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Stocks Too Big a Bet to Reach Early Goals


Rick Petitfils knows the risks of gambling firsthand. He remembers well the night he lost $4,000--more than two months' take-home pay--playing blackjack in Las Vegas.

"I was doing really well in the beginning. That's how it always starts, and every time I lost I would bet a lot more," recalled Petitfils. "That's why I don't go to Vegas very often. I know where my faults are."

Or does he? Petitfils, a 48-year-old supervisor at a Sav-on drugstore in Agoura Hills, may be avoiding the blackjack tables, but he has plowed such a big chunk of his savings into the stock market that he may be gambling with his goals of taking early retirement and paying for his two kids' college educations.

"If Rick wants to retire in six years, he needs to spread his chips around the table," said Chris Reedy, the founder of Reedy Asset Management in Newport Beach. "Rather than ride the roulette wheel, Rick should reduce his stock exposure and increase his bond allocation."

On the bright side, he brings a sizable stake to the table. By forgoing all but a few small luxuries--such as the occasional vacation to Hawaii or British Columbia, air fare courtesy of a family connection--he and wife Maria have built a $267,000 nest egg. Not bad on a combined annual salary of $56,000.

His share of that income--$35,000--is the result of a decision 10 years ago to accept a 50% cut in pay in return for a job that let him spend more time with his family. Until 1992, he was a district manager for Kentucky Fried Chicken, overseeing the operations of as many as 20 stores at a time. He worked 14-to-15-hour days and drove about 35,000 miles a year.

"I didn't see a lot of my son when he was growing up; I couldn't go to a lot of his functions," he said. "Now I live a mile from my job."

It helps that Maria, 44, plans to continue working as a teacher's aide for the Las Virgenes Unified School District until she's 62. And the family's overhead is low. The Petitfils own their three cars and their only debt other than a small mortgage is a 3.5%, $15,000 Small Business Administration loan they used to rebuild their home after the Northridge earthquake.

But with 85% of his portfolio invested in stocks--and more than a third of that in risky technology shares--Petitfils has placed himself at the mercy of an unforgiving market. In the last few months, for instance, the value of his portfolio has tumbled more than 11%.

"The equity markets are the most volatile investment tool there is. The market is for people with long-term horizons, and Rick needs to adjust for his phase of life," said Jim Macy, vice president of investments for Reedy Asset Management.

Typically, a 48-year-old is years away from the period when a shift to more conservative investments--such as bonds and certificates of deposit--is necessary. But in this case, the goals of early retirement and paying for collegeare more immediate.

Ryan Petitfils, 18, is a freshman at California Lutheran University in Thousand Oaks, where he has a scholarship that supplies $10,000 a year if he maintains a 2.7 grade point average and works 10 hours a week for the school. That and student loans, $6,000 a year from mom and dad and contributions from Rick Petitfils' parents take care of the $27,000 annual cost. Daughter Michelle, 12, is a few years away.

To reduce the risk in Petitfils' portfolio, the planners said he should cut his stock exposure to 60% to 65%. The remaining 35% to 40% should be invested in a laddered portfolio of fixed-income investments, such as Treasury bonds and high-grade corporate bonds. A laddered portfolio is invested in securities with a range of maturities. As securities mature, the money is reinvested in new securities, usually at the longer end of the maturity range.

"Our goal is to reduce volatility in Petitfils' portfolio by replacing equity-heavy and tech-heavy growth assets with a less volatile combination of income-producing assets," Macy said.By the time he's 55, Petitfils' 401(k) account from KFC should be worth about $165,000. At that point, he can use the money to purchase an annuity that would provide income of $13,800 a year over 20 years assuming a relatively modest 6% yearly return, the planners said. Returns from the couple's cash and stock holdings should add $1,770 or so to their annual income, and Petitfils' pension from KFC will contribute $3,600 annually.

The grand total in year one of early retirement, including Maria's salary: about $40,000, which should be more than enough to take care of the couple's expenses, allowing them to maintain their lifestyle plus a few luxuries and a vacation or two, the planners said. If Social Security remains intact, all the better--the planners chose not to include it in their analysis.

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