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Marc arrives for his early-morning appointment in casual summer garb and
flip-flops. He is on his way to his job as a marketing director of a
film distribution company in New York City. Marc jokes about his appearance:
"I am doing my adolescent rebellion thing now, because I didn't do it
as a teenager."
He is ahead of his age in other ways, however, according to his new
financial adviser: "Marc has an unusually clear vision of what he wants
to accomplish in the next five years financially. My job is to assist
him in identifying his goals and to help him to take the financial actions
necessary to accomplish them."
The first step is to take a full inventory of Marc's current financial
position--everything from student loans to 401(k)'s. This will enable
him to gauge his starting point. Like many professionals in their first
years after college, Marc's debts are higher than his savings. But his
career and his earnings are accelerating, and he'll soon break into
the black.
For many beginning investors, the best strategy to build wealth is
to set up an "asset builder"--an automatic payroll deduction that is
invested on a regular basis. If an employer offers a 401(k) or other
tax-deferred plan, that is the first place to allocate money, since
these plans have the additional benefit of investing your dollars pretax
and allowing them to grow, tax-deferred, until withdrawal--hopefully
after retirement.
An asset builder account is also a very effective investment strategy
because it employs the power of dollar cost averaging. By systematically
and regularly investing a set dollar amount, you will buy more shares
at the market's low points and fewer at its peaks. On average, the cost
of your investment will be less than an investment of one lump sum.
There is less risk in beginning to invest this way because your success
depends on time, rather than the timing of your investment.
Unfortunately, however, an asset builder account is not an option
for Marc right now. His current income, after 401(k) deductions and
taxes, matches his bare budget for living in the "big, expensive apple."
However, Marc feels he will be able to squirrel away a few nuts from
his paycheck during the weeks he is traveling at his company's expense.
With the help of his planner, Marc calculates that he could make an
investment of at least $500 every week he is out of town on business.
Since this money will not be automatically deducted from his paycheck,
it will require Marc's discipline to ensure that these payments are
made to him. He pledges, "When I have a goal, I can resolve to do anything."
Based on Marc's upcoming travel schedule and his commitment, he should
be able to progress quickly toward his goals.
Marc's first goal is to buy a town house. More specifically, he envisions
a brownstone that would include an apartment for himself as well as
an apartment or two to rent out for income. Marc's current aspirations
are focused on East Harlem, 20 minutes from midtown Manhattan, where
there are hundreds of vacant, turn-of-the-century town houses. The challenge
of a major renovation project in a gentrifying community excites Marc.
Hatch, who, in addition to being a financial planner, purchases and
renovates real estate in New York, points Marc toward several city-sponsored
programs that finance and sell vacant brownstones. Assuming a minimal
down payment, Marc could be a homeowner within two years of starting
his savings program. The income he earns from the apartments would cover
his mortgage expense and enable him to live for almost nothing.
Hatch advises Marc to take very good care of his credit rating so he
will qualify for mortgage financing: "Ironically, to be eligible for
credit, you must already have some credit, use it, and pay it off. You
have to demonstrate responsibility."
Before recommending specific investments, a financial planner must
have a sense of an investor's needs and concerns. Marc's answers to
questions about his attitudes toward investing reveal that he is an
"aggressive" investor with a "high tolerance for risk." Given his age
and the number of years before he retires, his adviser recommends the
highest allocation possible in a mix of equity funds in his company
401(k) plan. "If he has the opportunity to invest in some technology
and other high-growth funds, this is the part of his portfolio where
he should go for it." ¹
On the other hand, the money that Marc earmarks for his real estate
down payment should be invested more moderately, since his time frame
is shorter. For most people with less than $100,000 to invest, a portfolio
of mutual funds is a good option since it is difficult to get the same
diversification with individual stock holdings for portfolios of this
size. After two meetings, Marc's financial plan is set and it's time
to schedule a six-month checkup.
"It is important to keep your eye on the prize and regularly assess
your progress," Hatch advises Marc--a philosophy that applies to all
investors.
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