A Plan That Will Operate His Way? : Med Student Seeks to Invest Savings While Borrowing for School
George Kienle feels well suited to helping others tend to their physical health. But when it comes to tending to his own financial well-being, the future doctor knows he’s on weaker footing.
“I’m an amateur in investing,” Kienle, 27, conceded. “Whatever plan I’ve had in the past was spontaneous and not well thought out. I need a better strategy.”
But not too conservative a one. Kienle is not afraid to take risks. In fact, although he has almost $55,000 in savings, he’s decided to finance all of his four-year tour at Western University of Health Sciences in Pomona--which teaches osteopathic medicine--with student loans.
By the time he graduates, he estimates he’ll owe $154,000 plus interest. But Kienle believes he can make more on his investments over the length of his loan term, about 14 years, than interest (averaging around 7%) he’ll be paying on his loans.
However, Kienle also feels strongly about having money readily available to help close relatives who are struggling financially--strongly enough that he even deferred medical school for a year to continue his support. He now sends $50 to $60 a month to relatives in Hungary, and before he began his first year of classes last fall, Kienle had been giving several thousand dollars a year to his parents, who had been under heavy financial pressure when they tried to expand their computer component repair business.
“My father put six kids through college, so I feel this is the least I can do,” says Kienle, who grew up in Ventura County. “For me, having a reserve is really important because if something happens, I know it’d be tough for me to get a loan for emergency purposes.”
A Reasonable Risk to Take, Planner Says
Overall, David Morganstern, a fee-only certified financial planner in Portland, Ore., supports Kienle’s borrow-now-to-invest-now plan, saying it is indeed possible that Kienle could come out ahead.
A few numbers show how the scenario might work:
If Kienle used, say, $45,000 of his savings rather than borrowing for his school costs, he’d save about $26,700 in finance costs. But if he invests the $45,000 and it earns average annual returns of 8%, that $45,000 would more than double in 10 years. Of course, returns of 8%, though generally seen as a conservative estimate, are only a guess--no investment performance can ever be predicted with certainty. Kienle’s investments could very well make much more, much less or even lose money over any given period. (The scenario is not quite as advantageous when taxes are taken into account.)
That said, the planner nevertheless feels that the risk Kienle will be taking is reasonable--so long as he’ll be sure to stay with his plan.
“It’s critical that he take a long-term view and stick to this four-year horizon,” the planner said--that Kienle tolerate the inevitable stock market volatility and not panic and pull his money out during a correction.
Trying to guess whether stocks have hit a peak or a bottom--in other words, trying to time the market--”is typically unsuccessful for even experienced investors,” Morganstern points out.
Kienle isn’t worried about falling into that trap. Some of his holdings were down as much as 50% last summer and fall, he said, but he resisted any thought of selling. “I knew the market would come back,” he says, noting that his portfolio has largely rebounded since then.
Kienle accumulated his nest egg during the five years he was in the work force after graduating from UC Santa Barbara in 1993. He began working in biotechnology that year, first for Biotek Solutions, then for Ventana Medical Systems, the Tucson-based company that acquired Biotek in 1996. The company makes and markets means of analyzing cells and tissues on microscope slides. As a technical specialist with some involvement in sales, Kienle eventually was making $62,000 a year, including commissions.
“It was very tough to leave because $62,000 for a 26-year-old was a lot of money,” Kienle says. “But I’m really fascinated with the human body, and I like the fact that as a doctor, I’m going to help people.”
Kienle’s assets include $4,250 in Ventana’s 401(k), split between a large-capitalization growth-stock fund and a large-cap blend fund, both with Morgan Stanley Dean Witter. He has $300 in an IRA, invested in a mid-cap growth fund. Thanks to a Ventana stock-option program, he now has about $26,000 in company stock. In addition, he has about $250 in the stock of Matritech, a small biotech company; about $1,900 in stock in Mutual Savings Bank, a struggling Michigan-based regional institution; and about $1,700 in a unit investment trust, purchased through Piper Jaffray brokerage, invested in five blue-chip stocks. He also has about $20,000 in cash--$3,000 in a checking account, $14,000 in a savings account and $3,000 in a money market account.
