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December 04, 1988|JAMES FLANIGAN | Times Staff Writer

For many people, unfortunately, investment recommendations are a cruel joke.

The comparative merits of putting your money in bonds, stocks or real estate are somewhat irrelevant if you don't have the money to invest.

And that's the case with a lot of people these days, particularly if they're young.

Young, upwardly mobile professionals may be highly paid, but their disposable--and therefore investable--income is often low because they are paying back loans for their graduate education. The tuition tab for a master of business administration degree these days ranges from about $10,000 (in the University of California system) to $22,000 a year; for a law degree the tuition bill can go as high as $75,000.

Young but not college-educated people, on the other hand, may not have capital to invest because their real incomes have fallen over the past decade. On a national average, the income of a 30-year-old high school graduate in 1987 was 16% less, adjusted for inflation, than the income of a 30-year-old high school grad in 1973. College graduates fared better, but didn't gain either. The income of a 30-year-old college-educated person in 1987 was 2% less than that earned by the 1973 graduate.

The statistics come from "Dollars and Dreams, the Changing American Income Distribution," by Frank Levy of the University of Maryland, who explains that lagging U.S. productivity growth since 1973 has resulted in declining real incomes.

Other trends also went against the young. Financial deregulation brought higher interest rates on bank deposits and money funds for those generally older members of the population who had savings but marked the end of cheap mortgages for those younger people who were buying houses. A recent issue of Forbes reported that the share of family income going for house payments, including taxes and insurance, rose 46% in the last 20 years.

One way young families have afforded a home is by borrowing the down payment from Mom and Dad, who often have investable cash because they've benefited from the 70% average rise in U.S. house values in the past 20 years.

Another way is by having two incomes--wives and husbands both work in 56% of U.S. families, a higher percentage than ever before, and most two-income couples are more like the Conners of television's "Roseanne" than the prosperous Huxtables of "The Cosby Show."

It makes you wonder if you'll ever get ahead in the game. Treading water on two incomes leaves little for the kids' education or for retirement. Few people 40 and younger believe that Social Security benefits will be there for them as they are for their parents. On the other hand, they may have to care for aging parents, whose savings and home equity may be fast depleted if $36,000-a-year nursing home care is needed.

So how do you get ahead?

The first rule is simple: Save your money. "If you want to build a little nest egg, or even a big one, the first thing you might consider is spending less rather than earning more," wrote Andrew Tobias a decade ago in "The Only Investment Guide You'll Ever Need"--a book as smart today as it was then. But the manner of your saving depends on your age and what you're saving for. If it's money you cannot lose (for older people) or funds you will need in the next 12 months, a bank account or money fund is OK. The interest should protect you from inflation. But understand that you're not getting ahead by earning interest. Figure it out: From the 7% to 8% you can earn from a money fund or certificate of deposit, deduct the taxes you pay on that interest. That leaves you between 5% and 6%. Now deduct the current inflation rate, say 4%. That means you are earning 1% to 2% in real terms.

Clearly, interest-bearing investments protect capital but don't help you accumulate it.

"Bonds protect capital and provide income, but you cannot build wealth with yield," says Stanley Egener, president of Neuberger & Berman Management, a New York investment firm. "Only common stocks allow you to accumulate wealth."

(Yes, wealth has been accumulated in residential real estate--although it's a risky matter of timing and location. New England has been hot lately, Texas has been cold; California cooled in the early 1980s, now is hot again. Besides, it's not a game you can enter with a small investment, while you can invest $1,000 to $2,000 at a time in a mutual fund.)

Egener's statement about stocks is supported by the historic work of Roger G. Ibbotson, professor of finance at Yale, and Rex A. Sinquefield, chairman of Dimensional Fund Advisors, an investment management firm in Santa Monica. Twelve years ago at the University of Chicago, they put together studies of returns on various investments over the very long term.

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