INVESTED INTERESTS

AFTER THE BACON HAS BEEN DULY brought home, the gas tanks are full, the resident clotheshorse is well-tended and those ends have finally met, there comes another economic challenge, one that can be infinitely more titillating than watching the dollars take care of themselves: wisely investing the surplus.

Extremes are the vogue with the many Dallasites who manage to accumulate more shrinking dollars than are required to keep the kiddies in Wheaties. The trend is either to blow all in one fell swoop on some unaccustomed luxury, or to park the excess money in a traditional savings account, with hopes of enhancing security. Often we find ourselves watching our hard-earned buying power slowly disappear into the clutches of double-digit inflation.

But you don’t have to trust your savings to these uncertain extremes. Even during today’s chaotic and unpredictable economic times, there are sound ways to put your money to work, to beat galloping interest rates, and to become genuinely wealthy-if only the right investment vehicle is used.

According to investment experts, there are only two or three hard and fast rules for sound, sane investing. First and foremost, keep investment money separated from money budgeted for other purposes. Don’t confuse the cash reserve you’ve set aside for the house payment that’s due next week with your investment capital. As elementary as it sounds, many would-be investors fall into this trap, with disastrous financial results. Always remember: Investment money is money you can survive without – permanently.

And forget about getting rich overnight. Most good investments are long-term commitments to predetermined goals. If you want to gamble, fine; put your money into a trip to Las Vegas and enjoy yourself. But don’t confuse gambling with investing, because the two aren’t the same. Almost any investment entails a degree of risk. As one area economics professor puts it: “The anticipated rate of return is directly proportionate to the amount of risk involved.” Each investor must balance his own risk-return factor, basing his knowledge on reliable information and a solid understanding of what he wants to achieve -not on the roll of the dice or the turn of a card.

The final rule, then, is to know your investment objectives before choosing an investment vehicle. Many of your objectives will depend on personal circumstances – age, temperament, fixed expenses, cash flow and long-range financial prospects -as well as the exact amount of investment capital available. Trading in pork belly futures amid the dizzying ups and downs of the commodities market is not for the faint of heart. And if you worry yourself sick every time the Dow starts to slide, you’re probably better off with your money in a 5 1/4 percent savings account than in the hottest stock on Wall Street. Assess your strengths, weaknesses and goals before you take the investment plunge. Then you’ll be better able to stick with your choice and avoid jumping in and out and back and forth, a practice that has been the downfall of many spur-of-the-moment investors.

The following investment tips are not for those with well-developed $1 million investment portfolios, but are presented for the masses of folks of moderate means faced with opportunities -perhaps even needs -to invest some hard-earned cash. The information here deals with a broad range of investment possibilities, the sometimes conflicting theories of professional investment counselors and a few of the more common pitfalls awaiting the novice. For our purposes, potential investors will be divided into three categories: (1) the small investor with $1,000 or so in investment capital, (2) the mid-range investor with about $10,000 at his disposal, and (3) the upper-range investor with an investment potential of approximately $100,000.



IF YOU HAVE $1,000…

There was a time, not many years ago, when the individual with $1,000 in cold, hard, unencumbered cash was somebody to be reckoned with. A “grand” was a nice, tidy piece of change. You could buy a good used car with it, use it as a down payment on a comfortable three-bedroom house in the suburbs or even successfully capitalize your own small business with it. Unfortunately, times have changed; no longer is a “grand” quite so grand. But $1,000 is still a starting place, something for the small investor to build on.

Many people in the $1,000 investment class are young, just beginning to build a financial base. Their peak earning potential is still in the future -possibly several decades away. The trick here is to curb the natural impatience and impetuosity of youth. Don’t go for broke; turn that $1,000 into $2,000, then $4,000 and so on.

To keep your money from languishing in a passbook savings account, where interest may amount to less than half the annual inflation rate, you may want to buy a savings certificate or “CD” at a bank or savings and loan. The good thing about CDs is that they currently have an effective yield of more than 16 percent annually, which should allow you to stay well ahead of inflation. The bad thing about them is that they tie up your money for long periods -usually 2 1/2 years. At the end of 30 months, however, if you’ve let all the interest compound, your original $1,000 will have turned into $1,510.45 (based on the exact interest rate for one particular day in September -your actual yield could be slightly more or less). There is, incidentally, a penalty of six months interest for early withdrawal.

