Two families pull ahead by investing 'hidden' assets
Boston — When John and Elizabeth Jones first went to a financial planner three years ago, they were like many other people trying to make a little money with investments. They had made their share of mistakes.
There was a land deal in Arizona, gold and silver investments that went the wrong way, and some stocks that followed a similar course.
But unlike many other people, they had managed to set - and meet - a major financial goal. When their three children were very young, Mr. and Mrs. Jones correctly figured they would need about $40,000 for each child's college expenses by 1980, more for the college years after that date.
To achieve this goal, the Joneses assigned themselves the task of saving $3, 000 a year per child. They didn't do this every year, but on average, they came pretty close, putting the money in Unified Gifts to Minors Act accounts, where the interest was taxed at the children's lower rates.
So today, with one child about to graduate from college and the other two in high school, the Joneses have largely eliminated any concern about undergraduate college expenses. Now, they can begin to think realistically about another goal: starting their own business.
The Joneses, then, are highly disciplined savers.
Mr. Jones, an metallurgical engineer with one of the high-tech firms in New England, and his wife, a part-time teacher, have a combined income of about $70, 000, but they long ago saw the value of long-range planning and saving to reach their financial goals. Unlike many people who embark on planning programs, they know the process does not bring quick results, that setting and achieving goals takes time, a long time.
''They were a rarity,'' says Joseph Deitch, president of the Cambridge Group, a Newton, Mass., financial planning firm that has been working with the Joneses since 1981. ''They had a rational plan and followed it.''
Mr. Deitch frequently conducts seminars on financial planning. It was at one of these meetings that he met Mr. and Mrs. Jones. In his seminars, Deitch says, he asks his audience how many people have collected their financial data, including expenses, income, and net worth; how many have set goals; and how many have begun to analyze everything and put some goals into place.
The Joneses, he found, were one of those uncommon families where all three things had been done.
Still, to hear them tell it, the Joneses did need help.
Three years ago, their combined income was about $55,000, not particularly high by financial planning standards, but enough to be thinking about where their money was going.
Even so, Mrs. Jones said, ''We felt all along that we should look at different ways of investment other than our house. I think the only 'investments' we had were CDs (certificates of deposit) at the bank. We realized we weren't doing enough with our money. And especially as interest rates were going up, and as the inflation was becoming more severe, we realized we had to do something just to stay even.''
''Also,'' Mr. Jones noted, ''things we had tried to do in the past hadn't worked out. On two occasions we had invested in the stock market. We ended up selling the stock and lost in both cases. That was fairly convincing that we didn't have enough knowledge ourselves to judge where to be investing and for how long.''
It was at the financial planning seminar, sponsored by the local chapter of his professional association, that the Joneses learned of such things as the tax consequences and risk factors of various investments. They also learned that there was more to building and maintaining a successful investment plan than they had the time or inclination to do.
''Neither one of us really wants to spend much time working with finances,'' Mr. Jones said. ''Financial planning is a burden. Not something we look forward to doing with pleasure. Not like Midas counting his gold. It's one of the last things we want to do. We were looking for someone to, I guess, do the dirty work for us. Not to make decisions, but to make recommendations.''
One of the first recommendations that the Joneses seek professional financial guidance came from what some consider an unexepcted source: an insurance agent. It is often said - sometimes correctly - that many people who call themselves ''financial planners'' are nothing more than insurance agents or stockbrokers who may have taken financial planning courses or done some additional reading and added the title. Their main goal throughout the planning process is often the same as it was before they started: to sell insurance or stocks.
The Joneses' insurance agent suggested they work with a tax accountant, a lawyer, and a broker he recommended. But, the agent said, he would not be the financial planner. For a time, they did work with two of the people he suggested.
But they did not begin a full-time financial planning and investing program until they met Mr. Deitch.
With over $100,000 of college-education savings to work with - almost all of it in those bank CDs - ''the first thing we did was diversify the kids' money between three separate investments,'' Deitch recalls. He split the money about evenly between a money market fund, mutual funds investing in the stock market, and a public real estate fund.
Because of the timing of the moves, all three have done quite well. Three years ago, money market funds were near their all-time highs, returning yields in the mid-teens; stocks were about a year away from one of their biggest bull markets in history; and real estate had been advancing nicely on the strength of lower interest rates and more activity in the construction business.
Since then, some of the money has been taken out of the money market fund. The reason was one of those unexpected events that can upset a financial plan but which proves the value of good planning:
One of the Joneses' sons was unable to find the programs he felt he needed in his local high school. So his parents agreed to let him attend a nearby private school. But that meant pulling $2,000 to $3,000 out of the college fund for private school tuition.
After a year in his new high school, young Mr. Jones entered college - two years early - causing another premature drain on the college fund.
With the Joneses' pension and savings, Deitch says, he has recommended some additional risks, but not too much. Less money has been put into money market funds, for example, and more into real estate and oil and gas programs. The real estate investment consists of a fund that acts as a bank or lender, providing money for commercial property. The program, part of the Joneses' pension fund, is providing a tax-deferred yield of about 14 percent a year.
Deitch has also invested some money in mutual funds, including Templeton and Twentieth Century Funds, oil and gas investment programs, and a renovated Newton church that is the new location for his own financial planning firm. The rehabilitated church contains five floors of office space and a restaurant, and will probably double the Joneses' investment in less than two years, Deitch says.
With all their successes, the Joneses have also had their share of investments that didn't pan out. Two years ago, for example, they tried to raise more money for investments by taking out a second mortgage on their home at an interest rate of 18 percent.
They, like many other people, including a lot of ''experts,'' expected rates to continue going up, or at least stay up for a while.
That didn't happen, and the Joneses were unable to find investments to match the rate they were paying on the new mortgage. They recently got the second mortgage paid off.
Their home, purchased in 1964 for under $40,000, has also been a source of ''we should have done this differently'' thinking. Because their debt on the house is so low, the Joneses have to report a much higher net worth to college financial aid officials.
Even though they have set aside most of the money they need for their children's higher education, a scholarship would leave more available for other educational costs, like graduate school, if it is desired, or to obtain degrees should an undergraduate program may take more than four years.
The Joneses feel it is unfair for children of middle-income parents who have conscientiously saved money, to be at a disadvantage when it comes to applying for college scholarships based on ''need.''
''If we had bought a larger, more comfortable house, in a more expensive suburb with a better school system, we could have qualified for some of those scholarships,'' Mrs. Jones says.
Overall, though, they and Mr. Deitch are pleased with the way things have gone. In the past two years, their net worth has increased by about one-third, to over $400,000; Mr. Jones feels that he will be able to go into business for himself as a consultant in six or seven years; and they have learned a lot.
''I feel the education process has been one of the most important parts of this,'' Mr. Jones says. ''We've learned about a lot of things we wouldn't have tried before.''
Education, Deitch agrees, is important. In fact, he says, many people who call themselves ''conservative'' investors have simply not learned about the alternatives.
''I wouldn't call them (the Joneses) conservative,'' Deitch says. ''I would call them thoughtful. I don't find 'conservative' to be synonymous with 'prudent.' My experience has been that the so-called conservative investor often makes poor judgments because of emotional analysis rather than intellectual analysis.''