ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, November 25, 1996 TAG: 9611260009
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
MAYBE you have an insurance settlement, sold the family home before moving to smaller quarters or received an inheritance worth something like $100,000. Or, more likely, that is the amount of your retirement savings when you leave your job.
Although it sounds like more money that many people have at once, the situation is actually fairly common. The problem with so much cash is how do you invest $100,000 to maximize its potential?
With that amount of money, you have many more choices than with smaller sums. And, as usual in financial planning, your best options depend on your age, your financial goals and your tolerance for risk.
"There is no pat answer" to investing that sum of money, said Ben Powell, manager of the Roanoke office of Dean Witter Reynolds Inc.
"Lots of people" come in to invest nest eggs that size, Powell said, including people who have much less in regular income. The "vast majority" of them hold the proceeds of a retirement account, he said. It may come from a rollover IRA, a 401(k) workplace retirement savings plan or a cash settlement from an employer's pension fund.
Some people, he said, are ultraconservative in their outlook and simply want to invest the money in bank certificates of deposit.
For retirees looking for some growth to protect against inflation, on the other hand, Powell may recommend a "blended" portfolio of fixed-income securities and individual stocks.
An alternative, he said, is to invest in a mutual fund with a balanced portfolio of stocks and bonds.
Some of his clients turn their money over to a professional pension fund manager, who runs it at his discretion. These people, he said, have absolutely no interest in handling their own investments. Their only concern is receiving an income check every month.
There are as many ideas for investing money as there are people holding $100,000, Powell said.
You might, for instance, divide the $100,000 among 20 to 30 individual stocks or six to 10 mutual funds. Some people might invest part of their money in three or four mutual funds and put the balance into U.S. Treasury bills and bonds.
Mike English, manager of the downtown Roanoke branch of First Union National Bank of Virginia, said many people who come to the bank with that much money have a one-time shot at such a large nest egg. The money often comes from an inheritance or insurance policy, he said, so the financial cushion can never be replaced.
In such a situation, he said, the choices are tough. But even if the money is irreplacable, English said, "everybody needs some growth." That suggests a mixture of stocks and bonds, perhaps in the form of a mutual fund.
If, on the other hand, the people are in their 50s and in a high-income tax bracket, English suggests buying a fixed or variable annuity.
An annuity provides for sheltered growth. The earnings are tax-deferred until the money is withdrawn. A person who is working or who has a high income is not taxed on the annuity earnings until retirement.
A variable annuity, English said, can provide the potential for growth if the buyer puts his annuity investments in stocks.
English also likes mutual funds for people with $100,000, but he said investors should aim for diversity to reduce their risk. He tells customers with that much money to buy four or five mutual funds so they indirectly own more than 100 stocks.
"I'm a big believer in mutual funds," English said, but he would split the money among several of them to reduce the risk through diversity.
John Parrott, a certified financial planner with Wheat First Butcher Singer, said most lump sums that size coming to his office are from retirement plans at work.
He interviews each client to determine his or her situation and ability to deal with risk. The clients must also determine whether they want growth or income or some of both.
Some clients choose to invest entirely in stocks, he said, but most take a balanced approach by investing in both stocks and bonds.
Parrott recommends U.S. Treasury bonds because of their safety. He said the investment should be "laddered," meaning you should buy issues with varying maturity dates. With this method, some of the bonds are always coming due and can be reinvested at current market rates or be available for emergencies.
In today's stock market, he said, people have to look for issues that have not been run up unduly. The price has to be compared with current company earnings and to earnings projections by analysts.
The trick, he said, is to avoid a stock that is at its peak. In today's market, Parrott said, this is "harder to do."
He believes most mutual funds carry a high price today. Parrott prefers investing in mutual funds on a routine basis over time, thus taking advantage of any drop in value to acquire more shares for the same amount of money. Thus it is, to him, preferable to buy a mutual fund only if you can keep investing routinely.
The secret to any investing, he said, is to "be patient and look to the long term." He said investors in this market should be cautious and "look hard to find what you need." If not careful, Parrott said, you will take a risk greater than your expected return.
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