Getting Therapy for Money Troubles
Despite investing during the remarkable bull market and spending three hours a day researching stocks, Muralidhavan Vasudevan has watched 25% of his $100,000 portfolio evaporate during the last three years.
“I’m going crazy because of the bad luck I’ve had,” he told Sandra Field, a Los Alamitos financial planner who was among several answering questions and offering advice to people attending last weekend’s Investment Strategies Conference sponsored by the Los Angeles Times.
“I do my homework, check things like price-earnings ratios, but I’ve still lost my shirt,” said Vasudevan, a computer programmer in San Gabriel.
His experience illustrates the risks of the stock market--not everyone participates when the major indexes rise. Vasudevan’s list of losers includes Network Associates, which he bought at $35 and now trades at about $15, and Compaq Computer, which he snapped up at $33 and watched slide to $25. He’s now considering investing in banks in his native India, after hearing rumors of annual returns of 25% or more.
Vasudevan’s investment efforts have caused tension at home, and not only because of the losses. Hours spent doing research on the Internet have left him little time to spend with his wife and young daughter.
Field suggested Vasudevan consider a more hands-off approach to investing, which most probably will lead to better returns and allow for more family time. “You should construct a portfolio using mutual funds,” Field said.
“You shouldn’t spend all your time trying to pick the next big winner. You have seen how those choices can turn out badly.”
Vasudevan should start with a fund that mirrors the Standard & Poor’s 500 and add others that will give broad exposure to a variety of stock categories, Field said. The plan should make Vasudevan’s holdings less vulnerable to sharp downturns or mistakes. “Use index funds or funds with a good track record and let the fund manager spend the time doing all the research.”
“Actually, I have had good luck with mutual funds in the past,” Vasudevan said. “Maybe it’s a good idea to use them in the future.”
Other planners at The Times conference echoed this. “If you really want to dabble in speculative tech stocks, set aside 5% of your portfolio for that purpose,” suggested Edward Mora of Irvine.
Some people are anxious to participate in hot market sectors, so it may be better to set limits on it rather than forbid it. “Letting them play with 5% should satisfy that desire and allows people to keep the other 95% in a more structured financial approach,” Mora said.
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Sue Wong was looking for some tax-saving tips as she planned real estate moves. She owns two Monterey Park condominiums--one in which she lives and another that she rents out. Both have appreciated handsomely and she now intends to sell one.
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“Sell your residence and move into the rental,” suggested Diane Burch, a certified financial planner in Los Alamitos.
The reason: The sale of a primary residence receives much more favorable tax treatment than does a rental property. Profit of up to $250,000 on the sale of a primary residence is tax-free for a single person such as Wong. (The exclusion is up to $500,000 for married couples.) Profit on investment property is subject to a 20% capital gains tax.
If Wong moves into the former rental property and lives there for two years, the IRS will consider it her primary residence. If she then sold it, any profit would qualify for the special tax treatment.
The suggestion appeals to Wong. “I like the rental property more anyway,” she said. “With the tax consequences, it definitely makes sense to move back to it.”
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Maura McDonald has seen an $8,000 investment in the stock of Merrill Lynch & Co. grow to more than $12,000 in just six months. Now she’s torn between cashing in her shares or letting them ride.
She is convinced that the stock, which is her only non-retirement investment, has significant upside potential. But she wonders if she wouldn’t be better off selling the shares to pay down a 10.1%, $20,000 second mortgage on her townhouse in Irvine.
Given McDonald’s mixed feelings, Pasadena certified financial planner Toian Bowser-Alexander suggested that McDonald consider a middle ground: sell a portion of her stock and use those proceeds to pay down part of her loan. That would allow McDonald to lock in part of her gains but still give her the opportunity to enjoy more appreciation should Merrill Lynch rise further.
Bowser-Alexander also notes that she prefers to see her clients have more diversity in their portfolios--possibly through a mutual fund--than a single stock provides.
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Among the other tips offered by financial planners at the investment conference:
* Stick to your allocation. “If you’re constantly chasing the highest returns by chasing investments that have performed well recently, you’ll probably be always buying them at their high point,” warned Brent Kessel of Santa Monica.
“A slow and steady approach really does win the race,” he added.
* Buy disability insurance. “A lot of people buy life insurance but not many people buy disability insurance,” said Andrea Spatz of Century City. “Disability insurance will pay for 60% to 70% of your income and will be crucial should you suffer a serious injury that prevents you from working for an extended period of time.” Also, state and federal disability insurance programs provide far too little income for most people.
Such policies are easiest to find through employers who offer group rates to employees, but with some shopping most self-employed people should be able to find policies as well.
* Look beyond taxes. “A lot of people get into investments with the sole goal of minimizing their taxes rather than standing back and seeing what makes the most sense overall,” said Diane Burch of Los Alamitos. “If you are in a low tax bracket, it probably doesn’t make sense to be in a municipal bond fund even though it will save in taxes.” Better to look at the overall picture. “Taxes are only a part of that picture,” she said. “They shouldn’t be the sole driving force.”
* Resist investment envy. “Everyone seems to know someone these days who has an investment that has doubled in just a few months,” said Nigel Taylor of Santa Monica. Hunting for one of these stocks of your own is likely to lead to highly risky investments.
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“You can’t start making your decisions based on what someone else has achieved,” he added. “They may have a very different risk tolerance or different time horizon or different goals than you.”
* Brace for tough times. “When you’re looking at mutual funds, don’t just look at how they did during the recent bull market,” said Jack Allen of Lakewood. “We will have a correction eventually, so you’ve got to look at how those funds weathered the periods such as 1987 and the early 1970s.”
The proliferation of mutual funds in recent years means that many of them have never endured the acid test of a bear market. Consequently, Allen has a bias toward older funds. “Almost every fund has made money in the last decade,” he said. “You want to know how they will do when the going gets tough.”
Graham Witherall is a regular contributor to The Times. To be considered for a published Money Make-Over focused on your financial situation, 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.
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More Inside:
* BARGAINS: Despite lofty valuations in the stock market, there are still plenty of stocks worth buying, according to panelists at this weekend’s Investment Strategies Conference. A look at some promising picks, C6.
* TAPES:
How to order cassettes of sessions from The Times’ investment conference, C6.
