Diversification Is a Lot Like Money: You Could Always Use Some More
Q: My wife and I hold 25 different stocks, fairly evenly distributed among the technology, pharmaceutical, energy, finance and insurance sectors. Should we be concerned that we are too diversified? I remember someone commenting that holding about 12 to 15 stocks is ideal.
A: Ideal for whom, one has to wonder.
Diversification is a good thing, not a bad thing. A concentrated portfolio of just a dozen or so stocks allows you to be whipsawed by the market and exposes you to far more risk than the average person can stomach.
Probably more financial planners believe you should own all 6,000-plus stocks in the market than believe a dozen would be enough.
If the bulk of your money is invested in mutual funds--which give you diversification as well as professional management--then your portfolio of 25 stocks may be all right as a supplement. If it’s all you’ve got, I’d strongly suggest you find a competent financial planner to review your holdings. You can find suggestions on how to choose a planner at https://www.latimes.com/finplan.
The Price of Friendship
Q: I loaned a friend $500 and I’m trying to figure out what kind of interest to charge, because I’ve never really done this before and I don’t know what’s fair. I also want to set it high enough so he has enough incentive to pay me back in a reasonable amount of time. I know most major credit cards are charging about 20% a year on average. Does that sound fair to you, or do you think I should use some other kind of measuring stick?
A: I dunno. How much is his friendship worth to you?
Interest rates in the business world tend to reflect the risk involved to the lender. That’s why mortgage rates are so low--the lender can take your house if you don’t pay--and why unsecured personal loans for people with bad credit are so high. The average credit card rate is actually closer to 16%, by the way, and people with good credit can get rates of 9.9% or so.
But you’re not in business, are you? You’re supposed to be a friend. Charging a friend interest is distasteful, and demanding 20% is usurious. If there was a strong risk that he wouldn’t pay you back, you probably shouldn’t have made the loan in the first place. Many times, loans to friends become unintended gifts when the debtor doesn’t repay the money, and the friendship is often lost in the deal.
The time to decide on terms was before you gave him the money. It’s a little late now, and presenting a bill for 20% annual interest is likely to be more of a disincentive than an incentive to repay you.
Tax Conspiracy Revisited
Q: I read a book that said the income tax is voluntary and that we don’t have to pay. In fact, the book said it’s illegal. Why don’t you expose this government conspiracy in your column? Or are you afraid to tell the truth?
A: You’re right, it’s all a vast conspiracy. What’s even more sinister is the fact that all the best tax attorneys and CPAs pay taxes. Surely they know it’s all a sham, so they must be doing it just to mislead the rest of us sheep-like taxpayers.
One thing most people don’t know is that in order to legally not pay your taxes, you must run naked through an IRS office with the words “I am a tax protester” painted on your body. Don’t ask an attorney or CPA whether to do this; just take my word for it.
In case you’re the kind of person who can’t think your way out of a paper bag, the preceding was an example of sarcasm. You shouldn’t streak an IRS office, just as you shouldn’t believe every numbskull who scrapes up the cash to self-publish a book or put up a Web site promising a way to evade taxes.
Costly Tax Mistakes
Q: I just wanted to let you know how much I enjoy your column. I especially liked your answer in the Sept. 24 column to the person complaining about the penalty she incurred because she erroneously converted her IRA to a Roth IRA and then ignored an IRS letter telling her of her mistake.
I am a CPA who used to have a full-time tax practice and one of my biggest frustrations was trying to make a living working with clients like this person who did not want to pay for professional advice but were quick to deflect blame and responsibility when something went wrong. Keep up the good work of giving good advice and telling people to seek professional (paid) tax advice when appropriate.
A: A few readers thought I was too harsh on the woman, who wound up losing her IRA and paying more than $20,000 to the IRS. A few others thought, as you did, that she got what she deserved--both from the IRS and from me.
With all the tax software and Web sites available, it’s tempting to believe that taxes are a do-it-yourself matter. And they probably are for many people with simple tax situations. But any move involving a retirement account should be checked out thoroughly with a tax pro before proceeding. Mistakes made with these accounts can cost you for the rest of your life.
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Liz Pulliam Weston can be reached at liz.pulliam@latimes.com or in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.
