Sue Brokerage? Investor Would Do Better Learning to Be Responsible
Q: I am an inexperienced investor who recently opened a joint account with my sister at a discount brokerage so we could trade on the Internet. We set several limit orders for stocks, thinking that the brokerage would execute those orders when we had enough cash available in our account. But the brokerage willfully executed all those orders knowing that we didn’t have the money to cover the purchases. We wound up having to sell all those stocks at a $3,000 loss. Then when we tried to access our account, the branch manager refused to accept a personal check because a previous check had accidentally bounced. Is it possible for me to sue them?
A: Let’s see: You bounced a check. You put orders in for stocks you had no intention, at least yet, of actually buying. You confess you’re an inexperienced investor, yet you wanted to start out by actively trading on the Internet--and your first picks immediately lost value. And all this is somehow the brokerage’s fault?
Close the account. Take some of the money and invest in a course on investing, or at least in a decent guidebook (“Investing for Dummies” is a personal favorite). If you decide that you still want to be an active trader, start with one or two stocks until you get the hang of it--or until you lose all your money, whichever comes first.
Some brokerages go to great lengths to educate their clients; others refuse to do much hand holding at all. Brokerages aren’t supposed to execute trades if they exceed your margin limit (the amount of cash you have plus your borrowing power on that cash), but sometimes they do. Ultimately, it’s your money at stake, so you should put some effort into knowing what you’re doing.
And balance your checkbook once in a while, while you’re at it. Bouncing checks is rude, not to mention expensive.
Senior Needs to Recognize Risks
Q: I have a portfolio of stocks and mutual funds worth about $300,000, with 95% in equities. I am 68, and my wife and I are retired and in good health. We have an income that takes care of all of our needs except for travel and large annual bills, which take about $30,000 from my portfolio each year. I have no 401(k) or IRA plans. Conventional wisdom suggests that a much larger portion of my investments be in bonds or bond funds. Would this be your suggestion too?
A: You’re running a huge risk by having so much of your portfolio in stocks and by drawing out so much so early in your retirement. A bear market, or even a few years of low returns, could mean running out of money well before you run out of life.
Just think what would happen if we experienced another downturn like the one in 1973-74 and your $300,000 portfolio became $180,000. If you continued withdrawals at your current rate, your portfolio would be exhausted in a decade or so, even if stocks again returned 10% a year after a two-year slump. You’re likely to live beyond age 78, and that could be right about the time you might need the money for nursing care and medical costs.
You need to change course now, while you still have some options.
Because you have other income providing you with stability, you can be more aggressive with your portfolio than someone who has no pension or Social Security. Still, few advisors would recommend a portfolio with more than 70% stocks for someone your age. A more prudent portfolio might be 60% stocks, 30% bonds and 10% cash, with a withdrawal rate of 6% or less. That would mean $18,000 a year instead of $30,000, a pretty substantial drop. Since you are in good health, you might think about a part-time job if you need help supplementing your income.
Hang Up on Phone Booth Offer
My mother is approaching the age (70 1/2) when she needs to start withdrawing money from her individual retirement accounts. Lately she’s been approached by several salesmen touting the advantages of investing in public telephone booths. It seems a little fishy, but the returns they’re promising sound impressive.
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A Good investment ideas aren’t delivered with a knock on the door or a call during the dinner hour. They don’t come via salesmen who have a particular affinity for vulnerable older ladies. These guys are charming and convincing--and absolute poison. Tell your mom to give these guys the boot, and encourage her to keep checking investment ideas with you before she proceeds. Knowing that someone is looking out for their prey will often cause these sharks to find an easier target.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
