TAKING STOCK: Money manager

Dear Mr. Berko:

We have an $860,000 rollover individual retirement account that's all in cash for three years. We need to earn 6 percent, or $51,600, on this money plus my Social Security to pay our bills. We were introduced to a brilliant money manager who invests only in blue chips (listed below) that average 2.5 percent ($21,500) in dividends. He says he can easily guarantee us the extra 3.5 percent (total 6 percent) we need from capital gains. He has not lost money since 1998, and he showed us written proof. He only charges a 2 percent fee and small commissions for his service. I've enclosed his material and his papers, which look really good. The 3.5 percent guaranteed appreciation ($30,100) sounds like an easy goal. Your thoughts, please.

SH, Vancouver, Wash.

Dear SH:

I think this fellow is perfuming the hog, and with trusting folks like you, it's easy to do. I don't know of a single money manager who has earned a 6 percent cash return (after 2 percent fees and commissions) for 14 straight years and never lost money. Stocks such as DuPont, Monsanto, Boeing, Bank of America, Alcoa, JPMorgan Chase, Cisco Systems, Intel, Hewlett-Packard, Caterpillar and Hess are quality issues and yield between 1 and 3 percent. And believe it or not, those stocks also can decline in price. So in order to pay this articulate incompetent a 2 percent management fee and earn a 6 percent cash return, those issues must collectively generate an average annual total return of 8 percent. Considering our uncertain and volatile market, the slow but certain collapse of Europe and the inexorable crumble of our social, economic and governmental infrastructures, I'm certain as the sunset this grifter can't earn an 8 percent total return each year.

To illustrate: Assume you expect a 6 percent return on $860,000, which is $51,600. And to keep the comparison simple, assume that the money manager isn't charging a fee and that your $860,000 investment earns 2.5 percent, or $21,500, in dividends annually. Though the dividends are fairly dependable, they fall $30,100 short of the $51,600 you need. To plug the deficit, this magsman promises to earn that 3.5 percent in capital gains on your $860,000. If he does, you never will have to take a pfennig from principal.

But what if the market were to fall 5 percent in 2013, which has been known to happen occasionally? Your account would drop in value to $817,000, and you'd have to draw down $30,100 from your principal, which would reduce your IRA's value to $786,000.

And if your account value were to fall by just 2 percent in 2014 (the dividends still would be fairly worry-free), you'd need to withdraw $30,100 again, and your IRA's value would fall to $740,000. Be mindful that while all this went on, you would not be paying management fees or commissions, which would further decimate your account value.

And if the market were to be flat in 2015 (perish the thought), you'd have to take another $30,100 chunk from your IRA, reducing its value to $710,000. It's possible your IRA will never see daylight again.

Therefore, it makes better sense to own many of the dividend/growth issues often discussed in this column, most of which yield between 4 and 8 percent. Issues such as AT&T, Linn Energy, Reynolds, AstraZeneca, Kinder Morgan, Mercury General, Energy Transfer, Otter Tail Power Co., Altria Group, Old Republic, Boardwalk Pipeline, etc., fit the bill and grow their dividends annually. Then mix the above with some busted converts, real estate investment trusts, exchange-traded funds, closed-end funds and natural resource companies. Finally, add shares of Vodafone, National Grid, Hospitality Partners, Deutsche Telekom and PDL BioPharma and you'll own a dandy growth and income portfolio yielding more than 6 percent.

I guarantee that when the market falls, your account will fall, too. And I'll give you a nearly identical guarantee that when the market falls 5 or 10 percent, your dividends will remain unchanged, and some may actually increase. Therefore, you won't have to dig into your principal or depend upon iffy capital gains for your income. Meanwhile, that 2 percent management fee plus commissions is turnpike thievery.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2012 Creators Syndicate Inc.

Published: Fri, Nov 2, 2012


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