Conference nyoss1::market_investing

    
    	Re: .0
    
    	I think that trying to get her a 9% return that isn't high risk
    right now would be really difficult.
    
    	As to other options, I think we'd need more info to help you out.
    For example, is the monthly operating deficit amount less than the
    amount she is paying on her debts?  What kinds of debts are they and
    when will they be paid off at the current rate of payment?  Does she
    have equity in a house?  Etc., etc.?
    
    							-craig

    
    	Let me add another question to my .1 reply: Are you her only child?
    (And no, answering "yes" doesn't lead to "well, send her to one of your
    brothers/sisters then..."  There are different options and headaches to
    each of these situations.
    
    							-craig

    She does not own a house. She rents and apartment. Her only debt is the
    car which will be paid for in a few months so really she's debt free.
    Her monthly bills minus her month s.s. check and interest leaves her
    short about $250.00 a month. Saving Account balance is about 75k.
    
    I am not the only child, I have 2 sisters and 1 brother.

    Bethlehem Steel cv. pfd. (two issues) pays 9%.
    
    The reward is that if the economy and the company thrive, the stock
    will advance, since it is convertible into Bethlehem common (at a price
    much higher than the common sells for now).
    
    The risk is that if Bethlehem is outmaneuvered by its competitors, the
    company will go under; and so will the pfd.  A more realistic risk is
    that if interest rates rise, the price of the pfd. might suffer as
    well.

RE: 402.4 by AKOCOA::GLANTZ 

> Bethlehem Steel cv. pfd. (two issues) pays 9%.

Preferred stock is usually not for low or moderate risk individual investors.
It's a tax sheltered investment for corporations.  Corporations pay a much 
lower tax on "dividends" than on "interest".

Preferred stock usually pays a lower rate of interest than the same companies
bonds,  with higher risk.  The company can stop paying dividends on preferred
much easier than the company can stop paying interest on debt:  debt holders
can force the company into bankruptcy.  This may change for a company nearing
difficulties,  such a Bethlehem Steel is,  having lost a lot of money over the
past couple of years.  BTW,  I went and looked up Bethlehem Steels bonds in the
Wall Street Journal.  The 9% issue due in 2000 trades at par for a yield of 9%.

Now,  there are high risk reasons to buy preferred stock.  For a company near
bankruptcy the preferred may be a better play than the common stock.  Often
times the preferred is cheaper relative to the potential return compared with
the common,  and MAY fair better in bankruptcy court.  Not for the faint of 
heart.  Not for widows and orphans.  Not for the retired with a small nest egg.

As part of a diversified common stock holding,  convertible preferred stock 
near or above the conversion price may be better than owning the common.


> The risk is that if Bethlehem is outmaneuvered by its competitors, the 
> company will go under; and so will the pfd.  A more realistic risk is
> that if interest rates rise, the price of the pfd. might suffer as well.

As noted above,  the company DOES NOT HAVE TO GO UNDER TO STOP PAYING DIVIDENDS
on preferred stock.  Suggesting that a retired person with limited means buy a
single preferred stock is not good advice.


Phil

    In the long run, you can't earn more than 2 to 3 percent from
    capital at low risk, in real terms.  Any higher return is almost
    always nominal, i.e. includes an inflation component (and often
    a tax component, but that's a complication I'll avoid here).
    Now that inflation is momentarily lower, the nominal return is
    lower too.
    
    When your mother was getting 8%, that was 2% real return, 5%
    inflation compensation.  She should have been re-investing that
    5% if she wanted to keep a steady real income (I know, hindsight
    is better than foresight, and I can understand the panic now).
    So through those years of living on _all_ the interest she was
    consuming capital as well.
    
    If all she has is 75 thousand, she's not going to be able to
    live off it for long, even if her expected lifespan allows using
    some amount of capital each year (a reverse amortization, like
    running a mortgage backwards).  3% of 75,000 is only 2,250 a
    year.  
    
    You could get some idea of how much you can expect from 75,000 by
    pricing annuities.  You should also look up mortality tables and
    get an estimate of how many years have to be funded.  Note that
    annuities are generally non-inflation adjusted (steady nominal
    dollars) and thus overstate the amount of income you can get from
    a lump sum.
    
    Frankly, if you or your siblings don't come up with the extra from
    now until she dies, she will just have to spend less per month.
    And it won't get any better, especially if she's consuming capital
    now--every dollar spent of that 75,000 is less income in the future.
    
