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PERFECT YOUR PORTFOLIO
When a Lot of Cash Makes Sense
by Jeffrey R. Kosnett

Tracey and Kirk Calloway are hardly reckless when it comes to their finances. They drive old cars, max out their retirement contributions, save another $4,000 a month and rent rather than stretch to buy a house in pricey Southern California, where Kirk, an Army major, is stationed. Tracey has a solid career, too, working in human resources for Target, the retailer. Together, they make $200,000 a year, counting profits from a business and rental properties in their home state of Texas.

What worries Tracey and Kirk is the nearly $100,000 they have in the bank. They wonder if they're letting higher returns slip away while their savings earn next to nothing. "Suddenly, we've got all this money and we don't know what to do with it," Tracey says.

Big risk

But not all of the Calloways' investments are so sedate. Earlier this year, Tracey, 35, and Kirk, 36, borrowed $500,000 to buy a car wash in Texas from two of Kirk's brothers. Cash from the wash covers the loan payments and nets Tracey and Kirk $3,000 a month.

Still, this is a high-risk venture. Tracey and Kirk are absentee owners of a business in which neither has experience (although Kirk's brothers continue to manage it). Plus, the Army could send Kirk overseas. Unless he's transferred to a war zone, Tracey will quit her job and go along.

Normally, keeping $100,000 in the bank would be madness. But a variety of factors -- the big loan, the chance that Tracey may give up her paycheck and uncertainty about Kirk's post-military plans -- militate against making aggressive moves with the cash, says Dave Moran, a financial planner with Evensky, Brown & Katz, in Coral Gables, Fla. In fact, because the Calloways are entrepreneurs, they should hold a high level of cash in reserve to deal with uneven income and surprise expenses, says Everette Orr, a planner in McLean, Va. That could be as much as one to two years' worth of living expenses, says Orr. Living frugally, the couple can get by on $4,000 a month -- and sometimes less, says Tracey -- so $100,000 in the bank seems reasonable.

But that doesn't mean that Tracey and Kirk are limited to a savings account that pays 0.7%. They can build a ladder of short-term CDs maturing in three, six, nine and 12 months, says Orr. That would boost their yield to more than 2%.

Low on stocks

The Calloways have about $135,000 in various retirement kitties, spread mostly among American and Vanguard funds (both stock and bond) and a stable-value account. Including the money in the bank, 40% to 45% of their financial assets are in stocks. That's about half of what most planners would advise for people their age. But if you count the car wash as equivalent to an investment in a single company, they really have something like 80% of their assets in stocks.

So that dictates a cautious approach with other investments. Tracey and Kirk could take the $4,000 they save every month and put it in T. Rowe Price Personal Strategy Income or Vanguard LifeStrategy Conservative Growth. Both funds hold about 55% in bonds and cash and 45% in stocks.