This week's panel:
 Greg HiltonGregory Hilton is a Fee-Only®
financial planner in the heart of Chicago. He is an attorney with a masters degree in
taxation, a CPA, and a certified financial planner (CFP). Although his services are
comprehensive he concentrates on the tax and investment issues of retirement and estate
planning. His registered investment advisory is Cambridge Consulting, 500 N. Michigan Ave.
– suite 1530, Chicago, IL 60611 (312)527-5171 E-mail: cc@cambridge.cnchost.com |
 Frank ArmstrongFrank
Armstrong is author of Investment Strategies for the 21st Century, published here, and president of Managed Account
Services, Inc., a fee-only advisor specializing in global asset allocation strategies
utilizing no-load mutual funds. Frank is a Certified Financial Planner (CFP) with 24
years' experience helping investors build wealth. The firm, an SEC Registered Investment
Advisor currently manages in excess of $60 million for over 140 clients worldwide. Visit
Frank's Managed Account
Services, Inc. for more information about
the Alternative to Business as Usual on Wall Street or call 1-800-508-8500. |
Questions and Responses
Does my asset allocation properly consider the
effects of the Year 2000 computer bug?
from Lora
Q: I'm 28 and put roughly $700 in my 401K monthly. My allocations are 20% in
each of the following:
Guaranteed Interest Account 3 year
Guaranteed Interest Account 5 year
Money Market Account
Government Securities Account
Stock Index 500 account
I also have access to other investments such as Bond Emphasis
Balanced, Stock Emphasis Balanced, U.S Stock, Large Company Value, Large Company Blend,
Large Company Growth, Medium Company Blend, Growth, Small Company Blend, International
Stock, and Real Estate.
Is this a sound distribution, considering the impending Y2K issue
and the effect it might have on stocks, in general? Should I spread this out differently
if I am looking to retire in 20-25 yrs?
A (Greg): First, the Y2K
effect on the economy in general and specific investments in particular will be unknown
until the clock strikes midnight on New Year's Eve. It is going to affect businesses and
industries to differing degrees and the best way to protect from it is to diversify as
much as possible.
Second, based upon your age and investment horizon you have the
worst 401(k) allocation possible. I have done some analysis with portfolio optimization
software and with limited knowledge concluded that you could be doing much better. Your
current 401(k) has a probable rate of return of 8.00% with 3.81% risk (as measured by
standard deviation). If you allocated 50% to the balanced funds, 30% to the growth
oriented funds, and 20% going to the REIT and international funds you would get a return
(based on historical averages and assuming good quality funds) of 12% with a proportionate
increase in risk.
Should you be willing to accept that extra risk for that extra
return. I would say yes considering that this is very, very long-term money. Currently you
are investing like you will need the money for a spring vacation. The higher return you
will get by being more growth oriented could very well move up your retirement date by
several years. Now will that be worth accepting a little more risk?
Are blue chip stocks a better idea than
funds?
Q: I am a 76-year-old widow. Would I be better
advised to invest in one share of a blue chip stock, as an example or to invest in, say,
Waterhouse Dow 30 fund. I don't have very much money.
A: (Frank)
It's not possible to advise you without a lot more information about your situation. So,
I'm going to make the assumption that you have enough set aside to meet your known cash
needs and an adequate emergency fund, and further that you expect to invest these funds
for the long term -- not less than five years. If that's not true, then you might not want
to invest the funds at all.
In very general terms, because diversification is the primary
investor safeguard, you are always better off to invest in a portfolio of stocks rather
than just one. So, I would suggest that a diversified fund like the Waterhouse Dow 30
fund, an S&P 500 fund, or a total market index fund is a far lower risk position than
a single stock.
Is there a simple way to calculate my
mutual funds' returns?
from Ray
Q: Is there a very simple method to help me compute my return
on my mutual fund? I would like to compare my number vs what the mutual fund company tells
me via their quarterly newsletter. I realize a very simple method will only be a ball park
estimate.
For example, I could take the beginning of the year price per share
or total value of my fund and compare them against the end of the year numbers. However, I
contribute $100 each month to a fund and this complicates matters.
Thank you for whatever information you can provide.
PS. It's 82 degress and sunny in Honolulu today (Saturday). If it's
snowing where you are, please visit us soon and bring friends. Our local economy has been
in recession for 8 years and counting; and we can use the tourist $.
A: (Greg)
But what kind of base do you have on the ski slopes?
I understand what you are trying to accomplish and the best way I
know to calculate time weighted rates of return is through the use of portfolio management
software. The really sophisticated programs are used by financial planners and is very
costly but there are some good, inexpensive packages that can be purchased off the shelf
or over the internet. Try Master Investor from Owl Software or Quicken Deluxe. It would be
interesting to do an internet search as well. Once you have a way to manipulate the data
you simply put your purchases in and change the current market price to get your results.
Have fun.
What should I do with my 401b and Series EE
Bonds?
from Bill
Q: I am 58 years old and just retired from teaching last
summer. I draw about $2k a month teacher retirement for as long as either me or my wife
are alive. We have about $50k in mutual funds and about $150k in Jackson National Life
403b TSA. We also have about $8k($16k at maturity) in Series EE Bonds.
My question is what to do with the 403b and series EE bonds?
A: (Frank)
It's just not possible to give advice based on so little data about your objectives, and
financial situation. BEFORE you do anything, decide what you want to accomplish and then
look at the avenues open to you to find the one that best meets your needs.
If you are not happy with the fixed return of the Jackson National
Life Annuity, and otherwise believe that it doesn't meet your needs, then you do have some
options:
Most of the discount brokerages have 403(b) accounts that run very
much like their IRA accounts. You could open an account with them, and then have the new
custodian direct Jackson Life to transfer the cash value of the annuity to the new
account. This step avoids any tax problems as you have not received any of the funds.
Once the funds are at the brokerage house, you can invest them in
very much the same manner as you would invest an IRA, and withdraw the funds to meet your
needs as required.
On the other hand, if you like the Annuity, you can leave it alone
to compound until later, make periodic withdrawals to meet your needs, or set it up as a
guaranteed annuity income for you and your spouse.
You could use the EE bonds as your emergency fund. The interest is
reasonably fair, the credit rate of the issuer is OK, and you don't have to pay current
tax on the earnings. If you take the current value out, you will get to pay tax on the
earnings. I have no idea what your tax situation is, or how much that might cost in
current tax.
The total amount of money is not insignificant. You should think
this through thoroughly, and may want to get impartial professional advice, (both tax and
investment) before you proceed.
Comments? Criticism?
Suggestions?