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Portfolios: Expert Advice For Real-Life Finances


This is the time of year when investment advice flies at you from every dirsection. Apparel maker Under Armour "is a buy to the ninth power!" shrieks Jim Cramer, the over-adrenalized star of CNBC's Mad Money. Bank of America's (BAC) strategists are talking up health care and consumer staples as two key places to invest in 2007. Meanwhile, Jim Rogers, author of The Investment Biker, says the smart money is on commodities, which, unlike stocks, "cannot go to zero."

Whew. These are great ideas...for someone, but maybe not for you. So how can you funnel the barrage of hot stock tips and smart investment strategies into practical advice? To find out, BusinessWeek asked a team of financial advisers to review the portfolios of some very different kinds of investors and make recommendations.

The advisers were given key details about the investors, including the value and allocation of their retirement and taxable accounts, cash holdings, and annual income, as well as special financial concerns and goals for the year ahead. While a face-to-face encounter might yield other advice, these action plans show how investment advisers address real-world questions.

JOE DE COLA The former Today Show producer, 69, gives new meaning to the word "peripatetic." After retiring from General Electric (GE) in 2003, he ran straight to the airport. In the past 12 months, he has spent weeks at a time in Amsterdam, Palm Springs, Mexico, and Croatia. E. coli outbreaks? The breakup of Britney and K-Fed? Those are of no concern to De Cola; he has been busy sipping caipirinhas in Brazil for the past month. "I want to see as many places and do as many things as possible while I'm still healthy," says De Cola, who is divorced. No wonder the electronic signature on his e-mail is the W.B. Yeats poem The Song of Wandering Aengus.

How does he pay for this? So far, he has relied on his generous General Electric (GE) pension ($3,600 per month) as well as Social Security ($1,300 per month). He hasn't had to dip into investments yet, but wants to make sure his stash is safe for the day when he may need it--and still have some left over for his four grown children and their kids.

De Cola is sitting on plenty of cash, considering he doesn't need it for living expenses. He has $550,000 in a taxable brokerage account, two-thirds of which is AAA-rated floating-rate notes that reset every seven days, and now yield about 5.13%. Sometime in the next year, De Cola hopes to sell his vacation home in San Miguel de Allende, Mexico, for $500,000--which should bring in even more cash.

That's too much cash in one kind of investment, says Lisa Cremonini, a certified financial planner at Jane Siegel & Associates in Natick, Mass. Her advice? "Create buckets of cash to diversify your holdings." Cremonini recommends that De Cola put the money into insured certificates of deposit from different banks, choosing maturities of 3 to 18 months. That will ensure a CD matures every 90 days or so, instead of every seven days for the notes he uses now. Using the longer-term CDs, she estimates, De Cola could earn about one-quarter percentage point more. A good place to find high-yield CDs is Bankrate.com (RATE). While he's spreading the cash around, Cremonini also suggests a euro bank account, which will be useful if his wanderlust takes him back to the Continent. "Given how low the dollar is right now, it's a good idea to put some money abroad," she says.

De Cola's retirement account doesn't need much work. Cremonini likes the investment mix (48% equities, 40% fixed income, and 12% cash), although moving 5% out of cash and into international real estate and reallocating some fixed income to foreign bonds would make it even better diversified. Cremonini suggests including funds like Cohen & Steers International Realty Fund (IRFIX) and the Templeton Global Bond Fund (TPINX).

DAVID PATTERSON One look at David Patterson's portfolio, and you can tell the DesMoines father of three is a saver and a planner. A marketing communications manager at Deere & Co. (DE), Patterson has accounts at Smith Barney (C) and Ameriprise Financial (AMP) and a sizable retirement account at his employer. He's now paying for most of his son's college, and he contributes to the State of Iowa 529 College savings plan to fund his youngest daughter's college education. (The older daughter is finished with college.) Patterson, 50, has paid off most of the mortgage on his home and makes the maximum contributions allowed by law to his retirement plan.

Even so, Patterson faces a few financial dilemmas in 2007: He has built up a stash of John Deere stock options, potentially a five-figure sum, and he's not sure if it makes sense to exercise them, especially if his bonus is significant. "I don't want to create a taxable event," he says. In addition, Patterson is trying to figure out how much money he and his wife, Dawn, a part-time pediatrics nurse, should add to the $27,000 college savings account they have amassed for their youngest daughter, Nickie. She will be college-bound in two years and might be eligible for academic scholarships, so Patterson doesn't want to overfund the account.

Because John Deere stock is near an all-time high, adviser John Merrill of Tanglewood Capital Management in Houston, says Patterson should sell his options as soon as possible and diversify the proceeds. "Whenever you exercise options, you're going to pay tax," Merrill says. "I'd rather pay more tax if it means I exercised at a higher price." If Patterson is tax-averse, he could put the money in a municipal bond fund, which at least will protect the earnings from future taxes.

