by Archie M. Richards, Jr., CFP^®
August 26, 2002

Fran writes several questions, as follows:

1. "We have done fairly well with Vanguard Healthcare funds. But should we switch to REITs?"

   Yes, Fran. REITs are a separate asset class and a fine choice. But use other classes of investment as well, namely, U.S. stocks, foreign stocks, and bonds. You'll find index funds for all these groups. Healthcare is only an industry, not a separate asset class.

2. "Will a Medicare Prescription Plan cause less earnings in our Healthcare funds?"

   I don't know.

3. "Will the lobbyists for the Big Drug Companies cry and sway politicians to continue favoring them instead of real people's needs for Better Health and Longer Life?"

   You got me.

4. "For real estate, we read that many people, because of several increasing undesirables, are abandoning ownership and moving back to renting. How do you see the trends, projections and Desired End Results?"

   I haven't the faintest. The nice thing about asset allocation is, you just buy several asset classes, rebalance every 13 months (see the 5/27/02 and 7/8/02 columns in www.archierichards.com) and otherwise forget about investments. When your financial future depends on having correct answers to questions that no one knows the answers to, you introduce unnecessary risk.

   It's fine to ask such questions. Write them down with your answers and wait to see if you were right. But keep those conjectures away from your portfolio. Your investment results will probably improve. Your risks will certainly diminish.

   Exercise judgment as little as possible in your investments. Just set asset allocation in motion, rebalance, and otherwise let the portfolio alone. The more boring, the better.

Ken writes that the investments of his 82-year-old mother consist largely of 100 shares of AT&T and some baby Bell stocks. She doesn't need these investments, but might need nursing care in the future. She wants to get rid of the shares but doesn't know what to do with them. Should she sell them and invest in something else or give them to Ken, his daughter or granddaughter.

This calls for financial planning, Ken, which I'm in no position to provide. A few shares of telephone stock won't cover much nursing care. Will your mother need them at all for that purpose? Such issues need to be resolved. I can only supply a couple of pointers:

Emotions are more important than money. Let's say your mother truly doesn't need the stocks; taxes aren't a problem; and she loves you and your family. Under those circumstances, it might give her joy to give the shares to you or to members of your family, possibly selling the shares first.

It might give her special pleasure to provide something specific. She could set up a 529 Plan for your granddaughter's education. The earnings within a 529 Plan are not taxable. For educational purposes, the payouts are tax free. Call Vanguard or TIAA-CREF.

Now about taxes.

If your mother bought the telephone stock a long time ago at what is now a low cost and she sells it, she would pay a chunk of the proceeds in taxes. The feds tax capital gains at a maximum of 20 percent. If the stock has been held for at least 5 years, the tax rate is a maximum of 18 percent.

Say she bought the stocks many years ago for $500. They're now worth $5,000. She sells, incurring a gain of $4,500. 18 percent is $810 tax.

Unfortunately, if she gives the stock to you, the tax cost carries over to you. When you sell the shares, you'd pay the capital gains taxes, probably at the maximum 20-percent rate ($900 tax).

But if your mother doesn't sell and she dies as owner of the shares, her death gives the stock a new tax cost. No longer is the cost for tax purposes $500. It's now $5,000. If the stock passes to you after her death and you sell the stock for $5,000, you would pay no capital gains tax at all ($0 tax).

If taxes are a problem, elderly persons should think twice about selling low-cost securities.