Dose of Reality for a Daredevil Investor


Brian Smith is no stranger to risk.

The former college gymnast, now owner and operator of a mobile gymnastics business, once made a living by catapulting himself 20 feet into the air off a trampoline and somersaulting toward a basketball hoop.

As part of a daredevil troupe, he traveled the world, performing acrobatic dunking exhibitions at halftime of college and professional basketball games.

It was not only a blast, Smith said of the job, it also gave him a chance to sock money away. He had virtually no living expenses while out on the road for months at a time--and plenty of free time to read up on how to invest it.


“It really helped me with the basics,” Smith said of the lessons learned from reading about personal finance in newspapers and magazines.

At first he plowed his discretionary income into relatively safe vehicles, such as certificates of deposit and money market mutual funds. Later, after he married, he and wife Kerry, a personal trainer, bought a house in La Crescenta.

Eventually, though, Brian’s more adventurous side surfaced and he began investing in aggressive equity mutual funds, concentrating mostly on funds that held highly volatile technology stocks. Riding the highflying bull market of the late ‘90s, he was determined to bring in investment returns of 15% to 20% annually.

But the Smiths, both 35, are now the parents of two boys, Walker, 2, and Derek, 2 months. And late last year, with the bottom falling out of the tech sector, Brian began to wonder whether he should rein himself in a little bit.

“I know I’ve got 20 years before I start thinking about retirement,” he said. “But I thought, ‘What if I lose everything?’ ”

His fears aren’t entirely baseless, said Mark Gleason, a Glendale-based financial planner. Gleason is concerned that Brian’s high-wire approach to investing may be unnecessary, given the couple’s goals and financial situation.


After all, the family’s annual gross income is about $100,000--$75,000 after business expenses--and Brian and Kerry have built a portfolio worth nearly $138,000, with about 80% invested in U.S. stocks and most of the rest in cash.

With the couple’s saving habits and earning potential--Kerry plans to do more outside work when the boys are older--the Smiths’ goal of saving enough money to retire in 20 years and also finance their sons’ college educations is easily attainable, Gleason said. So what’s the rush?

“We’d all like to get a 15% to 20% [annual] return on our investments,” the planner told the couple, “but that’s unrealistic.”

It would be more prudent for the Smiths to aim for a return of 7% to 10% by hedging their bets. They can do that by diversifying their portfolio among several investment sectors, Gleason said.

“If you shoot for a higher return, chances are you might end up wealthier, but at the same time, the chance that you might go broke also increases,” the planner said. “Most people would rather be reasonably well off, but with a high degree of assurance. . . .

“Unless they have grand ideas that they have to be multimillionaires, people would rather be comfortable than wealthy.”


Before restructuring their portfolio, Gleason said, the Smiths should invest in disability insurance for Brian, considering the nature of his work.

Brian’s business, which involves setting up gymnastics and fitness programs for private schools, is a hands-on endeavor. He admits it’s hard on his body, as are the freelance daredevil halftime assignments he still takes occasionally.

“That’s a big hole in your possible security,” Gleason told Brian. “You might do everything right on the investment side, but an injury could put you out of business and your whole plan could fail.”

Disability insurance will probably be expensive--perhaps as much as $225 a month in premiums for a policy that would pay $4,500 a month--and might be hard to find, the planner warned, “but keep looking.”

“You’re not getting any younger,” Gleason said, “and the chance for injury goes up as you get older.”

Even if Brian does get the disability insurance, Gleason said, he should begin formulating a transition plan for his business to reduce his own physical involvement.


“You can’t do this till you’re 60,” Gleason said. “Either bring in someone else or bring in others to handle the physical aspects and make your own role more administrative.

“It might not be as much fun, but your dependence upon your own physical ability will be lessened. It might make it easier for you to get disability insurance or it might even make it unnecessary.”

As for the couple’s investment choices, Gleason said they are too narrowly focused and in some cases unnecessarily expensive.

“You’ve got what we call a barbell portfolio,” Gleason said. “It’s very concentrated on both ends--cash on one end, very secure, and then the risky, aggressive stocks on the other.

“It’s a recipe for high volatility, which defeats what you’re trying to accomplish: financial security.”

The planner suggested a more diversified portfolio that would decrease the couple’s holdings in cash and U.S. stocks by about half, while adding bonds, real estate investment trusts, hedged mutual funds and international stocks.


Gleason suggested that the couple sell their individual securities and invest in mutual funds, creating the following mix: 39% in U.S. stocks, 25% in foreign stocks, 12% in hedged mutual funds, 6% in REITs, 5% in high-yield bonds, 5% in international bonds and 8% in cash.

“[This portfolio] allows for adding assets that have different correlations--one zigging, the other zagging--which is very important in decreasing volatility,” Gleason said. “You’ll reduce the risk significantly while reducing the return only somewhat.”

To achieve the desired asset allocation, the Smiths will first need to sell some of their current holdings. Outside their retirement accounts, Gleason said, the couple should take advantage of tax breaks by selling individual stocks and stock mutual funds that have posted losses.

Within their retirement accounts, the planner said, the Smiths should restructure their portfolio to focus on mutual fund families that offer low management fees and no sales charges, such as Vanguard, Dodge & Cox and Tweedy, Browne.

The planner also said the couple should fully fund their SEP-IRA and Roth IRA retirement accounts before setting up college funds for their sons.

“Rather than set up education accounts, you can accumulate assets on your own,” Gleason said. “And then, at a later date, you can take those appreciated stocks and bonds and transfer them to a custodial account for the children.


“In fact, there’s an advantage in waiting--to see which stocks or mutual funds might go up. And those are the ones you then transfer over to the children so they can sell at a lower tax bracket.”

Overall, Gleason sees a bright future for the Smiths.

“If you make a few adjustments, all you need to do is to continue saving and to accelerate your saving as your income goes up,” the planner told them. “You’re on the right track.”


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This Week’s Make-Over

* Investors: Brian and Kerry Smith, both 35

* Occupations: Brian is the owner-operator of a gymnastics instruction business; Kerry is a personal trainer.

* Annual gross income: $100,000

* Goals: Retire at 55; fund sons’ college education

Current portfolio

* Cash: $26,000 in money market mutual funds

* Retirement accounts: $50,500 in SEP-IRA, Roth IRAs and traditional IRAs, invested mostly in U.S. stock mutual funds


* Other assets: $34,000 in stock mutual funds; $17,000 in individual securities; $10,000 in variable life insurance policy; $115,000 equity in house

* Debt: $185,000 on home mortgage; $10,000 on car loan


* Invest in disability insurance for Brian.

* Diversify portfolio to reduce risk.

* Avoid mutual funds with high management fees and sales charges.

* Take advantage of tax breaks by selling individual stocks and stock mutual funds that have posted losses.

* Fully fund retirement accounts before funding education accounts.

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.