    I'm sorry to be the bearer of such bad news.
    
    That said, it's true that investing some of that lump sum in equities
    is very likely to help in the long run, as in the past equities have
    shown real--not nominal--growth of a few percent (don't have the figure
    handy) per year more than bonds.  Certainly I'd recommend that anyone
    under 80 have some money in equities--in your case stock mutual funds.
    Another decade of growth might repair some of the capital consumption
    of the past decade.  How much to put in stocks depends on how long
    she can wait.  Also note that it's crucial NOT to consume the nominal
    income from the mutual fund or the stock dividends, as it's only by
    re-investing them that you can achieve the growth you desire.
    
    This is a hard situation you find yourself in, and one you share (or
    will share) with many other baby-boomers.
    
    		-John Bishop

    Is it true that if a parent gives any interest gained per year as a 
    "gift" to any of here children that she does not have to claim the
    interest on her tax forms as revenue as long as the gift is under 10k
    per sibling and that the sibling does not have to claim it if the gift
    is under 10k? If this is true then I think we all know what happens
    from here.
    	
    	Also what about the Save plan that Dec has? Fund A runs between 6
    and 8 % on the average. Would it be wise for myself to take the max
    that I can on this (knowing that it will be moms money) and somehow
    figure out what the % would be after the year is done with? I probably
    confused everybody with what I'm thinking and trying to say..
    
    Is it foolish to think something like this
    
    I contribute my max into save which I think is 8% of my salary. The 8%
    is really coming from moms pocket. After the year is over I take the
    balance of what was contributed that year plus the 8% gain in interest
    minus (some unknow %) that I'll get hit with when I retire 35 years
    from know and that would be the net gain of moms investment that year?
    
    Sounds good on paper but I must be missing something?

You're confusing things on the gift.  All your mom's income, including interest
and dividends, must be declared on her income tax.  And she is entitled to
give a max of $10k per year to anyone without there being a gift tax on it.
That doesn't equate to how you put it all together.  In other words, but giving
you her interest, it would not mean she doesn't have to claim it on her income
taxes.  It just means there's no gift tax due for gifts less than $10k.

And I don't quite understand how you'd work out the SAVE thing you mentioned.
Yes, your money in fund A would be growing at a known rate, but how would
you manage to give that to your mom given that you can't take it out of your
SAVE account til you retire?

Has she considered trying to reduce some of her expenses? My mother-in-law is
in a similar situation where her expenses exceed her monthly income.  We had
all suggested she get a cheaper apartment, but she chose to get a roommate
instead.  Since it's her aunt who was in a similar situation, it has worked
out well for both of them.  Perhaps a roommate may also be an alternative
for your mother.

Also, if she has an apartment, perhaps she might look at elderly housing. My
folks have looked at that, and are currently on a waiting list to get into
their preferred complex. I understand that the rent is a function of income,
so that might also help your mom out.

    Ok so the "gift" plan would not work how I had hoped it would since it
    still shows up on her income. Thanks for clearing that up for me.
    
    As for the Save part I would have to take out whatever money was put
    into the 401k plan Plus whatever % gained from my regular savings
    account to pay her off at the end of the year.  

    I don't think you plan with the 401K will work either. When you take
    money out of the 401K and you are not at retirement age, you'll be hit
    with a 10% penalty charge. That will wipe out more than what you can
    earn in Fund A.
    
    If this is possible... Can you and your brother and sisters invest her
    $75K in a growth mutual fund and not touch that money at all. Then,
    all of you have to put your efforts together and come up with her
    living expenses every month. It is reasonable to expect a investment in
    a good growth fund to get at least 10% returns - in a long run. So, you
    and your brothers and sisters are paying for your mother's living
    expenses now. After she dies (excuse me for using that word), the four
    of you can than cash in on the investment and divide that money. This
    way, the investment becomes a "long term" investment. It will have
    greater capital appreciation and you don't have to worry about the
    short term pitfalls and it not generating enough income, etc. 
    
    I know this is a wild idea. But, if I am in that situation, I may
    consider it.
    
    Mike

    I would not be taking money out of the 401k plan I was planning on
    taking whatever money that was owed to my mom at the end of the year
    from my personal savings account. This way its really coming from my 
    own pocket NOW but my 401k is being built up for later.. You have a
    good point about paying her bills now and that is 1 of the suggestions
    I will make with the family.