While he’s pursuing his studies, Kienle will be taking out the maximum allowable $8,500 a year in Stafford subsidized graduate student loans. “Subsidized” means the loans accumulate no interest while the student is in school. The interest rate is adjustable, with a cap of 8.25%, and the borrower has 10 years to repay, beginning six months after graduation.
The remainder of Kienle’s loans will be unsubsidized Stafford loans, which are like the subsidized loans except that the student does accrue interest while he or she is in school. Kienle now pays $50 a month toward the $30,000 of unsubsidized loans he borrowed for this year. The current rate on this sum is 6.86%, with a cap of 8.25%. He also has 10 years after graduation to pay these off.
Morganstern urged that Kienle pay more of the interest--as much as he can--on the unsubsidized loans while he is in school. He is currently paying less interest than is accumulating on the loans.
For many students, there’s a temptation to live beyond their means, to spend their savings or to lean heavily on credit cards while they’re pursuing their degrees. Come graduation day, they then face thousands of dollars in consumer debt on top of the student-loan load they’ve taken on.
But Kienle’s pretty sure this won’t happen to him. He’s prepared himself mentally to live simply on the roughly $1,000 a month from his student loan package. His Claremont apartment costs just $425 a month, “my car payments are done,” he said, “and I basically have $500 a month for gas and food. It’s not a problem at all.”
Now, how to invest Kienle’s savings? Morganstern considered Kienle’s age, his professed tolerance for risk, and his desire to own individual stocks as well as mutual funds, and came up with suggestions that would make for an overall asset allocation of 75% equities, 25% fixed income.
Open Regular and IRA Brokerage Accounts
First, the planner recommended that Kienle open regular brokerage and rollover individual retirement accounts at discounter Charles Schwab. Besides the fact that his costs would be lower than those at his current full-service brokerage, Morganstern said, Schwab offers a lot of good material that helps teach beginners such as Kienle about investing choices. The company also offers a mutual fund “supermarket” through which investors can buy many companies’ mutual funds and have all their holdings appear on one statement.
Morganstern recommended substantial changes to Kienle’s portfolio, however, believing the young man would do better with less expensive mutual funds and stocks likely to perform better and be less volatile than his current choices. The planner also recommended dumping the unit investment trust, which invests in the Dow Jones industrial average’s five highest-dividend-yield stocks, according to what’s known as a “dogs of the Dow” approach. It’s a bit more complicated than this, but in brief, the theory behind the “dogs” investing approach is that the dividend yields on these stocks are high because the share price is depressed, and so these stocks may therefore be poised for a rebound.
“Biotech is a very speculative, risky sector,” Morganstern said of Kienle’s Ventana and Matritech stocks, which account for more than half his assets. “Yes, we have an aging baby boom population, but there’s so much that goes into research and development in these firms that many don’t have earnings for several years.”
Holding On to a Favorite Company
However, Kienle wants to hang on to some of his Ventana stock, saying that as an ex-employee he knows the company and its business and believes Ventana will do well. Morganstern noted that analysts are bullish on the company as well but recommended that Kienle cut his stake to $8,700.
“I don’t mind you keeping some of your [Ventana] stock because it’s a company you believe in, but sometimes love can be blind,” the planner told him. Morganstern advised Kienle to set an attractive but realistic selling price in his mind, then “when it hits that price, let go of it and move on.”
Kienle also would designate $5,000 of his cash holdings as an emergency fund, and keep that in a money market mutual fund with the discount brokerage.
He would keep the $300 in the mid-cap MFS Emerging Growth--which has performed well enough and is a small position in any case. Selling the rest of his Ventana stock and his other holdings would give him roughly $25,000; that and the $15,000 remaining from his cash holdings would give him about $41,000 to reinvest. In making his choices, Morganstern kept in mind Kienle’s interest in health sciences and a preference for avoiding tobacco companies. Thus:
* $7,700 would go into Vanguard Health Care (three-year average annual return: 29.2%), a sector stock fund that invests in pharmaceutical companies, medical supply firms, biotech companies and health maintenance organizations.
“You always want to buy stocks or funds you understand and will track,” Morganstern said. “This fund invests in companies that seem to best fit your values and reflect who you are.” Besides, “this fund has a long-tenured fund manager who knows the industry in and out. He has performed consistently, with a low turnover of stocks. This is a great fund.”
