DONALD CHOU and MAUREEN TSUCertified Financial Planners,...

DONALD CHOU and MAUREEN TSU

Certified Financial Planners, Professional Financial Advisors Inc.

Maureen Tsu and Donald Chou are certified financial planners with Professional Financial Advisors Inc. in San Juan Capistrano. They spoke with Times reporter Greg Johnson after the Federal Reserve Board increased a key interest rate, a move that sent the Dow Jones Industrial Average down by nearly 100 points on Feb. 4. For the week ended Friday, the index recovered somewhat, gaining 23.36 to close at 3,894.78. Despite jitters in the financial community, the advisers advocate that consumers not make big changes in money strategies.

What should investors have learned from the market drop?

Tsu: People have been willing to take the stock market plunge because they don’t see the degree of risk and the possible losses. All some people have ever seen is the market going up. They’ve had good-paying jobs, and (housing prices) kept going up. Now, people have lost jobs, more people have had foreclosures on homes. The market drop means you should be aware of your investment timetable. If you’ve got a short timetable and the market takes a dip, then it’s a problem. That’s a lesson.

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So what are you advising that senior citizens do in the wake of Feb. 4?

Chou: In many cases, seniors have moved their assets out of certificates of deposit and savings accounts because of the low interest rates and have already gone into long-term bonds and utility stocks. But with all the talk of interest-rate changes, there’s been more volatility. You can get a higher yield on a bond. But when rates go up, bond prices go down, so there’s a Catch-22. We’ve advised some to go from longer bonds to (shorter) bonds. And we’re advising people to factor in the true cost of last year’s tax bill, which is effective April 15.

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How about regulatory changes that affect seniors?

Tsu: Social Security benefits will be taxed at higher amounts this year. And that makes income sources even more important--what income they get and how they get it. There will be a higher tax rate, and more of your Social Security benefits will be taxed.

Chou: That means you should not just focus on interest-rate increases. Instead, look at what kind of return after tax and after inflation you’ll get. In the 1980s, some seniors were getting a 20% return on money markets, but after tax and inflation they had a limited return. They might not get as much in gross dollars now, but they might be netting a better amount. Also, price deflation in certain areas has helped. If they can refinance a mortgage, that’s good. They can adjust their costs so they have better cash flow.

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How about estate planning, which is always tough in a changing market? Did the interest rate hike and market reaction mean anything there?

Chou: The big concerns now aren’t caused by changes in interest rates or inflation. Most people are looking at what Congress plans to change. In the last tax bill Congress took away the alternative minimum tax preference item for unrealized capital gains on property donated to charity. That changes estate planning. Congress is looking at the unified credit, which allows you to pass up to $600,000 to non-spouses and not have to worry about estate taxes. Some legislation has been introduced to reduce that to $250,000, but it’s not gotten very far. So what’s more significant in estate planning is what Congress is doing, . . . and it’s often said that dead people don’t have a very big lobby in Washington.

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Back to the increase in the Fed funds rate: So it’s not too late to refinance debt like home mortgages?

Chou: If you’ve not done your restructuring, while interest rates might be higher than three months ago, they’re not anywhere near where they were for most of the past 20 years. Lots of people wanted to restructure a year or two ago but just didn’t have the ability. What happened on Friday affects mainly short-term rates, so it’s still a good time to refinance.

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How about stock market investments?

Chou: There was a significant sell-off on Feb. 4, but it was really a small change, and the market is back up again. That means it was anticipated, that the market is going back where it should be. Remember that corporate earnings should show improvement in 1994, and there are money managers still out hunting for bargains, looking for value.

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What should people factor into their financial planning for the next year or two?

Tsu: People have to have more realistic expectations. Southern California got kind of spoiled in the 1980s. We got used to double-digit real estate gains, and the stock market did well. But our expectations have to be adjusted because we’re not going to see those times again for a while. We will have good gains but more steady and slower, which is healthier in the long run for our economy. And people need to understand inflation. You can come out positive after taxes and inflation. That’s what’s important--not just the numbers but what the numbers mean.

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Are financial planners generally changing strategies because of Feb. 4?

Chou: No. I’d be more inclined to say don’t do anything rash as a result of what happened. I think the economy is in good shape--we’ll see slow but consistent growth. Interest rates and inflation are relatively stable, despite the 0.25% move-up on short-term rates. What you need to do if you’re making capital investments or personal investments is make sure you’re buying good values and holding for the long term. Try not to have your vision colored by this one event. I don’t think we’ll see interest rates escalate as we saw in the early 1980s. This (increase) was timed, it was planned, it was done in a very small way.

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On repercussions of the market’s dive. . .

Chou: “This is a transition time, so there’s one key goal: Understand and identify your own unique goals, and don’t just jump on the bandwagon.”

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On whether the rate increase will affect lending to small businesses. . .

Chou: “Banks won’t change lending habits because of a slight hike in interest rates. This won’t change anything of significance for small business.”

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On whether Feb. 4 changed their guidelines. . .

Tsu: “I don’t see any major changes. When interest rates and inflation change, there are lots of new opportunities.”

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On buying real estate or a new home. . .

Tsu: “Look at the long term, not just the next two or three years. People live in a home on an average of seven to 10 years.”