'91-'92 Business. A look back and a look ahead. : With the Golden State Losing Some Luster, Investors Need to Polish Their Portfolios


California, long a land of special opportunity for smart people with money to invest, now poses a special problem for those same investors: How to keep what you have in a sinking state economy.

While the rest of the country may or may not emerge from recession in 1992, many experts believe that California's economy will continue to contract until 1993 at the earliest--a result of continuing business flight, crumbling real estate values, state and local budget woes, drought damage and weak tourism.

Even for Californians whose jobs or livelihoods aren't in danger, a statewide recession that may be the worst since the Great Depression could have drastic long-term financial implications.

For example, if you own real estate, bonds issued by California government entities, or stock in companies heavily dependent on the state economy, your net worth could be hurt by the ongoing recession in 1992.

No matter how insulated you may think you are, a top-to-bottom review of your assets is in order. The earlier you identify potential threats to your financial health, the better your chances of protecting yourself.

How to focus your review:

* Your home or investment real estate: If you need to sell your home, you're already coming to grips with the issue of falling prices. There is no universal experience in California real estate, of course--not all homes are falling in value, nor will they all even if the state economy suffers terribly in 1992. But the safe assumption for most Californians is that a home here in the '90s won't be the foolproof investment it used to be.

The fuel for soaring home prices in the late 1980s was a mixture of strong job growth, heavy immigration by financially able families and buying by speculators.

For California, and Southern California in particular, those ingredients have largely evaporated. The median price of a single-family home in California, which soared from $142,224 in mid-1987 to a peak of $207,470 last May--a 46% rise--now has slid to about $195,000.

Given that trend, many experts advise that you reconsider your home's status in your long-term financial plan. If you hoped that the appreciation of your home or other real estate would fund your retirement, you could be dangerously mistaken.

"Many people here have a disproportionate share of their wealth tied up in their homes or other real estate," says Robert Newell, head of AFP Group, a Los Angeles-based financial planning firm. "I'm telling my clients that they have to redesign their portfolios--we have to teach them how to diversify. And more and more people here are listening to that advice."

Newell tells many real estate-dependent Californians to look at the stock market, even if they can invest only small amounts at first via mutual funds. "I'm firmly convinced that people in their 40s and 50s have to allocate some of their portfolio to stocks," he says.

* California municipal bonds: For decades, Californians have been happy to buy the bonds of their cities, counties and state, funding the infrastructure that has supported growth. In return, interest paid on the bonds, exempt from federal and state taxes, has provided lucrative returns for residents.

Now, with budget crises racking the state and many of its municipalities, some bond owners fear widespread defaults among the thousands of California issues on the market.

Yet defaults so far have been virtually nil, notes Zane Mann, editor of the California Municipal Bond Advisor newsletter in Palm Springs. Even among the riskiest munis--so-called Mello-Roos bonds often used to fund real estate developments and dependent on a private developer rather than a government entity--there is only one known default: the Temecula Valley Unified School District.

Perception is just as important as reality in investing, however. If you own a Mello-Roos bond (also known as Community Facility District bonds) and try to sell it today, you might find other investors willing to pay much less than you paid simply because of concerns about the bond's future worth.

Indeed, the pricing issue--not default risk--should be most California muni investors' biggest concern, experts say. If the state sinks deeper into recession, many muni bonds will sink in price as well. If you had planned to cash in your bonds in 1992, you may want to sell sooner than later.

But if your interest earnings are all that matters, it's a sure bet that the vast majority of bond issuers will continue to make good on their payments. Thus, if you can plan to hold your bonds until they mature, how the market prices the bonds in the interim shouldn't faze you.

"I can't see any reason for my clients to bail out of their bonds," says Paul Barlow, a certified financial planner in Laguna Hills.

Even so, Barlow and other advisers say California muni bond owners should take a "sleep-well-at-night" approach to their bonds: Make sure you know exactly what you own, and who is ultimately responsible for the interest payments--the state itself, for example, or another government entity with taxing authority; a private developer; or, if the bonds are privately insured, the name of the insurance company.

If you own shares in a mutual fund that invests in muni bonds, the fund's diversification should be enough comfort. Still, it's worth your time to check the fund's latest financial report and look over the portfolio.

* Stocks of California companies: If the Golden State economy has entered a long slump, it's bad news for the companies that depend heavily on business here.

In 1991, the victims included Vons Cos. supermarkets, whose shares plunged from a peak of $34.125 to $23.75 by year-end; Pacific Enterprises, owner of Southern California Gas and Thrifty Drug, which tumbled from $43.375 to $26.25, and oil giant Unocal, which slid from $29.50 to $23.375.

For investors who own such stocks in a diversified portfolio, the declines are painful but probably not overwhelming. The big risk is to employees of the companies who have invested a major portion of their retirement savings, via 401(k) or other plans, in their own stock.

If your only major asset besides your home is the stock of your employer, you should think seriously this year about better diversification for the long term, experts say. That's true even if your company isn't largely dependent on California.

"People are becoming more aware that they can't have all of their eggs in that kind of basket," says Newell, the financial planner.

Perhaps you can begin reallocating at least part of your 401(k) contributions among other investments, such as diversified stock or bond mutual funds within the 401(k) plan.

If the prospects for your employer's stock appear much less promising even when you look out five years or so, you may want to consider selling part of your holdings and moving the proceeds into other investments. Even if you must take a loss, Newell says, "it's often better to do so and redirect the money into other areas. There's no point hanging on to a depreciating asset."

The U.S. Economy: An Off Year

Percent change, Indicator 1991 vs. 1990 Real gross national product -0.6 Consumer price index 4.2 Non-farm business wages 4.1 Industrial production -2.0 Defense purchases -0.7 Real net exports -17.7

In California, Where the Jobs Went

Percent change, Indicator 1991 vs. 1990 Total non-farm employment -3.2 Construction -16.1 Manufacturing -5.0 High-tech industries -6.4 Aerospace -9.2 Electronics -3.5 Trade -4.1 Finance, insurance & real estate -2.3 Services -1.9 State & local government 2.1

Unemployment Rates

Percent change, Indicator 1991 vs. 1990 California 7.6 United States 6.8

Source: UCLA Business Forecasting Project

A Tale of Two Recessions The last recession was worse than this one-unemployment reached 10.8%, versus 7% this time-but the current downturn shows surprising severity in consumer-related categories, as revealed by these figures comparing the percent decline,peak to trough, in various indicators. Source: Bear Stearns & Co.

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