    
    	Let me amplify .10 a little bit.  As long as all of you siblings
    are working together (which was why I asked whether you were an only
    child or not -- for all its potential disadvantages in this situation,
    being an only child does simplify the coordination needs...) and can
    afford to help your mom, it really doesn't matter if she uses her own
    money until it is exhausted or if all of you pitch in now so that
    she doesn't have to touch the principle.  Why?  My apologies also for
    using the "d" word, but when your mom dies, everything that is left in
    her estate (I'm presuming here) goes to you four kids.  If all of you
    pitch in now to solve her monthly deficit, the estate will be that much
    bigger so you'll effectively get your money back.  If she uses her
    money to handle the difference now, you four have more money now (since
    you're not giving her anything) but you get less later (at the risk
    that you four will have to fund her 100% if she lives long enough to
    drain the principle to $0).
    
    	Things would, of course, get really sticky in this situation if any
    of you four don't have the financial ability to help her, or if her
    will specifies any distribution of the estate that isn't 25/25/25/25.
    
    							-craig

  I have a similar situation to .0 where my mother has asked me to
  conservatively invest some of the money that she presently has in the 
  bank. 

  You might take a look at Kiplinger's March 1993 issue in which they
  suggest mutual funds for given needs (eg. retired person needing income).
  Their suggestions for income are as follows:
		Benham GNMA			15-25%
		Financial Industrial Income	5-15%
		Harbor Bond			20-30%
		Lindner Dividend		5-15%
		Stratton Monthly Dividend	5-15%
		Strong Short Term Bond		10-20%
		USAA Income Stock		5-15%
  Suitability: For income-oriented retirees who are seeking some growth as
		protection from inflation and who are willing to tolerate at
		least a small amount of volatility.

  Usually when I think of investing conservatively, I first think money of 
  markets and then bonds. But with interest rates so low, I'm concerned about 
  putting money into bonds. So, I expect to only invest in short to intermediate
  term bonds.

  Since I am by no means an expert, I will most likely invest with mutual
  funds. In order to diversify, I'm expecting to put her in about 4 mutual funds.
  And, since she is uncomfortable about the whole investment process, when 
  possible I will choose as many of the funds from on family as possible. That 
  way if she has questions or problems she can speak with a single representative.

  So far, I'm leaning toward investment in the following:

		Lindner Dividend		25%
		Vanguard Fixed Income -
		  Short Term Corp		25%
		Benham GNMA			25%
		???				25%

 
  Presently my last choice would probably be the USAA Income Stock
  or Scudder Short Term Bond.

  This is my first round of trying to figure out the problem. I am no
  means fixed on any of these, but I'd like to make a decision in the
  next month. Any comments or suggestions would be very appreciated.

					thanks,
					jp

    Just wanted to get a feeling from what we are thinking of.
    
    	Looking into having Mom buy a condo at 40k (cash). Her 4 children
    including myself will be paying her $100 a month each which will give
    her a little extra $ per month. The monthly condo fee is $183 per month
    which includes heat and water/sewer.
    
    She is "short" $400 a month now, If we do this her future looks like 
    this (i think)
    
    $ 650  (her rent now)
    - 183  (condo fee)
    _  16  (insurance)
    - 100  (Interest on 40k in the savings account she would be getting)
    ------
    $ 351 savings a month
    
    With the $ 351 savings put towards what she is short per month now $400
    she is now short only $49.00
    
    The $400 (her kids) per month she is now a Plus $351 a month.
    
    I know condo's are not the best investment but she is renting now at a
    cost of $7,800 per year.
    
    any thoughts???

 >   I know condo's are not the best investment but she is renting now at a
 >   cost of $7,800 per year.
    
I recently bought a condo (in MA) in part to cut down my living expenses.
This sounds like a move you could look at seriously if it helps solve the 
financial problem.

Don't forget that as an owner your mom would have real estate taxes to 
pay, too.

If she doesn't plan to move again, and is comfortable in the condo, perhaps
the investment potential isn't so important.

Some other comments based on my recent experience:

	- be sure the condo association is financially sound (basically that
they have a reserve fund for long term improvements, and add to it from the
condo fees collected).  Otherwise there is a higher risk that the condo fee 
will have to be raised appreciably at some point to cover repairs.

	- a large percentage of owner-occupied units is healthier than a
large percentage of renters. Owners take better care of their properties
and a greater interest in how the condo association is run.

