Sometimes simple investment questions are hardest to answer
By HELEN HUNTLEY
Published October 12, 2003
When it comes to investing, the simplest questions are sometimes the most difficult to answer.
Take the letter I got recently from an 81-year-old widow. She has about $300,000 in assets, a third of it in stocks. "At my age, would it be wise to sell my stocks?" she asked.
Some people might consider a "sell" recommendation a slam dunk. But while that's a heavy stock position for the average 81-year-old, it could be just right for her. That's because age is only one of the things to consider when deciding how your money should be invested.
The fact is, not all 81-year-olds are the same. Before she or you change your investments around, there are some important questions that need to be answered:
What is your investment goal? If you want to generate more income, stocks aren't going to do it. But if you want to build an estate for your grandchildren, stocks are just the ticket.
What is your time horizon? If you expect to need the money within a few years, a stock portfolio is not the best option. But suppose you want a retirement nest egg - or one for your grandchildren - that won't be tapped for another 20 years? Stocks are the obvious choice.
What is your risk tolerance? Some people can't abide the thought of their stocks fluctuating in value. But if this reader has held her stocks for decades, she is probably used to the idea.
What is your tax situation? Appreciated stocks carry a built-in tax liability. That means it is important to know your tax rate and the impact of a big capital gain on taxation of Social Security benefits. Sometimes it is best to spread a sale over two or more years. Sometimes it is best for older investors to hold onto stocks and let their beneficiaries inherit them with the basis for figuring capital gains taxes stepped up to the stocks' value at the owner's death.
Once you have answered those questions, you should be able to make an informed decision about how much money to have in stocks. Only then are you ready to move on to the question of what kind of stocks to hold. If your portfolio is concentrated in just a few stocks, it needs adjusting even if you want to keep your allocation to stocks the same. If you aren't up to closely following individual stocks - relatively few investors really are - most or all of your stock portfolio should be in mutual funds.
Simple question? Not at all.
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Q. I have a certificate for 200 shares of Kmart common stock that I attempted to deposit in my brokerage account. My broker returned the certificate to me along with a letter telling me the shares were nontransferrable. The transfer company told me the shares were worthless, but would not send me a letter stating this. Do I need more proof that the stock is worthless to take a loss on my 2003 tax return?
Go ahead and take the loss. The certificate and the broker's letter should be proof enough. Kmart investors who want something to print out and save can go to the Kmart Web site (www.kmartcorp.com) click on "financial statements," then "investor relations," then "shareholder FAQ's."
Q. I purchased a new car four years ago that has only 10,250 miles on it. However, I want to get a larger car because I am 6 feet 2 and have a leg disability that makes getting in and out of this car uncomfortable. I am an elderly widower and live comfortably. With my trade-in, I have enough money in my checking account to get a larger used car in good condition. Should I make this change?
You are the only one who can make that call. Once you have the financial basics covered, spending decisions are all about balancing priorities. Most of us can have some of the things we want, but not all of them. You obviously do not drive very much, but it sounds as though getting a more comfortable car is important to you. The question is whether the car is more important than whatever else you might be inclined to spend the money on. It's your money and you get to choose what you want most.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
