NEW YORK (MONEY Magazine) -
Scott Swanay used to calculate risk for a living. Now he's taking a sizable one himself.
After an unexpected layoff last year, the 40-year-old actuary turned his back on the industry he'd worked in for 17 years -- and the six-figure salary he'd commanded -- to start his own business.
"I felt like I had a lot more to gain than lose," he says. The longtime sports fan is now employing his math savvy to develop a rating system for fantasy sports league players.
Swanay hopes to launch his Web-based subscription service in time for the 2006 baseball season.
With no debt and nearly $400,000 stashed away, this bachelor can afford to go out on his own. But for how long?
Until his business takes off (if it does at all; most Web start-ups fail to turn a profit), he's drawing down his savings to support himself and seed his business. Trouble is, most of the money he's using to pay the bills is tied up in volatile stocks.
Where he is now
Swanay played it practical right up until April 2004, when cutbacks at his company left him out of work. An applied-math major at Harvard, he'd taken a job as an actuary after graduation and saved 20 percent of his salary every year.
Even now, he's moved from Manhattan's tony Upper East Side to a less expensive Harlem apartment and cut out exotic vacations to get his monthly expenses down to $4,000, and he's willing to tighten his belt even more.
Swanay projects that his site can bring in $500,000 a year in five years, but he doesn't expect to make a profit until a year after the launch.
"I don't have that dotcom mentality that I can start something up, make a million and sell it next week," he says.
But given the riskiness of his venture, Swanay's not playing it safe enough. The $162,000 that he's amassed outside of his retirement plans could support him for years, but not if the stock market tanks. While a quarter of the money sits in the bank, the remaining $122,000 is in a brokerage account that he actively trades.
Not only that, he favors shares of small companies with market caps below $5 billion, which tend to see big price swings. His retirement accounts are just as aggressive -- 45 percent of his $196,000 in 401(k) money is in international stock funds; shares of a former employer make up another 13 percent.
What he should do
To balance the sizable financial risk that Swanay is taking in his professional life, he needs to adopt a more conservative investment approach, says Marc Vorchheimer, a certified financial planner with Integrated Financial Consulting in Nanuet, N.Y.
"It's going to look like one of the more boring portfolios, but I don't see how he's not going to use at least $100,000 over the next two years just to live," he says.
The first thing Swanay should do is sell the stocks in his brokerage account and deposit the funds in a money-market account. This way he's guaranteed a pool to live off of for at least two years, with some left over to fund a job search if the Web site fails. Next up:
Create one retirement plan With a business to build, Swanay needs a hands-off retirement plan. Consolidating his two 401(k)s from old employers into a single IRA will make his money easier to manage.
Once he's done that, he can convert the IRA into a Roth IRA, which offers tax-free withdrawals in addition to tax-free earnings.
Even though he'll owe taxes on the amount he converts, now is the optimal time to do it. "He can turn taxable income into tax-free income while his tax rate is at a low," says Vorchheimer, who suggests making the move gradually over the next few years and paying the taxes out of savings, not the IRA balance.
Tone down the risk At age 40, Swanay should be in his peak saving years. Instead, he's not even adding to his accounts.
So he needs an asset allocation that balances growth and safety, not an all-stock one that tries to shoot the moon. "When you have times of uncertainty, it's a time to take less risk, not more," says certified financial planner Karen Altfest of L.J. Altfest & Co. in New York City. She recommends a moderately aggressive mix of 70 percent stocks and 30 percent bonds.
Buy funds, not stocks Since Swanay's new venture needs his full attention, he should let professionals manage his investments.
For the large-cap portion of his portfolio, Altfest suggests value and growth funds, including Oakmark Select (OAKLX) and T. Rowe Price Blue Chip Growth (TRBCX).
In addition to MONEY 50 favorite Dodge & Cox International Stock (DODFX), Swanay's foreign holdings should include single-country funds such as Matthews Japan (MJFOX).
Because he doesn't own real estate, Cohen & Steers Realty (CSRSX) will help hedge against inflation.
For small- and mid-cap stocks, Altfest likes Third Avenue Small-Cap Value (TASCX) and Muhlenkamp (MUHLX).
Pimco All-Asset (PASDX) would give him short-, mediumand long-term bonds.
Or he could divide his fixed-income funds among Vanguard Short-Term Investment Grade (VFSTX), Dodge & Cox Income (DODIX) and Loomis Sayles Bond (LSBRX).
Beyond annual allocation adjustments, Altfest says, Swanay can (and should) leave this money alone. "He's going to be one busy guy," she notes. "This is a retirement portfolio that should be good for the long term."