He’s a Good Saver and Wants to Be a Better Investor

Derek Hopkey still hears the voice in the back of his mind: “Do you really need that?”

His mother’s oft-repeated question from his childhood has shaped 29-year-old Hopkey’s view on personal finance, leaving him averse to debt and determined to invest his money prudently.

“I’ve got a pretty good hold on my budget,” said Hopkey, an assistant market controller for Clear Channel Communications, a San Antonio-based corporation that owns about 450 radio stations nationwide, including KIIS-FM (102.7), KACD-FM (103.1) and KXTA-AM (1150) in the Southland.

“My parents were pretty thrifty--they worked at a bank--and I think I kind of borrowed some of their traits.”

With one eye on buying a condominium in the next few years and the other on building a retirement portfolio, Hopkey tries to keep expenses to a minimum.

Though he could afford a more expensive place on his $45,000 annual salary, he lives alone in a $560-a-month, one-bedroom apartment--or “glorified studio,” as he calls it--in Chatsworth.

He drives a 1994 Saturn.

Still, he’s not a miser. He owns membership in a gym, where he can be found most weeknights lifting weights, and admits to having a bug for traveling. Two years ago, he spent two weeks driving along the East Coast and last year he spent two weeks hiking and scuba diving in Belize.

He also makes weekend trips to nearby mountains and lakes for snowboarding and water skiing.

Hopkey’s only debt is the $3,000 he still owes on a car loan. And he pays off the balance on his credit card bills monthly.

“I learned a lesson about that four or five years ago,” he said. “I wasn’t in over my head, but it took two or three months to pay off cards, and I didn’t like the discomfort of seeing a bill I couldn’t pay off immediately.”

Now “it’s nice to know that the money you’re bringing in can go into investing or into a bank account,” he said, “rather than paying off a meal from two months ago.”

Hopkey’s interest in investing was piqued about four years ago, when he started hearing and reading about individual retirement accounts and mutual funds.

“I used to hear things like, ‘If you had opened an IRA when you were 18 or 20 or 25, look how much money you’d have at retirement,’ ” he said. “I read things about how somebody who was investing when they were 18 and stopped when they were 30 would have more money when they retired than somebody who got in when they were 30 and invested all the way through retirement.”

Relying on friends’ advice, Hopkey invested in an IRA and other non-retirement mutual funds and now owns a portfolio worth about $16,600, including about $5,000 in an IRA that is invested in four John Hancock Life Insurance Co. mutual funds (Regional Bank B, Sovereign Investors B, Special Opportunities B and Strategic Income B).

Outside the IRA, he owns about $600 worth of his employer’s stock and has about $6,500 in mutual funds, including $3,000 in Lutheran Brotherhood Fund, about $2,300 in PaineWebber Tactical Allocation and $1,200 in PaineWebber Analyst Best Call. He also has $4,500 in cash investments--in a money market fund and a savings account.

After recently becoming eligible to participate in a 401(k) plan at Clear Channel, where he has worked since November, Hopkey volunteered for a Money Make-Over.

Mark Gleason, a fee-only financial planner based in Glendale, reviewed Hopkey’s investment strategy for The Times.

“The amount of savings and contribution to investments has been very good, if not excellent,” the planner told Hopkey. “But as far as the choice of investment goes, you could do considerably better. Most of the investments you’ve picked have very high expenses or surrender charges to get out.

“They’re not horrible--most have performed rather well--but there are better choices out there.”

Based on Hopkey’s goals, Gleason suggested he rearrange his portfolio so he can buy a condominium in two years and also invest aggressively for retirement.

But before worrying about long-term investments, Gleason said, Hopkey should:

* Pay off the remaining $3,000 on the car loan, which carries an 8% interest charge. By contrast, he earns only from 2% to 4% on his cash investments, and those earnings are taxable. Paying off the auto debt would reduce his cash reserve, but odds are he can build it up again before he would need to use his credit cards or borrow from other sources in an emergency.

* Contribute the maximum amount allowable to the company’s 401(k) plan, with the intention of using the borrowing provision of the plan in a few years to help make a down payment on a home. (Rules on 401[k] loans vary from company to company. The money has to be paid back to the retirement account with interest.)

“By putting as much as you can into a 401(k),” Gleason said, “you’ll reduce your taxes. So the [tax] money you save can additionally be used to help meet your goal of buying a condo.”

After examining the choices in Clear Channel’s 401(k) plan, Gleason recommended that Hopkey funnel 50% into Fidelity Money Market, 20% into Pimco Total Return and 10% each into Fidelity Low-Priced Stock, Fidelity Diversified International and Fidelity Equity-Income.

“This will sound way too conservative,” the planner said, but the idea is that some of the money should be readily available for borrowing even if there is a market crash in the next two years. Later, Hopkey won’t need any money in the money-market portion of the plan.

Though Hopkey could probably buy a condo more quickly with a 10% down payment, Gleason suggested that he shoot for 20%.

