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Meet the Money Managers

Coronado's Financial advisors bullish on 2003

By Nancy McRae

From both a geographic and lifestyle perspective, Coronado is about as far removed from Wall Street as one can get in this country. The aggressive energy, hustle and power of the New York Stock Exchange are in stark contrast to the friendly, sunny and easygoing ways of Coronado. However, Coronadans have not been immune to the Wall Street woes of the past three years. In this interview, nine of Coronado’s top investment professionals discuss their outlook for stocks, bonds and real estate for 2003. Read on, and pick up some hot tips!

CL: Is real estate a better investment than the stock market now? What could cause the real estate bubble to burst?

• Doug Brandt, vice president and financial adviser in charge, Merrill Lynch: Although autumn of 2002 was one of the best performing real estate markets in 40 years, we have a unique situation today in which real estate can still be continued as an investment theme because interest rates are so low.

• Charles Hayes, CPA/PFS, CFP, Hayes & Associates: Real estate is on the verge of a bubble that’s about to burst, so it may not be the best time to invest. On the other hand, stocks are very low-priced.

• Don Patrick, president, Sun Country Financial; vice president, PMG Securities: I’ve heard the bubble theory for about the last 30 years in California, and prices always trend up. I’m convinced that the only needle that could pop the real estate bubble is a “9-11” type event on the West Coast. That’ll drive property values down in a hurry. But right now there are people pouring into San Diego County. This place is booming.

However, the stock market is the best buy going right now. In every down stock market since 1929, there have been investors who make enormous gains. Buy low. Get in now and keep getting in. This is the greatest buying opportunity in history, so don’t miss out.

• Mark Andrews, MBA, MSBA, CFP, Andrews Capital Management Inc.: Many of my clients have asked if it’s a good time to sell all their stocks and catch the real estate wave. Remember the golden rule of investing: Buy low, sell high. I’m not telling anyone to sell their real estate, but this isn’t a good time to be adding to it. Why do I think the bubble may be about to burst? We’ve got interest rates at 40-year lows. Once interest rates perk up, which they will, a lot of people will be driven out of the home-buying market. We’ve all lived in San Diego long enough to see these cycles.

• Tim Cusick, senior vice president, Prudential Securities: Unlike stocks, real estate doesn’t get priced every morning in the paper. This may give people a false sense of comfort. The bubble is about to burst just on an affordability basis. However, Coronado is a unique market. I read Southern California’s high-end real estate magazines, and I’m shocked to see our prices are lower than some other areas. We’ve got Southern California’s most special real estate!

• Hayes: Coronado real estate is not less expensive than other areas if you do a “per square foot” comparison.

• Cusick: With real estate it’s all about location. Property doesn’t sell per pound. Although we may not continue to experience major real estate gains in 2003, because of our location we’ll see relative stability. Still, history has proven that stocks have always, over time, outperformed real estate.

• Gary Smith, president, Planning for Professionals: I’ll never forget a client I had who owned seven properties. I tried to get him to spread his risk. After our talk, he said, “Okay, I understand the importance of diversification. I guess I’ll buy a property on a different street.” That wasn’t quite the message I intended, but it’s the way many Coronadans think.

I agree with Tim about the affordability factor. I lived in Denver in the early ’90s when Californians came to Colorado by the wagonloads. They were accustomed to paying $500,000 for an average home and were stunned that they could buy a nice home in Denver for $185,000. With many people retiring, or working from a home office, or due to a natural or manmade disaster, I think we could see a major migration to smaller towns in less expensive places than California.

• Robert Maloney, investment representative, Edward Jones: Coronado is a microcosm when it comes to real estate, but we are toward the peak of the real estate market in Southern California. Many of my clients in their retirement years own rental properties here in Coronado. They could capitalize on the growth they’ve seen in their real estate investments, and move into some undervalued income-generating equities.

• Bixler: The best time to act on an investment is when other people are doing the opposite. If everybody’s buying real estate that might be the best time to sell. All investment classes have their cycles. Stocks have been down for three years, and we haven’t seen that since the early ’30s. Opportunity isn’t knocking, it’s screaming to invest in equities at wonderful prices. Take some profits in real estate and reposition that money to take advantage of great values in the stock market. If you really want to own investment property, but don’t want to actively manage it, turn to REITs (Real Estate Investment Trusts are diversified portfolios of office, residential or public storage properties). REITs create income of between 8 and 10 percent.

CL: How are you allocating assets between bonds and equities?

• Andrews: Let’s talk about greed and fear, because that’s what asset allocation is all about. In boom times, people forgot about having a balanced portfolio, for example, 60 percent equities, 40 percent bonds. They took more risk, weighing in at up to 80 to 90 percent stocks. Rather than re-balance, they wanted to keep “riding the market.” They didn’t want to pay taxes on gains, etc. In other words, greed kicked in.

