PERFECT YOUR PORTFOLIO Wipe Out Your Income Shortfall by Jeffrey R. Kosnett
Which is worse: carrying too much debt, or having more than half your investments in three stocks? Lori Parmentier has both problems. But she's eager to find solutions and, at the same time, address her anxieties about everyday finances.
Behind much of Lori's stress: credit-card bills and living expenses that exceed her take-home pay -- $2,200 a month -- by about $450 a month. For a while, Lori, 46, a county family therapist in Durango, Colo., bridged the gap by borrowing. Then she had a broker reconfigure her $190,000 portfolio, which she received in her divorce settlement in 2000, to yield $5,000 a year in dividends. That enabled Lori to put the credit cards away and nick her debt from $10,000 to $8,000.
Her portfolio's lack of balance, however, is alarming. It consists entirely of 14 stocks, including big stakes in Medtronic (25%), U.S. Bancorp (17%) and Coca-Cola (11%). Those are all defensible choices, but Lori invites trouble should any of them blow up.
Clear the debt
"She needs to do a few things, and they are all related," says Lauren Klein, of Klein Financial Advisors, in Irvine, Cal. Lori should start by paying off her credit-card debt and building a cash reserve. By selling less than half of her $50,000 stake in Medtronic, she can wipe out her debt and place six months' living expenses, or $15,000, in a money-market fund or an ultrashort bond fund.
Lori should also reduce her stock allocation to 65% of her portfolio. The rest should be in bond funds, real estate investment trusts (she already invests in two) and cash. After paying $7,000 in capital-gains taxes last year, following her portfolio revamp, Lori is understandably reluctant to sell more of her appreciated shares. But Karen Keatley, of K Squared Financial Planning, in Charlotte, N.C., says Lori should be more concerned about inadequate diversification than about taxes. Besides, Keatley notes, the top capital-gains tax rate of 15% is quite favorable and isn't "guaranteed to stay this low forever."
Lori could sell half of her holdings in U.S. Bancorp and Coke and divide the $25,000 or so in proceeds between an intermediate-term tax-exempt bond fund, such as Vanguard Intermediate-Term Tax-Exempt, and a high-yield (or junk) bond fund, such as our favorite, Northeast Investors Trust. The rest of her stocks, including blue chips such as 3M, ExxonMobil and McDonald's, are keepers.
Once Lori gets her debts and investment allocation in line, she can tackle her spending. "It bothers me that I have a good job but have to live off the income from my investments," she says. One thought: smaller living quarters. After her divorce, Lori bought a four-bedroom townhouse that today is worth $275,000 to $300,000. The mortgage is only $47,000, but taxes and homeowners-association dues are soaring. She could sell, move to a cheaper place and invest the freed-up cash. "That would be the cleanest way to get the equity out," Lori says. It would also help eradicate her cash squeeze -- and, one would hope, alleviate her fear of financial failure.
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