“At 20%,” Gleason told Hopkey, “the rate on the loan is less, typically, and you can avoid private mortgage insurance, which is not deductible and adds as much as 1% to the loan cost. It’s a very expensive increment of financing.”

Based on his salary and at current interest rates, many lenders would let him buy a home or condo for up to $200,000, although Hopkey has been setting his sights closer to $120,000. A 20% down payment for such a property would be $24,000, which may be difficult for Hopkey to amass quickly. The 10% option would require half as much. Alternatively, he could buy a less expensive property, or he could stay in his inexpensive apartment for a longer period.

To add to his down payment savings, Gleason said that Hopkey should sell his PaineWebber and Lutheran Brotherhood mutual funds and reinvest the money more conservatively.

Gleason suggested most of that money be placed in short-term bond funds, with possibly some in the Merger Fund, a fairly conservative fund that invests in stocks of companies that have agreed to takeovers, and the Gateway Fund, which invests in S&P; 500 companies but uses options to reduce the risk of a downturn.

“These are very low-volatility investments,” Gleason said. “Even a bear market would create only a modest decline.”

Finally, Gleason recommended that Hopkey convert his regular IRA to a Roth IRA. At his age, the advantages of a Roth, particularly its tax-free treatment of income in retirement, will easily outweigh the cost of paying taxes on a conversion now.

Before that conversion, Gleason said, Hopkey might want to move the IRA out of the Hancock funds, which are B class funds normally sold by brokers as part of an overall advisory relationship with a client. These funds have a back-end load, a fee charged if the funds are sold within five years.

Selling the funds would cost Hopkey 3% to 5%, depending on how long he has held particular shares. Gleason reasons that Hopkey could find similar funds with significantly lower expenses--as much as 1.25 percentage points lower--than the 1.8% to 2.2% charged in his B class shares.

Among investment options Gleason recommends for the long term are closed-end mutual funds. Like the more familiar open-end mutual funds, they own a whole portfolio of securities, but their shares are traded like stocks and thus the market can value them more or less highly than the total value of their holdings. They are not marketed aggressively like many open-end mutual funds and have been less popular in the last decade.

“Because it trades like a stock, the price of the fund can deviate quite a bit from the underlying net-asset value,” Gleason said.

“If for any reason it has fallen out of favor or is thinly traded . . . you might be able to buy it for 20% to 30% less than what it’s really worth. If we can buy assets at 70 to 80 cents on the dollar in terms of their true value, that’s very attractive.”

Gleason thinks that ultimately many closed-end funds trading at a discount today will later trade without the discount or at a premium.

Many Asian closed-end funds are being bought and sold at deep discounts, Gleason noted. Gleason also suggests Equus II, which provides capital for smaller companies, some of which aren’t publicly traded. It is trading at about a 32% discount to net asset value.

“It lost about 35% last year,” Gleason said, “but previous to that it was up about 70%, so it goes through big swings.

“Even though they’re more volatile,” Gleason said of the closed-end funds, “these types of fluctuations tend to wash out over time, and you end up with what’s called the truer long-term expected return, which should be high because of the types of investments these funds own.

“Over several economic cycles, they’re expected to do quite well.”

Gleason also told Hopkey to diversify his holdings:

“You’ll have U.S. [holdings], emerging markets, developed markets, small-company and large-company stocks,” he said. “These are all things that should do well in the long run and yet are just different enough that if one’s zigging, the other’s zagging.”

He said it’s right for Hopkey to take an aggressive stance.

“It’s a common error, even for older investors, to get too conservative,” the planner said. “The real risk with any retirement plan is not living too short but living too long and running out of assets.

“So, really, one should retain a somewhat aggressive approach even as one gets older so that the risk of outliving one’s assets becomes smaller.”

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Jerry Crowe is a Times staff writer.

The Money Make-Over column will not appear next Tuesday, when the Business section is publishing the quarterly investment overview section.

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, or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/HOME/BUSINESS/

FINPLAN/make-over.htm.

Information on choosing a financial planner is available at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

Investor: Derek Hopkey, 29

Gross annual income: $45,000

Goals: Save for retirement and a down payment on a home.

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Current portfolio

Cash and savings accounts: $4,500

Non-retirement, stocks and mutual funds: $7,000

Retirement, stocks and mutual funds: $5,000

Debt: $3,000 remaining on auto loan

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Recommendations

Pay off car loan.

Save as aggressively as possible in new company 401(k); consider using a portion of those funds for future home down payment.

Divide investments between long-term retirement funds, which should be invested aggressively, and short-term funds for down payment, which should be invested conservatively.

Note: See story for fund names.

Meet the Planner

Mark Gleason is a fee-only certified financial planner and senior financial advisor with Wescap Management Group in Glendale. He is a chartered financial analyst and holds a bachelor’s degree in economics from UC San Diego and an MBA from USC.