research from Merrill Lynch’s Quantitative Analysis Group, manufactured housing, gold mining and entertainment have been among the top-performing industries in each of the last four recessions.
However, don’t let history alone be your guide. Start reading financial journals, talk to a variety of brokers (the more the better to get a full range of opinion and perspective) and try to figure out where your money is going to bring you the greatest return.
Of course this is difficult work, and brokers, even those with deep research departments at their disposal, can’t be expected to do your thinking for you. If it is too great a task--and many investors are gun-shy about betting their money on one or two companies--a mutual fund or even money market fund may be just the answer for you and your $7,000 nest egg.
Trust Shouldn’t Block Tax Break on Home
Q: When I was diagnosed with cancer in 1983, I had a revocable living trust drawn and put title to my house into the trust. I am the truster of the account. I am age 66 and entitled to the $125,000 profit exclusion on the sale of my house. But I am wondering if the having title to the house held by the trust negates my qualification? -- T . B .
A: Assuming that your revocable trust was properly drawn, it should not get in the way of your taking advantage of the $125,000 exclusion when you decide to sell your home.
Furthermore, you don’t have to do anything out of the ordinary--such as breaking your living trust, to take advantage of the tax break. Sell your home as you normally would and claim the tax break when you file your income tax return.
How Social Security Figures Benefit Plans
Q: I am concerned about my widow’s Social Security benefits. Both my late husband and I were receiving minimum benefits. I thought that when he died, I was automatically entitled to 100% of what he had been receiving. Yet, the people at Social Security told me that I was entitled to receive just $10 more than I had been. Am I entitled to more each month, or are minimum benefits computed on a different formula? -- M . M . M .
A: Minimum benefits are computed on a different formula than the one used for the rest of the population, which should explain why you are receiving the amount you are. By the way, the Social Security Administration has since dropped the minimum benefit plan.
Margin Account Loan Interest Not Deductible
Q: May I borrow money from my brokerage margin account to make improvements to my residence or to repay my mortgage and deduct the interest charges as investment interest? -- R . R. A .
A: No. Unfortunately, as West Los Angeles lawyer Paul Hoffman notes, you are caught between two rules. You can’t deduct the interest as investment interest because you are using the borrowed to improve your home, not to make an investment. Furthermore, you can’t deduct the interest as home mortgage interest because the loan is not secured by your home.
Carla Lazzareschi cannot answer mail individually but will respond in this column to questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.