Q. I am in a quandary regarding my 401-K portfolio allocation. I am 56 years old and understand that in my age category I should have a 60%-40% mix between stocks and bonds in my portfolio.
For the past couple of years, I have been mostly invested in equities but recently shifted to the recommended 60-40 split --- except that right now the 40% is currently in a Money Market fund. This is because investing in bond funds has seemed to be more speculative than equities in these times.
My company 401-K plan provides me with 5 choices and a none of them includes owning bonds directly. Our bond fund return cannot keep pace with the Money Market return. The best choice has been the Equity Index Fund which is an S&P 500 Index Fund.
What do you recommend for people in my situation?
---B.D., Houston, TX
A. Your judgment has been excellent. Bond fund figures for the last three years have been dismal and cash has been a better choice.
You might consider some research by Peter Bernstein. Disappointed with bonds, he found that a 75/25 stocks/cash allocation produced the same volatility as the traditional 60/40 stocks/bonds allocation. In other words, if you hold cash instead of bonds, you can afford to hold more stocks because the cash is more stable than bonds.
Another option would be to look among your fixed income choices and try to find a fund that was what some analysts call "near cash"--- a very short term fund with an average maturity of 1-3 years.
Q. I have been self-employed (sole proprietorship) for over three years. My accountant has suggested that I start a retirement account, and I'm sure there's a way I can to this with pre-tax dollars.
Do you know of any way I can self-administer a SEP account by stock purchases rather than signing up with a company? Am I restricted to mutual funds only? What do you suggest?
I probably cannot afford too large of an initial investment, maybe $500 to $1000.
-----M. W., Minneapolis
A. You can open a SEP-IRA with any of the major firms and own individual stocks rather than mutual funds. You could, for instance, open an account at Schwab, get their e-Schwab software, and reduce your transaction costs to purchase shares dramatically. Until last week, e-Schwab accounts had lower commission rates than similar accounts at Fidelity. Recent reductions at Fido may have brought the two giants to parity. Given the size of your initial investments, however, it would be wisest to start with mutual funds.
Q. I acquired a house by will, which I now rent, that is located in a small town in the mid-west. I'm getting $400.00 a month rent presently. My landlords insurance coverage runs $250 a year and taxes are $366 a year currently. An appraisal at market value(not a tax valuation) was done in mid 1994 for $67,000. Considering the inflation rate of homes in the area I have added 3% each year and come up with a current value of $71,080. What formula or calculation would you use to determine a reasonable rate of return or rent that should be charged? I know that the present rental rate is too low. I'm comparing returns on other forms of fixed income such as treasuries to add to our current retirement income. Most of our other investments are in growth funds which we plan to keep invested.
----A. G., Webster, TX
A. There is no benchmark here, only Local Market, Local Market, Local Market. It really can't be done in the abstract.
In addition, you have some special considerations. Because of your distance from the property, you need to put a large premium on having a reliable, long term tenant. One bozo renter can turn your life into a living hell. This means to worry less about having a market rent and being content with a reliable renter.
Historically, single family homes have not been major income producers because they are inherently inefficient to manage, repair, and maintain. As a result, they are usually good long term investments only in areas of significant growth and appreciation. Basically, your rental income is a ìholding actionî and the real return comes from price appreciation.
File Name: 961118MO
Dallas Morning News file date: 11/19/96---TUE
Universal Press Syndicate file date: 11/18/96---MON ©
Dallas Morning News, Universal Press Syndicate, 1996