	- I'm assuming the condo association is run by the owners, not
by a developer who hasn't turned it over to them yet.  A developer may not
be building up a reserve fund in order to keep the (apparent) fees low.

Stan

    One problem I see immediately is that you are assuming the $183 monthly
    condo fee will stay the same. Well, that is not likely. A condo fee is
    just like another tax. It only goes up and it goes up frequestly. We 
    live in a condo and we lived there for about 6 years. For the past 6
    years, our condo fee went up 58%. And yes, tell me about condo not
    being a good investment.  :-( 
    
    I think a condo is a good place for a retired person to live. All the
    maintenance stuff is taken care of by the association. So, it's kind of
    a "worry free" life style. And your plan does seem to have some merit
    to it. But, I also see a couple of shortfalls, too....
    
    1)	An increase in condo fee may mean you and your brothers/sisters have
    	to put out more money each month down the road. 
    
    2)	It is not likely that in the next few (many) years, your condo will 
    	appreciate in value as much as the stock market. So, this means you 
    	and your brothers/sisters will have less money to divide. 
    
    And also, don't forget about the RE tax on the condo. That is
    guaranteed to increase in the future, too. You may want to "buy" something
    that will at least keep up with the inflation. I don't see the RE market
    will do that in the near term.
    
    MikE 

      I  am  a  former condo owner and a former president of the onwer's
      association.   Although  my  lifestyle  is  such  that  owning  an
      individual  home is now right for me, my condo experience was good
      and it looks like the plan for "mom" is a good one.
      
      To the considerations in previous replies -- all of them good!  --
      I add the following:
          
          Is  the  condominium  complete?   Or are new units still being
          built?  If new units are still in construction then the  condo
          is "unstable" and will remain so until all units are completed
          and sold. I would suggest that your mom would be better off in
          a condominium that has been complete for at least 1-3 years.
          
          (Units  in a new condominium can be both a good investment and
          a pleasant place to live, but they require  greater  attention
          to "politics" than your mom might want to give.)
          
          How many units are in the condominium? If there are least than
          ~50 then the condominium is small enough to be run efficiently
          by  the  homeowners without professional management.  If there
          are more than ~100 units then it is large enough to be able to
          afford professional management.  Condominiums with between ~50
          and ~100 units are big enough to need but NOT big enough to be
          able  to  afford  professional  management.  I would recommend
          avoiding them.

          Get  and  *READ*  copies  of  the condominium declaration, the
          owner's association bylaws, and the condominium rules. This is
          tedious  and boring, but do it anyway because it could prevent
          some very unpleasant surprises. Also get copies of the current
          year's  budget  and the last year or two of financial reports.
          Read them and look for stability and good  financial  planning
          --  or  the lack thereof.  If you don't trust yourself to read
          and understand these, pay  an  attorney,  accountant  or  some
          other trusted advisor to read them and render an opinion.
          
          (It always amazes me that many people will invest the price of
          a condo and *IGNORE* these important documents.  In  buying  a
          unit  in a condominium you are, in effect, going into business
          with all the other owners. These documents describe the mutual
          duties  and  rights  by  which this business is run.  They ARE
          important.)
          
          Check on the liability and property insurance that the owner's
          association has. If it is not adequate, the owner's can end up
          getting  a  big  bill!   I understand that insurance companies
          offer special liability policies  for  condo  owner's.   These
          policies  cover  liability  that accrues to the condo owner in
          case  the  owner's  association  is  unable  to  pay   through
          insurance  or  its  own  assets.  Of course you need a policy,
          similar to a "renter's polciy" to cover your own liability for
          occurances  within  your  unit,  as  well as property loss for
          personal property and furnishings.   
          
          You  also need property coverage insurance on your unit.  This
          may or may not be covered by the association's master  policy.
          THIS  DIFFERS  FROM  ONE  CONDOMINIUM  TO  ANOTHER, and is one
          reason why you should check carefully.

Hi,

I have a "helping mom" question too -- although this is a mom of a friend
of mine.   My friend's mother is 70 years old, has very minimal expenses,
is in okay health, but has a cash shortage problem.  She has 40K which is
her life savings, and which my friend "manages" for her.  *All* of her
mother's money is in a money market fund!  Her mother has been spending
about 10% of this money a year for misc. things.  I pointed out to my
friend that if her mother is withdrawing 10% a year, and is earning around
3% interest, that her mother's money will be gone in 12 years.

