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Salesman Has Overstock of Risk

Wall Street, California | MONEY MAKE-OVER: Southern
Californians Learning How to Succeed in Personal Finances

Semiretirement is in sight for the successful investor. But he must avoid the perils of having most of his money in similar mutual funds.

May 11, 1999|GRAHAM WITHERALL | SPECIAL TO THE TIMES

It's time for Wayne Prasertong to take some money off the table.

After years of riding the bull market in stocks, the divorced father of three finds himself with more than $430,000 in retirement savings. Add a pension and Social Security, and he can expect to have the financial flexibility he needs for the partial retirement he envisions in about a dozen years.

In fact, the most potent risk to his plans is the same portfolio that got him this far: The stocks and equity mutual funds that make up more than 80% of his investments.

Prasertong looks ahead to retirement with a sense of nostalgia for his past. As a university student in Thailand during the early 1970s, he plunged into a variety of environmental and social causes. After earning a psychology degree, he worked in a leper colony.

But after meeting and marrying an American woman and moving to the United States in 1977, Prasertong's priorities changed. He bought a home, built a successful sales career and raised three daughters.

Prasertong, 48, has begun making plans for a new life that he hopes will be similar to his younger, more carefree days. He'd like to quit his job as sales manager for a plastic bag company in about 11 years, when the last of his daughters finishes college. (He has already set aside $40,000 to help pay the college costs for his children, ages 19, 17 and 10.)

His first priority is to spend a year backpacking around the world. But eventually, the Monrovia resident would like to return to Thailand and perhaps open a guest house that would allow him to create a comfortable meeting place for travelers from around the world.

"I'd like to find something that I could enjoy doing and also allow me time to be helpful to the community where I live," he said.

To determine if his goals are realistic, The Times arranged for West Los Angeles financial planner Joel Framson to analyze Prasertong's situation.

The good news, according to Framson, is that Prasertong should have enough to quit his job by the time he hits 59, assuming that he continues a modest lifestyle in retirement.

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First of all, Prasertong has $100,000 in his company's profit-sharing plan, which is privately invested by his employer, Diamond Polyethylene Products, in a mixture of stocks and bonds. His company typically adds about $5,000 per year to that fund.

An additional $330,000 is in individual retirement accounts that Prasertong has invested himself, mostly in stock mutual funds. Although he contributes $2,000 a year to his IRAs, a large portion of the accounts was funded by Prasertong's share of his ex-wife's 401(k) plan, which he received in his divorce settlement.

His profit-sharing and IRAs will likely swell to more than $1 million during the next 11 years, Framson projected, using a growth rate of 7.5% annually. The profit-sharing funds will be available to Prasertong when he leaves the company, and the IRA can be tapped penalty-free when he turns 59 1/2.

In addition, Prasertong is eligible for an annual company pension of about $15,000 when he is 59, and Social Security benefits, worth approximately $14,000, will kick in three years later.

Right now, Prasertong earns about $50,000 annually at his job, of which $10,000 goes to taxes and about $37,500 is consumed by his mortgage and other living expenses. His hobbies, such as bicycling, are relatively inexpensive.

He is putting aside less for retirement now because he pays $5,000 annually for his oldest daughter's schooling, half of which comes from the dedicated savings and half from his regular income. His ex-wife and scholarships pay for the remainder of his child's costs at USC.

Overall, then, Framson said Prasertong is in a good position. "You have some generous company benefits in the profit-sharing and pension, and you've made a good start with retirement funding."

But floating just below the smooth financial surface is a potential iceberg that could sink his dreams--an investment strategy that Framson says borders on the reckless. About 95% of Prasertong's IRA investments are in stocks.

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Although this money is spread across 24 mutual funds, the holdings are not diversified, Framson noted. Most of the assets are in volatile sector funds or concentrated in large- and medium-size growth stocks. Many of the funds are similar. For example, half count Microsoft among their largest holdings.

"The large number of mutual funds have given you the illusion of diversification," Framson said . "In fact, you are not very diversified at all. You are taking much more of a risk than you need to reach your goals."

Even where Prasertong has made an effort to diversify his portfolio with a fund that invests overseas, such as Janus Worldwide, he has been buying the same stocks. It turns out that 30% of that fund's investments are in U.S. companies, including several that appear prominently in Prasertong's other funds, such as Cisco Systems, Microsoft and Time Warner.

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