* $9,450 ($4,250 of that would be from his 401[k], which would be rolled over into an IRA) would go into Domini Social Equity (three-year average annual return: 30.9%). This “socially responsible” growth-and-income fund tracks the proprietary Domini Social Equity Index, a list of 400 mainly blue-chip companies screened to exclude those involved in tobacco, alcohol, gaming, weapons-making and nuclear power.
“This fund has performed consistently, and is regarded as one of the best in its category,” Morganstern said.
* $14,050 would go to buy Microsoft stock. (Readers should note that the software company on Monday announced a 2-for-1 stock split that would take effect in mid-March if shareholders approve it. See chart, C4.) Because Kienle expressed an interest in investing in technology, Morganstern recommended that he go with a proven industry leader. Its legal troubles notwithstanding, “I have a lot of faith in Microsoft, because I don’t really see any company challenging its dominance,” the planner said. “I think the current [antitrust] litigation is just a blip on their screen. I invest my own money in this company. But you have to remember this stock is a long-term hold.”
* $9,800 would go into Strong Short-Term Bond (three-year average annual return: 6.2%). Because Kienle may need to tap more than just his emergency fund should a family crisis arise in the next few years, Morganstern said, “I want to make sure you have enough cash and liquidity so you don’t feel desperate if the market goes down.” This fund is “well-diversified, and there’s not a lot of risk,” Morganstern said, “and you can liquidate it any day.”
If, after he graduates, Kienle starts feeling overwhelmed by loan payments, Morganstern said, he may want to dip into his investment earnings to make the loan burden more manageable.
“But keep the principal invested, because during your residency you’ll want to have some savings,” Morganstern said. “You may want to buy a house or start a family.”
But for Kienle, all of that’s a long way off. For now, he’s happy to have a plan to get him through the next several years.
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Diane Seo is a regular contributor to The Times. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. You can also e-mail the information to money@latimes.com, or you can save a step and download the questionnaire at https://www.latimes.com/HOME/BUSINESS/FINPLAN/make-over.htm.
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Information about choosing a financial planner can be found at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.
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The Situation
* Investor: George Kienle, 27
* Gross annual income: None
* The question: How to invest nearly $55,000 in savings for maximum returns while borrowing money to study medicine.
* The suggestion: A fairly aggressive--and somewhat risky--stock and mutual fund portfolio may bring the returns he seeks.
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This Week’s Make-Over
* Investor: George Kienle, 27
* Occupation: Student
* Gross annual income: None
* Current financial goals: Invest savings for maximum returns while in medical school.
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Current Portfolio
* Debts: Will have accumulated $154,000, plus interest, in education loans by graduation in 2002.
* Retirement accounts: $4,250 in 401(k) plan, invested in Morgan Stanley Dean Witter American Value Mutual Fund and Dividend Growth; $300 in IRA, invested in MFS Emerging Growth
* Stocks and other investments: About $26,000 in Ventana Medical Systems stock; about $250 in Matritech stock; about $1,900 in Mutual Savings Bank stock; about $1,700 in a unit investment trust
* Cash: $20,000 in savings, checking and money market accounts
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Recommendations
* Have all investment accounts, taxable and tax-deferred, at a discount brokerage offering a mutual fund “supermarket.”
* Roll over 401(k) into an IRA.
* Revamp stock and mutual fund portfolio to reduce risks and expenses and to seek better returns. Keep $8,700 worth of the Ventana stock and the $300 in MFS Emerging Growth. Allocate remainder of savings as follows: $5,000 emergency fund in money market mutual fund, $7,700 in health-care sector mutual fund, $9,450 in a “socially conscious” mutual fund ($4,250 of that would be 401[k] money going into a rollover IRA), $9,800 in bond fund and $14,050 in Microsoft stock.
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Recommended Mutual Fund and Stock Purchases
* Vanguard Health Care: (800) 992-8845
* Domini Social Equity: (800) 762-6814
* Strong Short-Term Bond: (800) 368-1030
* Microsoft stock
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Meet the Planner
David Morganstern is a fee-only certified financial planner with Capital Management Consulting in Portland, Ore. He is active in several professional associations, among them the International Assn. for Financial Planning and the Oregon Society of the Institute of Certified Financial Planners.