My friend is looking to me for advice on what to do with her mother's
money, and I feel very awkward "telling" her anything.  She is extremely
nervous about loosing principal, but understands there won't be any
principal left if she doesn't invest the money somewhere soon.

My friend wants to keep at least 10K of her mother's money in a money
market fund for backup emergencies.  I suggested that she might want to
consider the following options:

Fidelity Cash Reserves         (10K)
Fidelity Short Term Bond fund  (15K)
Fidelity GNMA Portfolio        (15K)

(My friend likes to deal with Fido)

According to Fidelity's most recent focus magazine, STBF had a total (and
cumulative) return of 8.9% for the 1 year period just ending in March. The
GNMA Portfolio had a 10% return.  With the larger portion of her mother's
money in these funds we figured  she might average around 8%.  This would
extend the "life" of her funds out to 17 years or so -- which should be
sufficient.  Inflation shouldn't be a factor since her mother's living
expenses are so low and her expenses are mainly braces for her grandchild,
gifts for children, etc.  Her mother has no other equity (she lives in an
apt. and lives off of social security)

My friend is *extremely* nervous about her mother's money and *I* am
extremely nervous about offering *any* financial "advice" at all--

However .....  how were my "suggestions" for someone who is absolutely
terrified to put any of the money into equities?   I'd feel a little less
reluctant making these suggestions to my friend if some of you commented on
the situation.

Thanks

Diana

    It appears that both your friend and her mother are unable to accept
    the risk ofmarket investing/gambling.  Odds are that the market will
    jump downward at least twice during the next dozen or so years.  They
    will see how much their value has gone down on paper, panic, get out
    altogether and translate paper loss (which would have turned back to
    profits within 2 years) into real losses - at least that is the
    historical (and hysterical) experiences.  All things considered, and if
    it were MY nervous mother, I would recommend US savings bonds that are
    still paying out more than banks and are as 100% guaranteed as any
    investment can be.
    
    As always, For What It's Worth......,
    Dave

    re .18
    
    I don't think now is the time to be getting INTO bond funds if you
    can't stand any principle fluctuation. I'm in the Fido Sp sh term bond
    fund myself but I've been willing to accept the risk since I don't need
    the money today or tomorrow: rather I'm just using it as a money market
    alternative. It goes up a few cents,down a few - that's OK but how
    would she feel when rates accelerate and the price of her fund goes
    down ? 
    
    For the past few years, I would have agreed, but now I think short rates
    will be going up in the next few years so the price of the funds will
    be going down. I'm watching the exits for signs of more inflation and
    then I'm OUT of the bond funds.
    

Re: last two replies:

I understand the concern about going into bond funds, but what is the
alternative if this woman needs around 8-9% return to stretch her money out
17 years?

Savings bonds and treasuries won't do it.....   I figured a short term bond
fund (and GNMA fund) would have minimal flucuation of principal, and
provide the extra return she needed.  Or, maybe even a dividend paying
income fund like Fido Utilities portfolio (or whatever it's called), where
the fund invests in companies paying fairly good dividends and price per
share is sort of stable in those companies.

As interest rates begin to rise, she could maybe even switch over to CD's
or treasuries?

I don't know.  I *hate* offering suggestions, but my friend is so reluctant
to seek it from someone she doesn't know and trust.

A dilemma.......

Diana

      Diana --
      
>I understand the concern about going into bond funds, but what is the
>alternative if this woman needs around 8-9% return to stretch her money out
>17 years?

      Reality: There may be *NO* alternative.
      
      If  you're  friend  and  her  mother  ARE confident enough to ride
      through market fluctuations, then I think your recommendations are
      about as good as you're going to get.
      
      If  they  aren't,  then  the  savings  bond idea is about the best
      possible, even although it does not meet their goals.
      
      Just  about  the  WORST think they could do is to take your advise
      and then sell out at a real loss the first time  the  market  goes
      down.  They'd be better to say in the money fund.
      
      ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
      
      Here is a suggestion which recognizes the reality that your friend
      will at some point very likely be faced with  providing  at  least
      some  support for her mother.  Put the $40k into a trust that will
      pay income only to the mother.  Have your friend agree to make  up
      the  difference between that income and $4000.  In return for this
      the assets of the trust would pass to your friend on her  mother's
      death.
      
