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Checks & Balances
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April 24, 2000: 6:00 a.m. ET
College workers wonder if aggressive, tech-oriented tack is the right one
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Checks & Balances runs weekly on CNNfn.com. People with questions about financial planning are invited to write in explaining their financial picture and short- and long-term goals. See the bottom of this article for specifics. For those selected, financial planners will review the details and suggest ways to meet those goals.
Jim and Liz Hildebrand both work at Texas Tech University in Lubbock. Jim, 45, is a building manager and Liz, 44, is a secretary in the foreign-language department.
"My financial planner recommended a tech-heavy portfolio," Liz writes. The Hildebrands listened, and they doubled their money in a short space of time during the recent Nasdaq run-up. But now the tide has turned, and Liz is worried about the volatility of their aggressive investments, mainly in high technology. "What with recent declines and selloffs, I am concerned about how much I am losing."
 The Hildebrands made $62,000 in all last year, thanks to Jim's military pension and their two salaries. They're trying to set aside money for their future -- they figure they'll retire between 62 and 64 -- and for their kids: James, 17, Jenna, 14, and Libbi, 12.
With $1,000 to pay on their mortgage, two car payments at a total of $550 each month and $5,000 in credit-card debt, they manage to set aside $125 each month for their 403 (b) accounts through Texas Tech.
That money is in two Smith Barney Concert funds: high growth (for Jim) and growth (for Liz). They also have around $9,000 together set aside in Roth IRAs, in Van Kampen's aggressive-growth fund (for Jim) and enterprise fund (for Liz), though they're not contributing to them right now.
"We don't seem to be having any difficulty making our bills, and we always have money left over every month," Liz says. They eat out at least twice a month and set aside the rest for emergencies. Jim also has term life-insurance coverage of $165,000.
Buying the tech hype
Thanks to an inheritance, they had already set aside around $20,000 to invest toward retirement. But they feel they have left their planning late. At first they invested their money conservatively.
They were unhappy with the modest returns of about $3,000 over 30 months -- 6 percent a year -- that conservative tack yielded. When their financial planner suggested they move their money into something more aggressive, they took the advice.
Last December, they moved the money into the Van Kampen Technology fund (VTFBX). It took off -- instead of 6 percent a year, they made just over 150 percent in three months.
An uncle had also given the Hildebrands some stock in a couple of electric-and-gas utilities, Unicom (UCM: Research, Estimates) and Peco Energy (PE: Research, Estimates). Their broker suggested they move that from staid energy stocks into aggressive investments, too.
 So they sold the stock in March. After setting aside some money for a family trip to see their generous uncle in Boston this summer, they moved $10,000 into their portfolio. Half went into the same Van Kampen tech fund and half into the Van Kampen Aggressive Growth fund (VAGBX).
"No sooner did we do that than the bottom fell out," Liz recalls. From a heady total of more than $60,000 in investments, their holdings fell to just over $32,000 in early April.
"That's when I panicked," she says. "I almost cried -- I can see why people go ballistic and shoot their broker. It doesn't make it right, but you're seeing your investments go down the drain."
Hildebrand isn't about to take it out on her own broker. In fact, she likes following the stock market so much, she has considered getting a broker's license and going to work for her planner.
 But she did call to find out what was going on. Her broker told her everything was OK and to ride out the correction. Liz finds that hard to do, even though she has subsequently recouped about a third of the losses.
She tracks the market every day, though she has heard she shouldn't pay attention to its gyrations. "I know people need to stop doing this because people will drive themselves insane," she says. But when a sum equal to her entire annual salary vanishes out of their retirement money, she finds it hard to ignore.
"Am I the only one who is panicking?" she asks. She wishes her broker would keep her better informed, even if it was only to say she is looking out for the Hildebrands and still feels confident in their strategy. "If I was in my 20s, I might not have panicked as much," she says.
But this is her family's future. The Hildebrands also have a little over $15,000 invested for their kids in the same aggressive growth funds they're counting on. They have enough to cover James' college, particularly since he wants to study computer science, which he can do at Texas Tech, where they get virtually half price on the in-state tuition because they work there. They want to provide for their other children, too.
And there's their own planning. "All in all I say we are OK, but I worry about the future." So she frets.
Jim "thinks I worry too much and that this money we lost we never had in the first place," Liz says. "But I have been worrying about money for my entire life and it is hard to stop."
