Salesman Has Overstock of Risk
It’s time for Wayne Prasertong to take some money off the table.
After years of riding the bull market in stocks, the divorced father of three finds himself with more than $430,000 in retirement savings. Add a pension and Social Security, and he can expect to have the financial flexibility he needs for the partial retirement he envisions in about a dozen years.
In fact, the most potent risk to his plans is the same portfolio that got him this far: The stocks and equity mutual funds that make up more than 80% of his investments.
Prasertong looks ahead to retirement with a sense of nostalgia for his past. As a university student in Thailand during the early 1970s, he plunged into a variety of environmental and social causes. After earning a psychology degree, he worked in a leper colony.
But after meeting and marrying an American woman and moving to the United States in 1977, Prasertong’s priorities changed. He bought a home, built a successful sales career and raised three daughters.
Prasertong, 48, has begun making plans for a new life that he hopes will be similar to his younger, more carefree days. He’d like to quit his job as sales manager for a plastic bag company in about 11 years, when the last of his daughters finishes college. (He has already set aside $40,000 to help pay the college costs for his children, ages 19, 17 and 10.)
His first priority is to spend a year backpacking around the world. But eventually, the Monrovia resident would like to return to Thailand and perhaps open a guest house that would allow him to create a comfortable meeting place for travelers from around the world.
“I’d like to find something that I could enjoy doing and also allow me time to be helpful to the community where I live,” he said.
To determine if his goals are realistic, The Times arranged for West Los Angeles financial planner Joel Framson to analyze Prasertong’s situation.
The good news, according to Framson, is that Prasertong should have enough to quit his job by the time he hits 59, assuming that he continues a modest lifestyle in retirement.
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First of all, Prasertong has $100,000 in his company’s profit-sharing plan, which is privately invested by his employer, Diamond Polyethylene Products, in a mixture of stocks and bonds. His company typically adds about $5,000 per year to that fund.
An additional $330,000 is in individual retirement accounts that Prasertong has invested himself, mostly in stock mutual funds. Although he contributes $2,000 a year to his IRAs, a large portion of the accounts was funded by Prasertong’s share of his ex-wife’s 401(k) plan, which he received in his divorce settlement.
His profit-sharing and IRAs will likely swell to more than $1 million during the next 11 years, Framson projected, using a growth rate of 7.5% annually. The profit-sharing funds will be available to Prasertong when he leaves the company, and the IRA can be tapped penalty-free when he turns 59 1/2.
In addition, Prasertong is eligible for an annual company pension of about $15,000 when he is 59, and Social Security benefits, worth approximately $14,000, will kick in three years later.
Right now, Prasertong earns about $50,000 annually at his job, of which $10,000 goes to taxes and about $37,500 is consumed by his mortgage and other living expenses. His hobbies, such as bicycling, are relatively inexpensive.
He is putting aside less for retirement now because he pays $5,000 annually for his oldest daughter’s schooling, half of which comes from the dedicated savings and half from his regular income. His ex-wife and scholarships pay for the remainder of his child’s costs at USC.
Overall, then, Framson said Prasertong is in a good position. “You have some generous company benefits in the profit-sharing and pension, and you’ve made a good start with retirement funding.”
But floating just below the smooth financial surface is a potential iceberg that could sink his dreams--an investment strategy that Framson says borders on the reckless. About 95% of Prasertong’s IRA investments are in stocks.
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Although this money is spread across 24 mutual funds, the holdings are not diversified, Framson noted. Most of the assets are in volatile sector funds or concentrated in large- and medium-size growth stocks. Many of the funds are similar. For example, half count Microsoft among their largest holdings.
“The large number of mutual funds have given you the illusion of diversification,” Framson said . “In fact, you are not very diversified at all. You are taking much more of a risk than you need to reach your goals.”
Even where Prasertong has made an effort to diversify his portfolio with a fund that invests overseas, such as Janus Worldwide, he has been buying the same stocks. It turns out that 30% of that fund’s investments are in U.S. companies, including several that appear prominently in Prasertong’s other funds, such as Cisco Systems, Microsoft and Time Warner.
Framson recommends that Prasertong pull more than half his money out of the U.S. stock market and move some of the remaining funds away from the highflying growth sector.