      This  allows  your  friend  to  "guarantee" her mother's financial
      independence, while allowing the  trust  to  be  invested  with  a
      prudent  risk/reward strategy.  While your friend will have to lay
      out cash now, she will be at least partly repaid  when  the  trust
      funds pass to her. This could provide more money for the mother at
      less cost to your friend than just letting the  $40k  shrink  away
      until nothing is left.

      NOTE:  (1) This assumes your friend is able and willing to provide
      some financial support for her mother.  (2) I am *NOT* any sort of
      financial  advisor.   This  trust  idea should be reviewed with an
      appropriate legal/financial advisor.

    How many kids does she have? The reason I ask if they all have "loans"
    or Credit card with high interest rates maybe they could pay off there
    loans with high interest and maybe give "mom" 8% on the money they
    borrow from her to pay them off.. "its tax free for mom also"

That's a good idea, and I think the 8% interest rate they'd pay mom
probably falls within IRS standards of a "fair" loan.  The problem is
however, the daughter (my friend) just paid off all her credit card debt. 
The other sister is a single mother raising a kid, and she has *no* money
(no debt either).  There's a brother too, and he has no money either.

Charlie -- thanks for your input too.  I'm not so sure I understand the
benefit of the trust though.  Is that just so the money passes to the
daughter outside of probate?

Diana

    re .24
    
    And the mother can't change her mind or use it all up when ill.
    
    So it's far more likely to show up in the daughter's hands.
    
    		-John Bishop

    
income fund like Fido Utilities portfolio (or whatever it's called), where
    
    Fidelity Select Utility has a hefty load.
    
    Fidelity Utility Income is no-load.
    
    
    
    Kaizad

>    Fidelity Select Utility has a hefty load.
    
>    Fidelity Utility Income is no-load.
    
    
Right.  I meant the Fidelity Utility Income Fund (no load).  Although it's
considered a "select" fund, I imagine it's still appropriate for a retiree.


Diana

      .25 is the essence of my idea.  If the daughter is going to end up
      paying the mother's expenses anyway, the trust helps  to  minimize
      what  the daughter must lay out, plus guarantees that the daughter
      will eventually get the $40K.  Yes, my understanding is  that  the
      trust  funds  will  not  pass through probate.  That may have some
      benefit, but is not an important part of my suggestion.

      I  suggested this because the only alternative I can see is to use
      up the $40k and then rely on public funds to support  the  mother.
      If the daughter is, as I said, able and willing, and if the mother
      will cooperate, then the trust idea may  make  the  mother's  life
      considerably  more  pleasant, and the daughter's cost considerably
      lower.
      
      Don't  forget my STRONG recommendation to review this idea with an
      appropriately knowledgeable trust attorney or  financial  advisor.
      There  are  many  important  considerations.   One to ask about is
      whether or not the trust fund principle can be  protected  if  the
      mother encounters some major health expenses.  

> Right.  I meant the Fidelity Utility Income Fund (no load).  Although it's
> considered a "select" fund, I imagine it's still appropriate for a retiree.

Actually it isn't a "select" fund.  Maybe you meant "sector" fund?   It is
more riskier than you would think.  It's up ~22% the last 12 months.  You don't 
usually get that kind of return with out some risk. Also, when interest
rates start to climb, I would expect this funds NAV to drop.

Why not look at T-Rowe-Price Short Term Bond Fund.  They *stress* minimal
principle fluctuation, and even present a graph in their literature on 
the fluctuation of NAV over many years.  Sure, their yeild may not be the
best of the STB funds, but you'll certainly do better than a money market
fund.

John Piekos

Yes, sorry, I meant "sector".

    This is a tough one.  Mom2 has even less money, and is even less happy
    with risk.

    I think there are two issues for the author of .18 to consider:

	o What her role in this is, and what the consequences to
	  her and her friend are;

	o What her advice is.

    I can talk a bit about the second issue, but the first one is something
    for her to consider:  in particular, if the "right" answer involves
    volatile investments which might lead to panic (as some previous notes
    have mentioned), then should she skew the answer to a less-right version
    with lower volatility, or try to educate her friend?  What will happen
    if her advice is followed and the bond market drops--will she lose her
    friend?  Does she want to be involved in family money issues, which are
    always sticky?  A issue in both categories is can this family _not_ spend
    income from this money--that is, do they have the discipline to spend only
    an agreed-on amount each year, or will they wind up spending all the
    nominal income, thus making re-investment impossible and ensuring that
    the capital will be used up sooner?

    Ok, on to the second part--but there's a caveat at the end, so be
    warned!