What the planners say:
"Liz and Jim are trying to make up for lost time," says Jon Duncan, a certified financial planner with J. Duncan & Associates in Tacoma, Wash. "They realize they are behind the curve."
The good news is the Hildebrands recognize they have left planning late and are doing something about it, he continues. The bad news is, they are too blinkered in their approach to meeting their long-term goals, according to Duncan. They're focusing only on investing and looking for higher returns through aggressive strategies.
"This couple, like many others in these times of historically high stock market returns, has become mesmerized by the 'easy money' made in the stock market over the past several years," he says. "Jim and Liz may have the mistaken impression that to achieve your objective, all you have to do is dial in a higher return, without regard for the increase in risk."
Janet Tyler Johnson, a certified financial planner with SVA Planners in Madison, Wis., thinks the Hildebrands need to focus on a strategy that fits with their risk tolerance, which it seems Liz has exceeded. "Perhaps you are taking far more risk than may be comfortable," she says.
There is no free lunch, Duncan agrees. He, too, says the Hildebrands clearly have more risk than they are suited for at the moment. If Liz is scared about volatility and losses from tech investments, and has always worried about money, "my advice is that she listen less to her planner and more to herself, and adopt a less aggressive investment policy."
Their first step should be to "invest" $50 or $75 in a home financial-planning software program such as Quicken or Microsoft Money, Duncan said. Then they can control their investment destiny a little better. They should look to set aside more money each month for savings, he said.
Jim should maximize his 403 (b) contributions, and they should set goals of fully contributing to their Roth IRAs with $2,000 each every year. "Doing this first will take some of the pressure off investment return and allow them to adopt an investment policy more suited to their temperaments."
Next, Duncan suggests that Liz and Jim adopt a more balanced investment strategy. They should set aside 60 percent of their total investments for a broad, diversified portfolio of equities. The other 40 percent should go to a total-return bond fund.
Johnson seconds the notion that they need to broaden their investment horizons. "The way to help minimize risk is through diversification over several different asset classes," she said.
The Van Kampen funds are all midcap or large-cap growth funds, she pointed out, and several have the same manager. All hold many of the same stocks, emphasizing tech. "This is far too much concentration," she says.
Duncan suggests they put half the money in U.S. large cap stocks, a quarter in small-cap stocks and a quarter in non-U.S. stocks. They might look to split the large-cap investments between a broad index tracker such as Spiders (SPY: Research, Estimates) -- which track the performance of the S&P 500 but trade like a stock on the American Stock Exchange -- and an actively managed, no-load growth fund, Duncan said.
It's tough to find a small-cap fund that's actively managed and has low costs, Duncan says. Instead, he believes the Hildebrands should pick an index fund that just maps the Russell 2000 closely. For the international exposure, he recommends a no-load fund that maps Morgan Stanley Capital Internationals' EAFE index -- investing in Europe, Australasia and the Far East -- without placing big sector or country bets.
Johnson, too, likes no-load funds and thinks the Hildebrands should split their investments between mid- and large-cap funds, small-cap funds, international investments and bond funds.
It's also important that the Hildebrands find an investment adviser they can sit down with, who they trust is putting their interests first. Then they should work with him or her to establish their real risk tolerance and appropriate strategy. "Work with someone who can give you good, objective advice," she recommends, "and do not put all your eggs in one basket."
"Set a policy and stick with it," Duncan advises.
The Hildebrands still have more than 20 years to invest, plenty of time. "Why are they worried so much about short-term volatility?" he wonders. "Do not be distracted by short-term gyrations in the stock market."
As a secondary issue, "Jim should plan on living because if he dies, Liz and the kids will be in a world of hurt," Duncan says. Jim's $165,000 life insurance "will not last very long." He should look into getting group life insurance at work and the opportunity of stepping up the coverage, Duncan said.
Got questions about financial planning? Need some advice? CNNfn.com has organized a panel of outside experts to answer your questions. If you want to be considered for the "Checks & Balances" column, where professional planners suggest ways you can manage your money, send us an e-mail at checksandbalances@cnnfn.com. Include information about your age, occupation, income, assets and monthly expenses -- imagine you're providing a full income statement and balance sheet. Also, share with us any short-term and long-term financial goals you may have. And don't forget to leave your phone number.
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