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A friend asks the question: "What should I do with a $10,000 inheritance I’ll soon receive?" Oh wow! The investment writer's favorite game. We welcome the opportunity to play the "what to do with" game.
The sum is challenging because $10,000 is small enough to limit the options but large enough to raise hope. The heir hardly could slap a down payment on the exquisite Louisiana plantation Rosedown, which was advertised recently in the Wall Street Journal for $4.5 million. The owners of historic Rosedown will accept a down payment of one-third and carry paper on the remainder.
The inheritance is so small that few people would want to hire a financial adviser to guide them to a decision. The fee for counsel would likely wipe out any expected gain for a year or more.
On the other hand, $10,000 is enough to light a rocket under an important financial goal. The lucky recipient should think seriously about how to maximize the gift. Here are some ideas, but remember, they are only ideas. Always, always, always — investors should think through and make their own financial decisions.
Education is the finest investment anyone can make, paying off in both higher income and personal satisfaction. Consider using your inheritance to help pay for special training, a college degree or an advanced degree, even if it is earned evenings and weekends at a local college. If you don’t need more education, establish an Educational IRA or some other tax-sheltered account for your children. For information on the rules and how to set up an account, contact your bank or a large, well-established discount brokerage house.
Pay off existing debt, especially if it is credit card debt. Think how hyped you would be if your company gave you a 16 percent raise in salary. When you’re paying high monthly interest rates on car payments or other consumer debt, it’s like a reduction in your income of that amount. Most people can buy breathing space by paying down a mortgage ahead of schedule. There are several books and online sites that can help you figure the benefit of early loan paydown. Often your bank will make the calculation for you.
The current stock market volatility may be hair-raising, but you can take advantage of market declines to snap up stocks at bargain prices. If you don’t already understand the equity market — learn. You'll be hooked once you start. A good source of information is the new book, "Trouncing the Dow: New Strategy Shows Investors How to Gain Extraordinary Returns With Less Risk," by Ken Lee (McGraw-Hill).
When looking online for stocks with a low price-to-earnings ratio, modest debt and steady earnings growth, up popped WD-40, the old, reliable San Diego company, (trading symbol WDFC). At around $25 per share, $10,000 would buy more than 400 shares of WD-40. Not only is there a good chance your investment will grow, but WD-40 has an annual dividend of 4.7 percent. During my search, another local star shone from my computer screen. The Bank of Commerce (symbol: Bcom) is one of the stocks most recommended this summer by Wall Street analysts. Bank of Commerce is selling at around $16, and has a yield of 0.7 percent.
Small Talk
For those who want a safe, insured haven for their funds while searching for the right investment, La Jolla Bank seems to offer the best local stashing place. The bank offers a 5 percent interest rate savings account, guaranteed until January, 1999. While 5 percent may seem modest, remember, it’s all gain, no fees, no risk, and you have access to your funds at any time without penalty. There is a $1,000 minimum deposit and savers can access the account through an ATM card. La Jolla Bank has branches in Escondido, Rancho Santa Fe and (naturally) La Jolla.
Several years back, after the very first issue of this column was published, we took a whacking for writing about the notorious San Diego attorney William S. Lerach. We claimed that in an era when corporate shareholders had limited rights, sometimes the only true friend we have is the litigious Lerach. The controversial local lawyer was featured in a July 13 Business Week special section, which was a summary of a recent chief financial officer's forum sponsored by the magazine. Lerach told CFOs that "compensation program frequently tie bonuses to earnings targets, and we all know that human beings change their behavior in reaction to changed incentives."
One would hope that "the change" would be to strive to hit the higher earnings targets. However, Business Week conducted a survey at the CFO seminar, in which the respondents remained anonymous. According to that survey, 55 percent of the CFOs confirmed they had received requests to fiddle with corporate earnings, but resisted the pressure. Thankfully, another 33 percent said they'd never been asked to misrepresent earnings. However, 12 percent admitted that they had yielded to such requests, and issued earnings reports that were favorable to corporate management. It’s that 12 percent who fear Lerach the most.
Janet Lowe is author of several investment books, including "Value Investing Made Easy" (McGraw Hill) and "Warren Buffett Speaks" (John Wiley & Sons).
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