    First off, a 70-year-old in "okay health" has to plan to live a good
    long time--90 or more is not out of consideration.  So we have Social
    Security and $40,000 to work with.  This isn't very much--actually, it
    is too little.  So the goal is to make the best of a bad deal (as an
    aside, this and the previous discussion are powerful motivators for me
    to take retirement far more seriously than I did before!).

    One area to explore is other resources: does Mom2 have things to sell?
    Can she move to a cheaper area?  Can she change her budget (e.g. cut out
    life insurance and magazine subscriptions, stop using a car)?  An extra
    hundred dollars a year would make a difference here, a few extra thousand
    in capital would make a difference.

    Another area for Mom2 and her family to think about--and it won't be
    fun or easy--is a fall-back plan in case Mom2 has a sudden expense or if
    the $40,000 is used up.  The trust idea is a start along those lines.

    The "right" solution for using $40,000 for 20 or more years of income
    is a combination including a significant amount of equity as well as
    bonds (e.g. 10% money market, 70% balanced fund, 20% growth fund).  But
    this wouldn't produce more than about 5% to be treated as income, and
    it would have ups and downs which don't meet the requirements.

    Diana's suggestion of 10K in a money market, 15K each in short bonds and
    Ginnie Maes isn't a bad start, but it's very exposed to interest rate
    risk, and like others I think interest rates are not about to go 
    dramatically lower.  The recent high returns in bonds and mortgages
    (Ginnie Maes) are the result of recent interest-rate drops, which are
    thus not going to be repeated.  So yields will drop on those funds.

    I like the suggestion of the utility fund. I think it's worthwhile pushing
    to have some of the money in equities, even if only in a balanced fund.

    So as a first step I recommend the following mix, but I'm not entirely
    happy with it, for various reasons. I am not an expert either, nor a
    paid professional, etc.:

    Fidelity Cash Reserves         (10K)    [ Mom2 requirement, earns ~2%
    Fidelity Short Term Bond fund  (10K)    [ earns about 5% +- capital changes
    Fidelity Utility Income	   ( 5K)    [ earns about 4% +-, low growth
    no-load balanced fund	   (15K)    [ earns about 2% +-, medium growth,
					    [ expect 5% capital gain on average.

    I don't remember off-hand what balanced funds Fidelity has, but Vanguard
    has a no-load which is roughly 60% in stocks, 40% in bonds and has very
    low expensees (Wellesly Income?).

    Total expected income is only $1200 if capital gains on the latter two
    funds are re-invested, and about $2000 if they are spent.  I suspect this
    would be unacceptable.

    Further, as I said, I'm unhappy with this:  I went with the requirement
    of $10K in a money-market fund, which greatly drops the total return;
    I included the bonds for steady yield, but fear loss of capital; longer
    bonds seem too risky; I fear the equity market is in for some rough times
    in the next few years and Mom2 and her family sound like weak hands.

    As a zeroth step--before implementing the above--I'd look into using
    a trust, a loan or an annuity to trade the cash for a pre-defined income
    stream (paid by the daughters if they don't trust insurance companies),
    which brings up issues of control and trust within Mom2's family.
    
    So my _real_ answer is that these people need to think about the real
    issues, and Diana should _not_ attempt to advise on a portfolio before
    the real issues are settled, as that may be the wrong problem.  Issues:

	o How much will Mom2 spend, and who gets to say?
	o Who controls this $40K?
	o Who will pay for Mom2, and how much?
	o If there is any money left when Mom2 dies, who gets it?
	o If it runs out, who pays for her, and how much?
    	o How are expenses shared between the children?

    One possible answer is the trust (Mom2 gives to trust irrevokably,
    trust to descend to daughter, daughter gives Mom2 $4K a year).  This
    requires a great deal of trust on Mom2's side and a steady income on
    the daughter's side.  And there's no inflation protection for Mom2
    here.

    Another is Mom2 lends the money to daughter at 10% or whatever the 
    magic number is for Mom2 to have the income she wants.  Daughter
    invests it in growth stocks for her own retirement.  If the loan is
    interest-only, Mom2 can forgive the loan in her will.  But now the
    daughter is trusting, and paying as well.  And if the loan is not
    interest-only, it might run out before Mom2 does.  And there's no
    inflation protection here, either.

    And setting up trusts costs money as well (figure on about $300 and
    some continuing cost each year for tax forms, plus extra if you have
    a paid trustee).  Plus there's the issue of fairness between the two
    daughters.

