SLAM DUNK : Investing Not Just Another Game to Melissa Barlow

Melissa Barlow says she learned the value of discipline and good strategy from basketball, which she played competitively throughout high school and college. Her impressive financial portfolio is ample proof that the lessons she learned on the court have served her well in the pocketbook.

Exercising financial restraint and a long-term fiscal approach that belie her age, the 31-year-old pharmaceutical account executive from the Inland Empire has already managed to accumulate a substantial nest egg. Barlow has $95,000 in her firm’s retirement plan, and an additional $67,000 invested independently in the stock market.

Barlow has even figured out how to make her love of hoops pay off. She no longer has to purchase tickets for college basketball games now that she referees professionally, a $15,000-a-year net that augments the $90,000 she earns in salary and bonuses from her job.

Nonetheless, Barlow isn’t satisfied. Although her acumen is the result of diligent research, Barlow sought the advice of a financial planner because she is still insecure about her investment decisions. She is also curious about estate planning.

Barlow was uncertain whether her burgeoning portfolio contained the proper degrees of diversity and risk. In addition, she wanted to know where she stood in relation to her long-term goals: retirement at age 60 with a yearly income between $50,000 and $60,000.

“I don’t want to live an extravagant life and I don’t want to work until I’m in my 70s, either. I want to be able to travel and play golf somewhere warm,” Barlow observed. “But I don’t want a strict financial formula plan that will let me retire 15 years from now. I’d rather work an extra five years so I can continue to eat dinners out and take trips to the mountains.”

Little did Barlow realize she’s the type of client financial advisors dream about.

Judith Martindale, a certified financial planner from San Luis Obispo who reviewed Barlow’s portfolio, pronounced her finances “among the best” she’s ever come across. Not only is the self-taught investor well on her way to achieving her goals, Barlow’s yearly income of $105,000 also places her in the top 0.5% of female wage earners in the United States.

“Your savings are extraordinary. You clearly have a long-term horizon that’s unusual in anyone under the age of 60,” Martindale told Barlow.

Barlow is saving $1,100 a month, or about 10% of her income--exactly what Martindale recommends as a target savings rate.

“Most people aren’t saving enough. Most people are in denial,” Martindale said. “They don’t think about their retirement income, or they blindingly think it will all work out. They think the government will step in or they will receive an inheritance.”

Assuming a 3% inflation rate and a 10% annual return, Barlow will have saved $3.4 million by age 59, enough to enjoy a yearly retirement income of $105,000 in today’s dollars if she maintains her savings and investing habits--quite a bit more than she was counting on. This calculation did not include any Social Security benefits, which Martindale considers unpredictable for members of Generation X.

How did Barlow do it?

First, she paid off her $12,000 in student loans several years early, saving herself thousands of dollars in interest. Barlow refuses to yield to financial laziness or self-indulgence. A credit card issuer’s worst nightmare, she insists on paying her balance in full every month on her several cards, avoiding high interest charges.

In addition, she puts her cards to work, making sure to possess a card that awards her miles in an airline frequent-flier program. She also drives a company-provided car, a substantial savings since she does not face monthly car payments or lease charges.

Eschewing job hopping, Barlow has stayed at the firm that hired her shortly after her college graduation, slowly but surely moving up in the organization, acquiring valuable skills and amassing considerable savings through its 401(k) plan.

Barlow began contributing funds to her employer-sponsored retirement account when she joined the firm in 1987. She now contributes $9,500 annually--the federally imposed limit.

Moreover, Barlow has $300 a month deducted from her checking account and put toward the purchase of mutual fund shares. Not a foolproof method, but it prevents her from getting lazy and not making her monthly mutuals buy.

In addition, Barlow began investing independently three years ago, when she and her mother jointly purchased a few stocks. The two women enjoyed the research and made a profit, but quickly realized that co-ownership was a tax nightmare. They sold the stocks, and Melissa began buying shares on her own.

“When I was first starting out in the stock market, I got so neurotic. I would check the price of my stocks several times a day,” Barlow remembers, saying she eventually learned to remain calm about her new holdings, realizing they were a long-term proposition.

“Basketball taught me to stay the course. If you keep plugging away consistently, the gains will be there, just like in team sports.”

Barlow currently owns $2,050 in shares of Dave & Busters; $5,480 in Johnson & Johnson; $6,790 in Iomega; $12,710 in Intel; $3,040 in Merck; $2,840 in Motorola; $1,025 in UFP Technologies and $7,860 in US Robotics. She also includes several mutual funds in her account, such as $3,975 in Warburg Pincus International Equity (five-year average annual return: 12.5%); $5,790 in SteinRoe Capital Opportunities (five-year average annual return: 20.6%) and $5,220 in Strong Schafer Value (five-year average annual return: 17.8%). Finally, she keeps $10,500 in a Charles Schwab money market account.

It’s worth noting that Barlow is unmarried and childless, and says she plans to stay that way. Those two factors are major contributors to her high savings rate. The $1,500 cost of her springer spaniel’s illness sounds expensive, but it’s nothing compared with the cost of raising a child and paying for child care, orthodontia and after-school activities.

Barlow’s excellent credit record permits her to keep only $10,500 in her money market account, an amount that seems suspiciously low. What about all that much-talked-about advice suggesting that you keep six months’ salary in cash in case of sudden unemployment?

It’s not necessarily true, says Martindale. If a person has a steady, reliable job and little debt, there is no reason to leave large sums of money in a low-interest-earning account. Instead, Barlow could always tap into her credit lines if an emergency looms.

