Dr. Don, I am 35 years old. I work as an engineer in the San Francisco Bay Area and have an annual income of $120,000. My monthly rent is $1,800. I don't have any debt or any dependents and am able to save $1,500 per month. My objectives and plans: Here's why I need an Rx: SM
To buy a $150,000 to $180,000 condo in Lake Tahoe, Calif., in the next three to four years
I will continue to rent. I have no desire to own a house in the Bay Area.
Before I am 40, I plan to take a full year off from work to travel the world.
At some point in next 10 years, I will try to scratch an entrepreneurial itch.
Am I being foolish by not buying a house or condo in the Bay Area? In today's market, a decent condo will cost me $300,000, and the same condo sold for about $200,000 just four years ago. My fear is if I buy a condo in the Bay Area and the bottom drops out of the real estate market, I will be left holding the bag.
I am thinking of dollar cost averaging into the Vanguard Total Market fund. Would I be happier if I invested in a fund that has low turnover and strictly invests in nonleveraged companies, not just low P/E value stocks? How should I structure my portfolio? Got any suggestions for me? Or I should I just stick with GNMA investing?
Whether it's in the stock market or the real estate market, no one likes buying into the tail end of a market trend, where the greater fool theory applies. When it gets to that point, we all become value investors. As you point out, Bay Area real estate has been red-hot for several years. The
California Association of Realtors
recently reported that real estate in the Bay Area appreciated by 30% year-over-year as of November 2000. With the decline in technology stocks and the resultant decline in IPO millionaires, you would have expected a reduction in the demand for housing, but for now lower interest rates and a lack of inventory have helped keep prices sky-high in this market.
I don't understand why you're willing to invest in real estate in Lake Tahoe but not in the Bay Area. They're different markets, but fueled by some of the same economic trends. I'll admit that I'm not a real estate expert, and with your plans, it may not make sense to own real estate in both markets. However, if you can use the mortgage interest deduction, the tax savings offers some protection against falling real estate prices. Personally, I'd rather own my home and rent my vacation condo then rent my home and own my vacation condo.
Trading history is ignored in these portfolio reviews because it's more important to review your holdings and look toward the future than it is to see where you've been. You can't change what the portfolio owned -- just what it will own -- to help you meet your financial goals. That said, you've dealt yourself a very interesting hand. You've got lots of cash sitting on the sidelines, a very conservative investment in government mortgage-backed securities and a collection of sector funds investing in natural resources, including a gold fund.
Then you bite off a huge piece of speculative risk by shorting half the
. OK, that's a bit of hyperbole but the risk is real. These short positions have, in aggregate, been very profitable for you, as shown in the table below. Three of these stocks,
were down more than 65% last year. But what's your exit strategy for these short positions? Will you hedge any of these positions in the options market by buying out-of-the-money calls?
I think we're too deep into the market's reversal for you to be holding on to this many short positions. Get out of the ones that you've started to get nervous about, and keep watching the others closely. In long positions, the adage is that no tree grows to the sun. In short positions, there's nothing less than zero, so don't get burned trying to wring the last dollar out of these trades.
GNMA fund has had a great year last year, earning more than 10% while the broad-based stock funds languished. It's unlikely that you will see that performance level again this year. The fund's manager doesn't make interest rate bets, and lower mortgage rates will cause prepayments to escalate, forcing reinvestment at lower interest rates.
I can't think of a reason to own a mutual fund that invests in gold mining stocks. Typically, investors like to hold gold as a store of value or as a hedge against inflation. Gold mining stocks allow you to participate in the hedge against inflation angle, but I'd rather own the
Treasury Inflation Index
bonds or the
Series I Savings Bonds
as an inflation hedge. My money's safe, the principal's protected against the ravages of inflation and I earn a coupon interest rate above the inflation rate. There's some tax issues to consider, but overall it's a good way to have an inflation hedge in your portfolio.
I think that the Vanguard Total Market Index fund is a great core holding for a portfolio. With low fees and expenses, tax efficiency and a broad-based approach to investing in domestic equities, your portfolio will grow with the U.S. economy. I understand your reasoning for wanting to dollar cost average your purchases. It's always a difficult issue when you have a lump sum to invest, but don't spread it out over too long a horizon. You're investing $1,500 a month already. The planned monthly investments will spread price risk out some, so don't plan on investing the lump sum over a three-year horizon.
I'd also like to see you pick out a broad based international fund. Your Fidelity stock funds have a little foreign exposure, I think you need additional foreign holdings. Do some shopping.
Fund Selector is a great way to separate the wheat from the chaff.
Dr. 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