I am a 50-year-old widow. My only child, a daughter, has graduated from college. I inherited about $700,000 worth of individual stocks from my mother's estate after taxes. Boy, did the U.S. Treasury make out! Valuations were made during 1998. Now all are down almost 50%. I have owned my home for 25 years. It's appraised at $900,000, and this goes up every year quite nicely because I live in Aspen, Colo. I owe $100,000 on a mortgage at 7 1/2% interest. This is my only debt. I don't work but rent out a duplex and receive about $1,500 in monthly rental income. I have $60,000 in a money market account and own five acres of farmland in Ohio that is for sale at $20,000 an acre. This is all I own. No 401(k) or the like. I don't want to work, so I want to live off of my stock portfolio. I have traded stocks this year and made about $10,000. Can you suggest a plan for me? I live very modestly because all I do is play golf, ski, ride my bike and trade online. -- K.C.
I'm sure that many readers are jealous of your Aspen lifestyle. I'll try to figure out how you can keep it rather than join in their envy. Let's start with a couple of points of caution: First, an 800-word column reviewing your portfolio isn't the same as a full-blown financial plan. Second, you should review the tax impact with your accountant when trading out of a stock position, as I'm going to suggest you do.
I don't know how long you've been in these positions, but according to
, a portfolio composed of your current holdings would have been worth almost $76,000 more 12 weeks ago. For a nonworking widow, that's a tremendous loss of wealth in just three months.
People who inherit stock positions often stay in those positions, even when it doesn't make sense to do so. If you inherited these shares from your mother's taxable account, your tax basis is the price of the shares as of the date of her death, rather than the date she purchased them. That means you don't owe any taxes on any gains those shares accrued during your mother's lifetime. (In essence, the estate tax took care of that.) That should make it easier for you to restructure the portfolio to meet your needs.
I can't see you investing a third of your portfolio in
stock, so I'm assuming that Bank One is one of your inherited holdings. The stock has returned almost 9% so far this year, but nearly half that return was dividend yield, and the CEO has cut the stock's dividend.
All told, you have about 52% of your stock investments in financial stocks, and that's more than three times the weighting of financial stocks in the
S&P 500 index. Your stock portfolio also has an average
price-to-earnings ratio of 62 compared with a 34 P/E ratio for the S&P 500. So, you're making a big bet that your stocks will experience earnings growth well above that experienced by the S&P 500. Again, the biggest bet is Bank One, selling for 93 times its most recent 12-month earnings. Even if you're convinced management can turn things around at the company, it's not a bet-the-chalet scenario.
On a year-to-date basis, you've got an interesting collection of winning and losing positions. Penny stocks, especially mining stocks like
, are not the best investment for widows. But I don't know enough about the company to tell you to sell it and move on.
I recommend you invest some of your portfolio in bonds. I like individual bond holdings vs. bond mutual funds, but if you can't get comfortable buying individual bonds, go with a bond fund. I also think that you should pare back some of the individual stock holdings and replace them with a
no-load, indexed mutual fund. The eventual sale of the farmland can finance the bond portfolio, while reducing the Bank One holding can provide you with the funds to invest in the indexed mutual fund.
This will reduce some of the volatility in your portfolio. The mutual fund will help you reduce volatility by owning hundreds of stocks vs. the 25 in your current portfolio, and the bonds will provide a steady income stream to help you meet your living expenses. If you're going to consciously make sector plays in the portfolio, make them with sector funds.
You need to construct a budget. Saying you live modestly doesn't quite jibe with your locale or some of your hobbies. I'll give you the benefit of the doubt, but you need to put it to paper. How is this portfolio going to meet your needs for income and for growth? What role does the real estate play in this budget? The portfolio needs to be invested, so that you can be fairly certain of meeting your financial needs without reducing the principal balance. In your 60s, a
reverse mortgage -- a type of loan you take out against your home equity -- could make sense to help meet your need for income. And you should contact your
Social Security office to see what survivor benefits you can expect. If you qualify, you can start receiving reduced benefits at age 60.
Send In Your Portfolio
If you would like to submit your portfolio for a makeover, send it to email@example.com. Give us enough details -- dollar values or percentages -- so we can determine how your assets are allocated. Also tell us a little about yourself and your investing goals, and let us know how we can contact you if we have further questions. Though we'll only use your initials publicly, please include your full name so we can verify your identity. Unfortunately, we cannot guarantee your portfolio will be selected for a makeover, nor can we promise to respond individually to everyone who submits a portfolio.
As originally published, this story contained an error. Please see
Corrections and Clarifications.
Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at