Banks and savings and loans are offering a new savings plan available to the pin money investor, offering a significant tax advantage. Known as the “all saver certificate,” it pays 70 percent of the treasury bill interest rate. On this plan, an individual is allowed to accumulate tax-free interest up to $1,000 (or up to $2,000 for married couples).

Many people with a few hundred unencumbered dollars consider putting their money into some type of collectibles -antique furniture, art objects, jewelry, old cars, rare coins or stamps. Some of these can be extremely good investments, but it is always advisable to know as much as possible about what you’re buying.

For every collectible of authentic value, however, there are 10,000 pieces of junk. A few weeks ago, unopened cans of Billy Beer, the short-lived brew produced in honor of President Carter’s errant brother, were being advertised in local newspapers for up to $500 each. But their true market value, according to reputable dealers, is just $10, and even that price is likely to drop over the next year or so.

Often, the investor in the $l,000-and-under class is reluctant to buy common stocks because he knows little or nothing about the stock market. If he does invest in stocks, he is likely to put his money in the “safe” issues where the security factor is high but the return is negligible. Chances are, he would be better off with a CD.

But if the young investor with limited finances puts his money into young, growing, solidly managed companies in carefully selected fields, he can grow along with them financially much faster than he might think possible. In fact, these so-called “growth stocks” may be the young investor’s best hope for a high rate of return at minimal long-term risk.

“Pick companies that show expertise in their field, financial solidity and strong management, and you have the potential for dramatic growth,” says Willard Samples, a veteran stockbroker with Rotan Mosle, who has worked with numerous small investors. “Look for companies where the multiple [the number of times the per-share earnings must be multiplied to equal the per-share price of the stock] is lower than it’s likely to be in the future. If you pick the right companies, you can expect a return of 30 to 35 percent per year- that’s something you’re never going to get with the old, established stocks.”

Probably even more important than the specific stocks you buy is the broker with whom you deal. Choose a broker who has been in the business for awhile-preferably 10 years or more -and who has a track record of building assets for other clients. Avoid brokers who advocate constant trading based on market fluctuations. Each time you buy or sell a stock, you must pay a brokerage fee, which will often nullify even a seemingly healthy paper profit for a small investor. If you buy good stocks and stay with them, you’re almost certain to profit.”

“Chosen carefully, today’s common stocks are far and away the best investment around,” says Samples. “Nothing else that the average person can afford will even come close.”

IF YOU HAVE $10,000…

Several more flexible -and more lucrative-types of savings investments are unavailable to the $ 1,000 investor. Six-month money market certificates, paying in excess of 17 percent annual interest (as of this writing) and U.S. treasury bills, which pay about the same, are available only in $10,000 increments.

Like almost everything else in our inflation-ridden society, a $10,000 nest egg is a far cry from what it used to be. But if you manage to accumulate this amount over and above what you need to live comfortably, you will have still attained a financial plateau that most people never reach. Bear in mind that this is not the same money you have rat-holed for a down payment on a home of your own or even for your dream vacation. There should be no strings attached to this stash; its only job should be to go to work for you and to multiply itself as many times as possible.

Most financial advisors agree that every working middle-income person should maintain a savings account for emergencies. A good rule of thumb is to keep a savings account balance totaling somewhere between three and six months’ regular, after-tax income. In the event of illness, job loss or other crises, this will enable you to retain a degree of economic normalcy while weathering the storm and will keep you from devastating your investment portfolio merely to survive.

On the other hand, if you leave thousands of dollars more than your necessary “survival fund” stagnant in a passbook savings account, you will cheat yourself and stunt your savings growth. Every day you let this money loaf causes further shrinkage in its buying and investing power through inflation. Even while drawing compounded interest of 5? percent, $100 left in a savings account during a year when inflation runs at 10 percent or more can gradually dwindle to $95. This is not investing; this is divesting.

