For the ignorant among us whose only true assets our 401k or IRA plans, where is the truth and where the hyperbole here? Is this the investment equivalent of Y2K, or something else?
--- C. A., Freindswood, TX A. Great question! In the late 70's there was good reason to be interested in gold. When the sale of gold to U.S. citizens was first allowed it was priced at $75 an ounce. There was a clear case for a much higher value for the metal. And for the companies that mined it.
After prices rose over $300 an ounce (on the way to a bubble peak of $800) the case was not as strong. In addition, the technology of gold mining changed so more production came on stream.
From that period to the present, gold bugs insisted the world economy was heading for trouble. If you had listened, you would have missed the greatest bull market in history. You would also have missed the commercialization of technological changes that have transformed how we work and do business. Great value was created. Old companies fell in value. New companies rose.
Today, we have greater monetary reasons to consider gold than we have had for 20 years. Gold can still be used as an "insurance" investment--- but only that. My personal belief is that we collectively create more value than we destroy, whatever our faults and whatever the miserable behaviors of some.
Q. I was recently asked to review my aunt's portfolio. She is 80, single, and has metastasized breast cancer. She has been with Smith barney for about 6 years and has about $300,000 in financial assets, owns her home without a mortgage, and gets some daily help paid for out of a long term care insurance policy she purchased years ago.
Her portfolio is 86 percent in stocks. About 56 percent of her total portfolio is in Coca-Cola, which she bought in 1960 for less than $900. Naturally, she is averse to selling the Coke and incurring taxes. She needs about $20,000 annually over her Social Security benefits to cover her expenses.
Her broker recommended selling everything in stocks and buying either all bonds or a mix of preferred stocks and bonds. I think she should get about $20,000 in cash, put all the rest but the Coke into a short term bonds fund, sell enough Coke to offset the losses in other equities, and put a stop-loss order under the remaining Coke. So if it declines 10 percent she can sell it. And if it goes up 10 percent she should sell that amount so she can start harvesting it and converting those gains into cash or bonds. What do you think?
----R.D., Morristown, NJ
A. Using the percentages you provided, your aunt has $168,000 in Coca Cola shares, $90,000 in other equities, and $42,000 in bonds. I suggest that you take a very simple path. Realize the losses in the other equities and offset them by selling the necessary amount of shares in Coca-Cola. When this is done she will have at least $132,000 in cash. This will cover more than six years of her expenses.
Rather than exposing this to significant interest rate risk, I suggest that most of it be invested in a relatively short ladder of fixed income securities--- three to five years at $20,000 per year. Invest the remainder in longer-term securities that provide a higher yield.
Leave the remaining Coca Cola unsold because all the unrealized capital gains will disappear at death when the cost basis will become the value at her death. There is little point in realizing as much as $33,000 in capital gains taxes to reduce risk when the most important task is to provide cash for your aunts' financial security and to obey her wishes.
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