The financial analyst’s approval cheered Barlow, who said she had argued over Thanksgiving dinner about her savings strategy with a family member who is a banker.

“He was banging his fist on the table, insisting I needed six months’ reserves on hand,” Barlow remembered.

Martindale approved of Barlow’s current diversity, pointing out that she has a good mix of stocks that do not rely too heavily on one particular industry, and that she also includes international investment funds in her portfolio.

Martindale also noted that in both Barlow’s 401(k) and her personal portfolio, she is maintaining a 70-30 ratio between stocks and bonds--a ratio appropriate for her age.

“The currently accepted wisdom is that you should take the number 100, subtract your age, and that’s the percentage of your savings you should have in stocks. Melissa is almost perfect,” Martindale observes. “It’s not too much risk as long as your stomach can handle it. Some analysts are more radical now and say all funds should be in stocks, but personally, I would be nervous.”

Barlow did not fall into the novice investor’s trap and assume that bonds are a safer investment than stocks, because the former offer a guaranteed rate of return as opposed to the stock market, where buyers suffer both profits and losses. In fact, since 1926 stocks have demonstrated a significantly greater annual compounded gain (10.8%) than either corporate bonds (5.7%) or Treasury bills (3.7%).

Yet as impressed as she was with Barlow’s financial handiwork, Martindale said that she could still stand to improve her individual investment strategies as well as ease her tax burden.

While Martindale urged Barlow to continue her 401(k) contributions, she recommended that she begin investing in variable annuity funds instead of the mutual funds now in her portfolio.

Investing in annuity funds will offer Barlow a way to reduce her taxable income. This is an important point, because she’s losing more than one-third of her income to state and federal taxes. Annuity funds offer interest, dividends, capital gains and no yearly tax. In return, buyers cannot withdraw the money from the account until they turn 59 1/2, unless they are willing to pay a stiff penalty. This should pose no problem for Barlow because her savings goal is a financially secure retirement.

Martindale, a fee-only planner who does not receive commissions from the investments she recommends, said Barlow should look into several funds offered in Vanguard’s Variable Annuity Plan, including its International Portfolio and Small Company Growth Portfolio, because they have a low fee schedule and no surrender charges if she decides to invest in another annuity fund.

The financial analyst also urged Barlow to unload her shares in Dave & Busters and Motorola because both are trading several dollars lower than her purchase price and she could claim the loss on her 1996 taxes.

Speaking of financial losses, Martindale also suggested that Barlow sell her home. Bought jointly with a friend in 1993 for $260,000, the house would now probably fetch only $230,000. This is a matter of some concern, because Barlow herself would like to sell the home and purchase another one closer to her office. However, she doesn’t want to lose money or let the bank foreclose, because the latter would severely damage her credit record.

Martindale assured Barlow that she could afford the financial hit of selling the property, noting that she could always divest her individual stocks and current mutual funds if she needs extra money for a down payment on a new residence.

“You have to weigh your financial loss versus your well-being loss,” Martindale advised. “There’s no guarantee the real estate market is going to improve over the next year or two. And you are still young enough to take a loss and make it up. Age counts!”

Martindale’s last words of advice for Barlow concerned catastrophe planning. While she pronounced herself satisfied with Barlow’s employer-provided life, health and disability insurance plans, she said the pharmaceutical sales representative had let some legal matters slide.

As a single woman, it’s important that Barlow ask a legal advisor about a living will and designate someone she trusts with the power of attorney. Moreover, Barlow needs a will, because now all her assets would automatically revert to her parents in the event of her death.

Because Barlow intends for her nieces and nephews to inherit a portion of her estate, Martindale urged her to see a lawyer and get her wishes down on paper. In addition, she urged Barlow to review the situation in five years, when her assets might increase to a point where a trust becomes a more efficient estate-planning decision.

So what does Barlow get from her money make-over? She gains the knowledge that a financial planner approves of both her long-term and short-term financial strategies. And the golf devotee can go to sleep at night and imagine a future where her biggest numbers-crunching problem will concern making par.

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This Week’s Make-Over

Investor: Melissa Barlow

Age: 31

Annual Income: $105,000

Primary Investment Goals: Retire before age 65 with an annual income between $50,000 and $60,000 (adjusted for inflation). Properly diversify her portfolio and ensure it contains the appropriate degrees of risk. Begin estate planning.

Current Portfolio

Individual stocks:

Dave & Busters

Johnson & Johnson

Iomega

Intel

Merck

Motorola

UFP Technologies

US Robotics

Mutual Funds:

Warburg Pincus International Equity

SteinRoe Capital Opportunities

Strong Schafer Value

Retirement funds:

401(k) currently valued at $95,000

Cash:

$10,500 in a Charles Schwab money market fund

Recommendations

Retirement: Continue adding the legal maximum to well-diversified 401(k) plan.

Investments: Sell Dave & Busters and Motorola, and take a loss on 1996 tax return. Cease investing in current mutual funds and move into annuity funds.

Housing: Take loss on Inland Empire home and relocate nearer to office.

Estate Planning: Have a lawyer draw up a will, living will and power of attorney.

Recommended New Portfolio

Vanguard Variable Annuity Plan funds, including the International Portfolio and Small Company Growth Portfolio.

Meet the Planner

Judith Martindale is a certified financial planner in San Luis Obispo and co-author of “52 Simple Ways to Manage Your Money” and “A Woman’s Guide to Retirement Planning.” She received a master’s in education from the University of Cincinnati. She is also a registered investment advisor.