At the $10,000 plateau, certain attractive investment potentials become available. One of the best of these is U.S. treasury bills, bought directly from the federal government, and paying (in September) more than 17 percent in annual interest for a mere six-month investment. Thus, treasury bills are not only an extremely “safe” investment, but also offer a buyer both high yield and a high degree of control over the money.

Money market certificates are also available in $10,000 increments for six-month periods. Although their interest rates are tied to those on treasury bills, their effective yield is somewhat less. During one week, for example, treasury bills were paying 1.114 percent more in interest than money market certificates.

The $10,000 level is also something of a watershed for the stock market. At this point, many brokerage houses will begin to encourage some buying “on margin,” which simply means that the house will finance credit purchases of stock by the investor. “If you’re a young professional person who earns a good salary and has $10,000 to invest, you can borrow another $10,000 on margin and buy $20,000 worth of stock,” says Samples. “If you buy the right stock and it doubles in a year, you’ve made $10,000, and you can deduct the $2,300 you paid in interest on your loan. It’s one of the few tax-sheltering devices available to the person in a normal tax bracket.”

Even greater care than usual should be used when buying stocks on margin. The interest rate of approximately 23 percent currently being charged by brokerage houses means that a growth rate of at least 35 to 40 percent per year will be needed for the investor to come out ahead.

Many stock market veterans feel that energy issues – particularly vigorous, well-managed companies engaged in the production of energy, rather than in its distribution or consumption -offer particularly strong possibilities over the next five or six years. “Let’s just say that right now I’d buy stock in a drilling company a helluva lot faster than I would in an airline,” one veteran says.

Most stock market experts are very cool at present toward gold, silver and other precious metals, especially as an investment for those in the $10,000 class. Most foresee no early return to the soaring prices of two years ago, which were primarily attributed to widespread negative feelings about the future of the U.S. economy in general. If “Reaganomics” can stabilize the economy, slow down inflation and restore sanity to interest rates, precious metals may remain depressed for a long time.

Assuming that the person with $10,000 to invest has already made a down-payment on his own home, the acquisition of additional real estate is another way for a young, energetic investor to increase his equity holdings with relative speed, even with today’s excruciating interest rates on mortgage loans. This is particularly true in Dallas, where the population boom of the past few years has kept residential real estate values increasing at the rate of 15 to 20 percent annually.

Dallas Realtor Pat Zaby has repeatedly taken advantage of this phenomenon, by buying houses in solid, middle-income neighborhoods, holding them as rental property for two or three years, then reselling them to take advantage of their appreciation, and buying more houses. Zaby has developed his technique so well that he now travels across the country, lecturing to other would-be investors on the merits of his system.

To help explain that system, Zaby offers this illustration: “Let’s say you bought a little house for $20,000 back in the mid-Seventies and paid $3,000 down. If you sold it in 1981 for $40,000, you’d have an equity of $23,000. With this, you could make a down payment on two $75,000 houses worth $150,000. Now you could take advantage of 15 percent per year appreciation on $150,000 instead of $40,000.”

This, in turn, means that you’ve made $22,500 on your investment, instead of just $6,000. In the meantime, you have rented the houses, theoretically making it possible for you to own them without actual cost to yourself. In fact, since you can depreciate them as income-producing property under IRS regulations, you may actually make a profit on them even before you sell them.

Although interest rates on condominium mortgages are currently running somewhat higher than on single-family detached housing, Zaby believes that con-dos also represent excellent investment possibilities. “Dallas has now fully accepted condominiums, and their resale value is comparable in every way to other kinds of homes,” he says.

IF YOU HAVE $100,000…

Inflation or no inflation, this is still a lot of money. To the young person just launching a career, getting one’s hands on that much money at one time may seem about as unlikely as achieving millionaire status. And yet, it is becoming less and less unusual for middle-income people -especially married couples -to find themselves in possession of $100,000 or more in unencumbered funds.

A large amount of money may come through an inheritance, an insurance settlement, equity in a home or business, or as a result of careful planning, saving and investing. But however it happens, it may well be a once-in-a-lifetime opportunity – ail the more reason not to blow it. Wisely invested, $100,000 can provide a more-or-less comfortable annual income without depleting the principal. Or it can represent the first major step toward genuine wealth. Seldom, however, can it do both. It will be up to you to choose what you want from your $100,000.