Now we’re dealing with fear. Clients should be building up the equity portion of their portfolio, but they’ve just been burned, and they’re afraid to make a move.

• Brandt: The good thing about bonds is also the worst thing about bonds – you get your money back, but you only get your money back …if you’re lucky. No bond fund has ever outperformed the index. Bonds are tricky things; a lot of people in our business don’t understand them. This is the year you need to understand them because two to three years from now, they’re all going to be 80 percent of face value. People are comfortable with bonds right now, so it’s easier to sell them, but that’s not the right thing to do.

• Bixler: Take a $6 billion, 30-year municipal bond issue with 5 percent coupons. Sounds great, but it’s easy to forget when you’re reaching for that 5 percent coupon, that if interest rates go up 2 percent, your bond principle goes down in value about 18 percent. We’re encouraging clients to take a lower rate coupon and shorten the bond maturity to less than 10 years.

• Andrews: I’ve never been a fan of bond funds. I use individual, high quality bonds. Keep the maturities short; don’t go beyond 7 to 8 years. There’s a place in every portfolio for bonds in terms of capital preservation. But right now, as bonds mature, I’m keeping them in cash just to see where we go with this interest rate cycle. Clients are not used to seeing losses on their bond portfolios, the last 10 years have been good years. But we’re right on the verge of a turnaround. Rates are going to head up.

• Cusick: Rates can’t go much lower, but they won’t go up a lot either. We’ll see a stable rate environment for the foreseeable future. Most bond funds are a bad bet; after fees, they just don’t work. But discounted corporate bonds could show more capital appreciation over the next 3 to 5 years than even equities.

• Maloney: I use bonds regularly. I’m using a special breed of AAA corporate bonds called “estate planning bonds.” The interesting feature is that if the owner of the bond dies, regardless of what point the bond is into maturity, the heirs have the option of redeeming the bond for face value. It’s great because it allows my clients to have their money working as hard as possible for them right here and now, getting the highest coupon they can without worrying about the market value when these bonds are passed on to their heirs, who are guaranteed to get face value on the bonds.

CL: How does your investment advice differ for a couple in their 20s, 40s and at retirement age?

• Hayes: The principles of investing, like the laws of gravity, do not change with age. The perception of security changes, so we adjust accordingly. I’m nearly 60 years old, and I’m investing as if I were a 20-year-old. I believe that equity investments are the answer for anyone who does not want to outlive their investments.

I hope you’re not relying on Social Security, the largest Ponzi scheme in the world, sold by the U.S. government. In 1934, the American population was guaranteed a bit of supplemental income when they retired at age 65. What was the average life expectancy in 1934? Sixty-four years of age. A $5,000 portfolio was plenty back then. I remember my grandfather saying his $20,000 was more than enough back in the ’50s. But when he lived into the ’70s, he was panicked because of inflation. Stocks are the best guard against inflation. And regardless of your age, you need to be investing in them.

• Cusick: In your 20s you’re earning money and investing it; in your 60s the money you’ve invested is earning money and paying you.

At the risk of sounding like I’m pushing life insurance, for $500 a year, someone in their 20s can get $1 million worth of coverage. It’s the most fundamental thing for a 20-something to have first, especially if there’s any possibility of having offspring. I use insurance only as a safety net. Hopefully by the time someone is in their 40s or 50s, they have substantial equity in their home and their retirement plans are well funded. If they were to die then, the kids are probably out of the house anyway, and there are enough assets to cover the surviving spouse.

• Patrick: Term insurance is real cheap today, and it’s cheap clear into someone’s 60s. People at age 65 now can buy $100,000 of 10-year term life for less than it would have cost a guy age 25 back when I started in the business. I lost two clients in the World Trade Center and one in the Pentagon. They all had investments, and yet term life insurance became a vital asset to their families. Comparatively, the portfolios they had were insignificant. With term life so cheap today, you have plenty of funds left over for investments.

• Bixler: Even with longer life spans, more people are wanting to retire in their 50s and early 60s. So clients in their 20s and 30s should be putting as much money as possible into their retirement plans. This is probably the only way they’re going to have money to spend once they retire. For older clients, life insurance can provide some wealth protection if they put it into a life insurance trust. If they don’t die within three years, they can use that to pay tax on the estate.

• Andrews: Insurance provides security so that if the breadwinner dies, there’s something to replace the lost income. I don’t look at it as leaving a windfall for the kids.

• John Hart, MS, EA, masters in tax and financial planning, Hayes & Associates: The biggest risk for retired investors is that they need money when the market is down. But if they’re in good quality investments, those investments are always the first ones to spring back.

