A Jewel of an Investment Plan

Using a windfall to prepare for the future.

By Jeffrey R. Kosnett, Senior Editor

From Kiplinger's Personal Finance magazine, June 2005

If office politics and a tedious commute sap your spirit, you'll envy Nadia Fusager. She gets along famously with the other three employees of Magick, a jewelry studio that she manages. Two of them are her father and brother, who make gold cloisonné pieces that sell for $400 and up in shops, art galleries and craft shows. Nadia, 34, and daughter Sabelle, 10, live just five minutes from the studio, located in Fairfield, Cal., midway between San Francisco and Sacramento.

It's a sweet life, but Nadia won't get rich off Magick. She is happy to get a $42,000 salary and health insurance, but she receives no retirement benefits. And that is the heart of Nadia's problem: how to finance her retirement.

Nadia expects to inherit a share of the studio from her father someday. But she knows that her best shot for a comfortable retirement is to invest the $97,500 she realized last year from the sale of a small house. It's the first time Nadia has ever held such a large sum, and she's uneasy. "I'm not a big risk taker," she says, "and when I have taken risks, I have not been successful." Nadia owns some individual stocks; the bulk of these investments, worth about $15,000, are in shares of Cisco, General Electric and Microsoft. She's in the red on all three.

Not surprisingly, given the boom in real estate, Nadia is thinking of buying a rental property or two, perhaps in partnership with her father. The problem is that property values in California have gone through the roof, making it increasingly difficult to invest successfully in real estate (see Get Real About Real Estate).

A better idea is to invest in a diversified group of funds. Nadia is decades from retirement, so she should emphasize stocks. Even with her risk aversion, about 70% in stock funds would be appropriate.

The ETF angle. Because she's investing a large sum, Nadia is well suited for exchange-traded funds, says Helga Cuthbert, of Touchstone Financial Guidance, in Decatur, Ga. The small, one-time fees to buy ETFs shouldn't dent returns much, Cuthbert reasons. She suggests that Nadia put 40% in U.S.-oriented ETFs, spread among those that invest in large and midsize companies, 15% in a real estate ETF and 15% in an ETF that tracks major foreign markets. (For a list of ETFs, visit www.amex.com.) Nadia could split the rest between a solid taxable bond fund, such as Harbor Bond, and a fund that buys municipal bonds, such as Vanguard California Intermediate-Term Tax-Exempt.

Because she doesn't have a 401(k) at work, Nadia should put the maximum into a Roth IRA ($4,000 this year). Barbara Camaglia, of Legacy Financial Advisors, in Beachwood, Ohio, says the Roth is a good tax shelter for bond funds and high-yielding real estate investment trusts, whose payouts don't qualify for the 15% tax rate on dividends. Nadia could also save on her taxes by selling her individual stocks and claiming the losses on next year's returns. Follow these suggestions, Nadia, and you're on your way toward building a jewel of an investment plan.

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