    If you want to help, you can get them information--like how much
    of an annuity $40K would buy, what the tax consequences of a trust
    or a loan would be, what responsibilites the daughter has if the
    mother is broke, and so on.  I think your portfolio advice should
    maybe be limited to estimating return and risk.  They need to 
    understand the limits (e.g. my note 402.6).

    		-John Bishop

    Last night on WBZ, Johnathan Pon (sp?) was on giving financial
    advice from 7-10. Two things: He was asked about the Fido short
    term bond fund. He said an increase in interest rates of 1% would
    lose about 4% of principle. As mentioned last note, the interest 
    rate is 5% or so. He did not think this was a bad risk to take for
    a conservative investor.
    
    The other item worth mentioning is an address for information on
    investing for yourself in the 90's through no-load funds and stocks.
    Send a large SASE along with $1 to: Investment Info, P.O. BOX 350, 
    Watertown, MA 02272.  I sent for it this morning and if it's really
    informative I'll post another note.
    /Bob

John,

I agree completely about showing them the possibilities and I think you have
offered up some pretty sage advice.  I'm going to share everything with
them that I have read and learned from all the replies to my original note --
then I'll step back and let them do what they need to do.

Thanks for the reply, John....  as always your comments are insightful
and take into consideration all aspects of a situation.

Diana

    
    Diana,
    
This same question was asked/answered in the April '93 issue of the Benham
market letter - Perspective. The VP of research has the same dilemma with
his own mother's money. Here is how he answered:

A conservative investor all her life, my mother was taught to follow the
savings rates posted in the bank lobby. When I told her what our GNMA fund
was yielding, she gladly left the ranks of savers and became an investor
for the first time in her life. I couldn't help but feel anxious, though,
because no matter how low the risk, the actual returns of any investment 
are never guaranteed. 

This is the advice that I gave to my mother:

First separate your savings from your investments. Your savings are cash
reserves, or 'Mattress Money'. Your investments are intended to produce 
income or growth. With savings you don't want ANY fluctuations in the value
of your principal. It's money with checkbook liquidity for emergencies.
Your yield should be enough to keep pace with inflation.

After she allocated some of her cash reserves into savings, she still had
to take care of her primary concern: income. For that you have to make 
'investments'. It's not necessary to take high risks, but you do need to be 
able to tolerate some fluctuations in the value of your investment. That's 
why it's so important to focus on the long-term investment objective 
instead of day-to-day moves in the market. That's his job. (Portfolio mgr).

My mother's objective is achieved by the combination of income and credit 
safety provided by a Ginnie Mae fund investment. It's best for her to be 
patient and to remember that INCOME is her primary need. So a buy and hold
stategy makes sense.

The accompanying table compares dividends paid for 1992 on a $10,000
investment in 3 funds: Gov't Agency Fund (money mkt),Adjustable Rate Gov't
Securities (ARM Fund) and GNMA Income Fund. The two mortgage-backed funds 
paid substantially higher dividend despite a dramatic surge in mortgage
refinancings.

A bond fund's higher, steadier dividends act as a cushion against possible
share price declines. For example, the GNMA Fund generates enough div yield
(compared to the money market designed to maintain a stable share price)
that it's share price could (and may) drop 35 cents per year and it would
still generate a total return that would equal the return from a money market 
fund. For the less volatile ARM Fund, the share price could fall about 20 
cents per year and still match the return on the money market fund. The 
longer you stick with these investments, the greater the cushion you build.

Patience, balance and diversification enable new investors like my mother to 
ignore the day-to-day swings in a fund's share price. 
These are sensible,achievable goals.

     ----------------------------------------------------------------------
              EARNINGS ON A $10,000 INVESTMENT FOR 1992
     
      Benham Fund               Div.    Share price     Avg annual total
                               Paid        Range            Return
     ----------------------------------------------------------------------

     Government Agency        $323.20    $1.00-$1.00        3.39 %

     Adjustable Rate Gov't
     Securities (ARM)         $594.95   $10.01-$10.17       5.23 %

     GNMA Income Fund         $769.04   $10.45-$10.92       7.67 %

     ----------------------------------------------------------------------

Note usual disclaimers about price/yield may vary. Price will fluctuate,etc.
Shares may be worth more/less than what you paid,etc ....

Thanks a lot Bob.  Some more good information to pass on to my friend and
her family.

Diana