Much of that choice is likely to hinge upon your age. If you’re a pensioner who has just sold the big, empty family homestead in favor of smaller quarters, and you’ve pocketed the difference, your priorities may be a great deal different from the up-and-coming 35-year-old executive who has just made a killing in the commodities market. As a rule, the older the investor and the lower his future earning potential, the safer his investments should be.

“The elderly person has to be very careful,” says Samples. “If he loses his $100,000, he’s not likely to get any more. Money market funds aren’t ideal, but they’re relatively safe. They’ll return the investor up to $18,000 per year on his $100,000 investment with minimal risk.”

Offered through brokerage houses in $1,000 increments with no strict time limit, these funds are a current favorite of many larger investors. While they have established an impressive track record of sustained returns, the funds are not insured in the same way as money market certificates or treasury bills.

There is a continuing tendency among stockbrokers to steer older buyers into old, established companies. But in many cases, these stocks have not only stagnated to the point that they offer virtually no growth possibilities, many of them – including even some former blue-chip issues – have become downright risky.

If the investor has passed his 55th birthday, his approach to investing -like his approach to almost everything else-should become more conservative. His desire to make money must be balanced by a concern for holding onto what he already has. But for the individual in his 40s who earns $150,000 a year and has every reason to believe he will continue to do so for a few more decades, it’s a completely different ball game.

Most experts advise this person to put his apples into a number of baskets rather than piling them all into one. He should probably have from one-quarter to one-third of his investment capital in high-quality stocks and should be willing to utilize some margin in buying them. Another 25 to 30 percent of his capital might be put into financing for such energy-related projects as offshore drilling, supply barges or land-based oil rigs. Another 25 to 30 percent might go into real estate, with the remainder saved for money market funds and other investments.

When it comes to real estate, many larger investors prefer commercial properties: apartments or warehouses, a piece of an office complex or a shopping center. But in today’s market, the $100,000 investor may find himself unable to buy commercial real estate individually and will have to settle for a partnership, which gives him far less control over his investment.

With residential real estate, however, this is much less of a problem. Generally, the down payment on residential property is lower than on commercial.

Unlike most other types of investment income, profits derived from real estate are taxed as long-term capital gains rather than as straight income. They are for this reason an attractive option for the investor who is in no particular hurry. Under the Economic Recovery Act of 1981, the investor will pay long-term capital gains taxes on only 40 percent of the actual gain, providing it takes more than one year to realize that gain.

But according to Zaby, the most important plus factor of residential real estate investing is leverage. Zaby defines leverage as “the potential to increase financial gain as a percentage of investment or equity by using mostly borrowed funds,” and he tells how it works:

“If you put $5,000 in the bank and draw 10 percent interest, you earn $500 in a year and pay straight income tax on it. But if you use that $5,000 as the down payment on a $50,000 house and it appreciates 10 percent in that same year, you’ve made $5,000 on your investment and it’s taxed as capital gains. This is how people are getting rich on borrowed money.”

Surprisingly, says Zaby, you may find it easier to buy a second house as rental property than to obtain a mortgage on your home. “On rent property, lenders look less at your total income than at your reasonable cash flow expectations,” he says.

There are two tricks involved. The first is patience. “Don’t rush in, fix the house up and resell it immediately,” warns Zaby, “or you’ll lose money. Keep it for two to four years, and you’ll make 15 percent per year after taxes.” Real estate brokerage fees, he adds, are deductible.

The second trick is learning to live with massive indebtedness. Zaby cites the case of one individual who has purchased more than 50 houses in this way over the past decade or so. If each is now worth approximately the average Dallas home price of $75,000 or so and is mortgaged accordingly, the investor is probably several million dollars in debt -but he is also adding to his equity at the astounding rate of $462,500 a year.

Zaby and other risk-hardened investors have a favorite saying -one that they’ve gone a long way toward proving true: “What you owe today, you’ll be worth tomorrow.”

If you can’t resist adding, “unlesssomething happens,” maybe you’d betterleave your money in CDs after all.