• Maloney: I agree. The real risk is in not buying in right now. So many people need to recoup their unrealized losses of the past three years in order to retire and have the income necessary to make it through the remainder of their lives. If they are not buying into the stock market right now, they are running the risk of outliving their income. My tactic is dollar cost averaging. If somebody has $100,000 and wants to invest it all right now because they think this is as low as the market will go, I strongly advise against that. Instead put in $10,000 a month over the next 10 months.

CL: What effect would a military engagement in the Middle East have on the stock market?

• Cusick: The market discounted going into the last invasion (Desert Storm 1991). The following day, it went up 87 points and ultimately went from 2,400 to 11,700. A war or an action in Iraq is not a surprise; therefore, the market is not going to be surprised. It’s already discounted for that possibility.

• Patrick: Part of that war is going to be fought over here. Not by armies, but by terrorists. They’re not going to quit. That’s an aspect we’ve never before faced.

• Bixler: I’d love to be able to say that war is great for the economy and that the market will take off, but there’s a lot of uncertainty. People will be in a “wait and see” position.

• Andrews: If we have a quick war, like the Gulf War, I think the market will jump. But if it turns into a protracted situation, with the use of biological weapons by the enemy, I think the stock market will go down and stay down until the uncertainty is removed. The market doesn’t have the war totally priced into it.

• Brandt: The events of 9-11 have virtually destroyed the airline industry. We depend on tourism here. If the tourists don’t come, layoffs in the hospitality industry are immediate, and it trickles down quickly. Locally, war is not a good thing for us.

CL: Now that corporate fraud has been exposed, have we seen the worst? How much confidence can the public have in CEOs and financial disclosures?

• Patrick: With new legislation, we no longer have the fox watching the henhouse, as when Arthur Anderson Consulting was watching Arthur Anderson Accounting. That’s going to help all of us.

• Cusick: All financial professionals knew that Wall Street analysts were Ponzies who were paid on their investment-banking relationships and not on the performance of their picks. We just assumed everyone else knew that. The downfall came when independent investors got on the Internet and said, “Gee whiz, this company has 19 buys, two holds and no sells; it must be a good buy.” They were relying on horrible research. We knew it, but the public didn’t know it. Now they do. And that’s part of the solution.

• Hayes: The American Institute of Certified Public Accountants, of which I’m a member, has some culpability in this due to the quality of the financial statements. The big accounting firms were essentially buying off audits to get consulting contracts. They weren’t staffing those audits or performing the tests like they should have. Now audits are going to be more expensive, but worth it.

• Andrews: We are absolutely in favor of CEOs being held accountable for their corporation’s financial statements. But the public needs to remember that not every CEO is corrupt. The majority of CEOs are honest and hard working.

• Cusick: Investors have a way to send a message to corporate America. Use that postage-paid proxy and vote against the board of directors. Don’t rubber stamp them. Don’t go with the “Vote for All” recommendation. Don’t throw your proxies away. We may not win, but at least we’ll let them know we’re out there.

CL: What information resources do you recommend for investors? Why should Coronadans still consult a professional financial adviser?

• Bixler: If people want to spend their time on the Internet looking up research, I’d recommend Morningstar for mutual funds and Valueline for equities. However, a professional financial adviser is the best resource investors have to help them sort through all this information and uncertainty, to help them define their goals and keep them on track, and to help with asset allocation, risk and diversification issues.

• Smith: With the down market and the potential of war, the fear factor is high. Investors are becoming immobilized. It’s imperative for them, if they want to reach their financial goals, to have a personal relationship with an adviser who helps guide them through the process of accumulating wealth. Part of the process is monitoring the plan, and making adjustments as needed, not just freezing up.

• Andrews: People are suffering from information overload. Investors need someone they can talk to, someone they can trust to put things in perspective. That’s one of the main values we bring to our relationships.

• Smith: The amount of financial information and the speed at which it’s delivered is overwhelming, and often misleading. A recent study showed that people who were doing their own trading traded themselves right out of their investment nest egg. By the way, they were mostly males.

CL: What one piece of advice are you giving your clients for 2003?

• Smith: Spend less. Save more.

• Maloney: Turn off CNBC.

• Andrews: Diversify.

• Hayes: Head for value stocks, and away from growth.

• Hart: Get a financial plan and stick to it.

• Cusick: Clients, open up your statements. Stop being ostriches putting your head in the sand. Be pro-active. It’s a new year; get back on track.

• Brandt: Asset allocation. If you’ve already done that, then the last few years weren’t as painful for you as for your neighbors. Looking ahead, you may not get a 100 percent return on the stock market, but you’re going to get pretty darn close.

• Bixler: Hold on and diversify.

• Patrick: It’s not what you make, it’s what you keep that counts.

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