He acknowledges that this message may be difficult for investors such as Prasertong to swallow at the moment. The stock market has achieved remarkable returns in the past several years, allowing many of Prasertong’s funds to pile up annual increases of 25% or more--better than several funds that Framson recommends.
But Framson believes that Prasertong has been lulled into a false sense of security by a market that has raced ahead for years. And although stocks may continue to do well, Prasertong must still ask himself if he is prepared to take the risk of changing his plans if the market weakens in the next decade.
Though some analysts suggest that changes in technology, investor psychology and other factors have fundamentally altered the way stocks perform, Framson is not convinced.
“History tells us that it’s not possible for the market to keep going at this pace--the fundamentals are just too far out of line,” he said, referring to traditional benchmarks used to value stocks such as the ratio between price and earnings as well as dividend yields.
Framson counseled Prasertong to stop riding his luck, secure some of his gains and restructure his portfolio.
Most importantly, Framson suggested Prasertong take about 45% of his retirement funds out of the stock market altogether, putting about half his portfolio into bonds or bond funds.
With the remaining investments, he urged Prasertong to reduce the overall risk and volatility by switching from growth to value funds, increasing his exposure to foreign markets from 8% to 16% and adding a real estate component.
Value funds look for companies that may be out of favor and consequently have a comparatively low price. Indeed, as if to underline Framson’s point, the stock market’s rally in the last few weeks has been led by the value sector.
Recommended funds in this category include Dimensional Funds’ 6-10 Value (three-year average annual return: 11.7%) and Vanguard Value Index (three-year average annual return: 25.4%).
About 5% of his portfolio should be held in a real estate investment trust, such as Cohen & Steers Realty Shares (three-year average annual return: 13.8%), Framson said. Although any market predictions are iffy, Framson says an annual return of 7.5% is reasonable for this portfolio, based on historical analysis. While that pales compared with what Prasertong has enjoyed in recent years, the recommended portfolio is far less vulnerable to a steep downturn that could scuttle Prasertong’s goal to strap on a backpack and see the world before his 60th birthday.
Framson also suggested that his daughters’ de facto college fund be moved away from the stock market. Currently about one-quarter of that $40,000 is invested in a single stock, Walt Disney, and the remainder is spread across four growth-oriented mutual funds.
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With one daughter already attending college and another due to start in two years, a mixture of money market and bond funds would be a wiser place for the money, Framson said.
High volatility makes stocks an inappropriate investment when the money will be needed within five years, he said. Prasertong has had a dose of that volatility through Disney, which has lost about 25% of its value during the past year.
“You don’t want that much risk for money that will be paying for your children’s education in the next few years,” Framson said.
For Prasertong, taking his foot off the stock pedal will be tough since the ride has been so profitable. But he acknowledges that a more conservative approach might be wise.
“When I started investing, I wanted to see how well I could do, and my money has grown very quickly,” he said. “But I realize that doesn’t mean it will continue that way. I think it makes sense to reallocate some of my money.”
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Graham Witherall 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 to money@latimes.com, or 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 https://www.latimes.com/finplan.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Make-Over
* Investor: Wayne Prasertong
* Annual income: $50,000
Goals
Prepare for an early retirement.
Retirement savings
* IRAs worth $330,000, invested in Oracle stock ($6,000) and 24 mutual funds (two largest holdings: Fidelity Fund, $38,000, and Phoenix Engemann Growth, $36,000).
* Company profit-sharing account, approximately $100,000, invested in stocks and bonds.
Other savings
* $40,000 designated for children’s college education, invested in Walt Disney ($10,000) and four mutual funds.
Recommendations
* Switch about half the stock mutual fund investments to bonds, increase money in international stock funds, reduce the emphasis on growth stock funds.
* Move college account from stocks and stock funds to bond and money market funds.
Recommended mutual fund purchases Bond funds
* Pimco High Yield D
* Pimco Low Duration D
* Pimco Total Return D
* (800) 426-0107
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Equity funds
* J.P. Morgan Disciplined Equity
* (800) 766-7722
* Vanguard Value Index
* (800) 523-0857
* D.F.A. U.S. 6-10 Value
* (310) 395-8005
* Cohen & Steers Realty
* (800) 437-9912
* Lazard International Equity
* (800) 823-6300
About the Planner
Joel Framson is a fee-only certified financial planner and certified public accountant/personal financial specialist with Glowacki-Framson Financial Advisors in West Los Angeles.
