GEORGE MEKRAS, DIRECTOR AND DEAN KLEVAN, PRESIDENT AND CEO OF CORAL GABLES TRUST PUBLISH ARTICLE "BACK TO THE BASICS" IN TC BUSINESS JOURNAL

Investing: Back to the basics
BY GEORGE MEKRAS AND DEAN KLEVAN

Think back to May of 2007. While there were warning clouds in the housing market, things looked pretty good. Your equity portfolio looked healthy. Bond and CD rates were not great, but they provided enough income to supplement your portfolio returns. You felt fairly good.

Probably, too good. Many investors became adventurous. They became hunters in search of yield. Made forays into the financial jungle, adding to their portfolio investments they did not understand and faced risks that they could not quantify — hard equity mortgage participations, auction municipal bonds, hedge fund limited partnerships, CMOs, CDOs.

Wow!

Explaining all of this would have made an MBA proud.

Fast forward to today. Many of our most respected institutions have taken tens of billions of dollars in write-offs. Good local banks are reeling from real estate loans. Risk-free interest rates are at 2 percent.

Are we in a recession? What should an investor do?

Answer: Go back to the basics.

First, inventory what you have. Outline where your wealth is invested. If you are doubtful how to start, there are many free Web sites that can help.

Once you have the inventory, analyze it for risk. If you do not understand an investment, ask your advisor to explain it. If you are uncertain about what you are hearing, determine the value and consider selling the investment. There is still more bad news out there — and no reason for you to be a participant in it.

There are three traditional asset classes: cash, bonds, and equity. Our advice is to keep it simple until the investment horizon clears:

• Cash. This is usually bank CDs or money market. For CDs, diversify. The FDIC only insures up to $100,000 per institution. If you build a ladder portfolio of CDs, do not concentrate in any one institution. If you are using a money market mutual account, look only at those of the highest quality (invested in US Government obligations). In today's market, there is no excuse for taking risk in your cash holdings.

• Bonds. There are timely opportunities, particularly in municipal and corporate bonds. Now could be a good time to build a ladder portfolio. Consult with your advisor; stick with the highest credit quality. There are also good bond mutual funds, but be careful. Some well-known short- to medium-term bond funds recently experienced significant losses. We stress, stay with quality, and do not hunt for higher yield through lower credit ratings.

• Equities. Equity markets have not been all that bad. We are almost positive for the year to date, and not that far off the high set last October. If your risk profile includes equity investments, now may be a good time to start dollar cost-averaging back into the market. How you invest is important. Be well diversified including international, not just Standard & Poor's 500 Index. In difficult markets, good active managers of mutual funds can outperform passive indexes.

• The rest. Unless you are well versed in other asset classes, you may be well advised to stay away from them. Currencies are tough to call; the recent decline in the dollar may be short lived. Many commodities may have peaked. Alternative investments such as hedge funds have liquidity issues and at times a lack of transparency as to the underlying investment. These assets are best left to the most experienced investors. Now is not the time to experiment.

We are all well aware of the problems in residential real estate. Depending on the nature of your real estate holdings, anticipate a slow market without a clear outlook for sales. Be very aware of the estate tax ramifications of real estate holdings. Notwithstanding a weak market and potentially poor sales prospects, your estate includes real estate and taxes due upon your death. If you have significant real estate holdings, review life insurance options with your advisor.

Dr. George Mekras, a retired physician residing in Vero Beach, is a member of the board of Coral Gables Trust Co. Dean Klevan is president and CEO of Coral Gables Trust. They may be reached at gdmekras@bellsouth.net and mailto:dean.klevan@cgtrust.com.

WHAT TO DO NOW

• Inventory your investments.

• Analyze the risks involved.

• Keep your investments simple and understandable.

• Be aware of tax issues in real estate.