As for the college savings, Merrill thinks Patterson should contribute $5,000 in 2007 to get a state tax deduction, but he should hold off on any additional contributions. "He can earmark those assets toward his retirement," says Merrill, who is bullish on large-cap stocks in general and the Marsico 21st Century (MXXIX) and Jensen Portfolio (JENSX) funds in particular. "If you are going to have a little spice in your portfolio, this is the time," Merrill says.

Patterson also needs to ratchet up his international investments, both in his retirement and taxable accounts. Merrill, who is high on international equities, says Patterson should have 25% to 33% abroad, rather than the 12% he holds. Merrill suggests funds such as AllianceBernstein (AB) International Value, Dodge & Cox International, (DODEX) and Janus Overseas (JAOSX).

RICK SPICKELMIER Don't be fooled by the Birkenstocks and the Berkeley (Calif.) Zip Code. Rick Spickelmier might look like a hippie, but he has the nest egg of a yuppie.

Spickelmier, 47, is the chief technology officer at a software startup, and he has socked away about $230,000 in retirement accounts, as well $200,000 in taxable accounts and cash. His home is valued at $600,000. Let's just say that with an annual income of more than $150,000 and big annual bonus potential, Spickelmier can afford to wear tailor-made tie-dyes.

But Spickelmier, who is single, has a lofty goal. He wants to retire at 55, and to do that, adviser Susie Johnston of Cherry Hills Investment Advisors in Littleton, Colo., thinks he needs to make some changes. His retirement account is currently split between two T. Rowe Price (TROW) Retirement Funds--2015 and 2020. (In these target-maturity funds, the asset mix changes as you get closer to retirement.) "These low-maintenance funds are appropriate for people who don't want to pay attention to their investments, but there are better options," Johnston says.

His other problem is now familiar--he doesn't have enough foreign exposure. Johnston recommends fixing that with a 5% allocation to Dodge & Cox International Fund (DODFX). While that's the only purely overseas portfolio, the other funds she recommends all have some portion of their assets abroad. They include Third Avenue Value (TAVFX) and Fairholme (FAIRX) funds, which focus on cheap or out-of-favor stocks, and Loomis Sayles Bond Fund.

In Spickelmier's taxable account, Johnston thinks exchange-traded funds (ETFs) are better vehicles than mutual funds because of their low expenses. She also recommends ETFs (as well as municipal bond funds) because they're more tax-efficient. Because Spickelmier has no international holdings in his taxable account, she suggests a 20% stake in a diversified international ETF.

Right now, Spickelmier is putting an extra $400 toward his $2,400 monthly mortgage payment, with the goal of getting a significant portion of the house paid off by the time he retires. But Johnston says he would be better off investing the money, because the interest on his mortgage is just 5.625%.

LINSAY SHIRLEY Six months ago, Linsay Shirley left her lucrative position as a software consultant for a new position: mother to Jaidyn. Ryan, Linsay's husband, a certified public account, is now the sole breadwinner. The loss of one income means that the Shirleys, both 30, are making some sacrifices--including dinners out (as if there's time with a new baby). The Shirleys, who live in Highlands Ranch, Colo., a Denver suburb, have about $40,000 in retirement accounts, as well as a cash cushion of $32,000.

Looking ahead to the next year, the young couple wonder whether they should start saving for Jaidyn's college education. Ryan, who expects to earn $60,000 to $90,000 next year, also wants to begin an MBA program at night. Ryan hopes his employer will pony up for some of the tuition, but he still expects to pay part of the bill, which will put an even bigger drag on their finances.

David Brady, president of Brady Investment Counsel in Chicago, says the Shirleys shouldn't stress out about college savings. "I'm a big fan of keeping things as flexible as possible," Brady says. He prefers they focus on paying down their mortgage, and bulking up on their retirements accounts. Although Ryan doesn't have as much flexibility in his company's retirement plan, Brady says Linsay should "get as aggressive as possible" with hers. She should tilt her rollover IRA to a mix of ETFs--iShares S&P 500 Growth Index ETF (50%), iShares S&P 500 Index (30%), Wisdom Tree SmallCap Dividend (10%), as well as a mutual fund, Vanguard Developed Markets Index Fund (10%).

The Shirleys also have about $12,000 in taxable accounts, with positions in two stocks, Comcast (CMCSA) and Level 3 Communications (LULT). Brady recommends adding 100 shares of Chipotle Mexican Grill Inc. (CMG). "This is great growth stock for a young family starting out," he says.

Linsay might begin part-time consulting work (which means an expected $2,000 per month), and any additional cash should be directed to technology and health-care investments, Brady says. His two choices are both ETFs as well: Vanguard Health Care (UGHCX) and Vanguard Information Technology (UGT) "These two sectors have among the worst performances in 2006 but are expec.ted to be among the best in 2007," he notes. We'll know this time next year.

By Lauren Young


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