Thursday, April 23, 1998

Q. Id like your advice for a friend of mine. He is 82 and receives a Social Security check of $1,300 a month. He works about 10 hours a week in a part-time job. He is in excellent health. He has about $14,000 in a low interest rate checking account. This is all he has.

Where should he put this $14,000 for a higher rate of return? Or how could he invest this money?

—E.S., Dallas, TX

A. With banks paying under one percent on regular checking account balances, it is very expensive to "keep all your eggs in one basket" which is what your friend is doing.

Like many, many people, he is asleep at the wheel and only his banker is benefiting. With low yields on virtually all investments, all of us need to keep our money active and well exercised.

He needs to strip that account down to about $2,600 (two months Social Security income) and use it only for checking transactions. Then he can invest the remainder elsewhere.

The safest course would be one of the better earning government securities money market mutual funds. The highest earning funds are regularly listed in newspapers and in the major personal finance magazines like Money and Kiplingers.

This would earn him about 5 percent. He could get a somewhat higher return by investing in an ultra short term corporate bond fund like Strong Advantage— about 6 percent. This fund, however, has small fluctuations in value. These ups and downs, however small, might make him nervous. He can learn more by calling Strong Advantage at 800-368-1030.

He could get a still higher return by investing in a mortgage securities fund such as Vanguard GNMA fund— about 7 percent. ( telephone 800-662-7447) Since he has no apparent experience with investments and probably wont take ups and downs in value very well, hes probably better off with the government money market mutual fund.

Readers with a little more in both assets and experience would do well to consider a mix of all three.

Q. I have two questions regarding the capital gains on your Couch Potato Portfolio. I am aware that long or short term capital gains are reported on the Index 500 Fund if they are incurred in a particular tax year. In addition to that, if the rebalancing requires selling shares in the index fund, doesnt that also create a taxable situation for the difference in the Net Asset Value at purchase to the time of sale? How does that affect the comparisons over one to five years time?

—R.D., San Antonio, TX

A. A specific answer could be misleading because so much would depend on the particular time period. In the last three or five years, there would be a need to do a good deal of rebalancing because stock prices have advanced so much. In other time periods, the need would be less extreme.

Many financial advisors who recommend asset allocations recommend it in "bands" so that allocations can drift a bit without forcing a taxable rebalance. Indeed, a number of academic articles have tested the cost efficiency of rebalancing and concluded that relatively wide "bands" make sense.

What does that mean in English? Simply this, your portfolio may be better off "drifting" between 40 to 60 percent equities than being held to a strict 50/50 regimen.

So far, Ive ignored any tax consequences of rebalancing the Couch Potato back to 50/50 or 75/25 stocks/bonds because other portfolios would have to do much the same. In addition, many people will have these portfolios in a tax deferred plan such as an IRA rollover from a 401k plan so there will be no tax consequences for any rebalance. Finally, even a taxable portfolio could be kept in balance if the investor was making new additions to principal each year.

Q. For reasons not entirely clear to me, some letters get your attention and are answered as well. These letters are from people whose incomes and accumulated savings far exceed what an average person earns or owns. Recently, for instance, you answered a letter from a retired couple who were worried about how to distribute assets to their children but were worried about their own retirement. Yet they had over $1,350,000 in financial assets. Your reply was a good one you told them that on the basis of their age, life expectancy and assets, they have about $700,000 in excess assets and they should not worry

My question to you is WHY waste the time and space in the newspaper to answer these people? Couldnt you focus your efforts on those of us who really need help and leave these millionaires to fend for themselves?

—R.R., Mt. Prospect, IL

A. About ten years ago another reader wrote with much the same complaint— only that reader thought I should let the people with $100,000 fend for themselves. Similarly, I have received letters from readers in California and New York who dont believe the low rents and low housing prices readers from places like North Dakota and West Texas mention in their letters.

What Ive learned in 20 years of writing this column is that this is a very big country, that circumstances vary widely, and that people at all levels worry but about different things. Lots of readers will feel that people with $1.3 million have "got it made" and should never worry. In fact, they do worry. Worry is part of the human condition. It grows around money like fungus around bathroom tile.