MONEY MAKEOVER
Diversifying investments may enrich life of young, hard-working single man

By David Butts
Advertiser Staff Writer

Glen Hayase may seem like the last person to need a money makeover.

Glen Hayase of Kapolei stands in front of his home. Hayase is taking part in The Advertiser's money makeover. Eugene Tanner • The Honolulu Advertiser

He is single, has no debt (other than a mortgage) and has saved about $230,000 toward his retirement. Last year, he bought a three bedroom, seven-year-old home in Kapolei for $230,000, and last month he paid cash for a 2001 Toyota Corolla.

How did a 26-year-old manage to accomplish all this? The simple answer is he likes to save.

Hayase began investing in 1994 when he was earning tips as a bag boy at the Hickam Air Force Base commissary, going to school and living with his parents. He drove the same car — a 1990 Honda Civic with manual transmission and no air conditioning — for eight years. He rarely buys new clothes and always takes his lunch (a mix of fresh vegetables, beans and rice) to work. He's not likely to be spotted clubbing on the weekends or even running errands at the neighborhood mall.

"I don't find joy in shopping," he said. "If I buy something, that means I need it."

If anything, he may be too good at saving money.

"At his age, he has a ton of money," said Roberta Lee-Driscoll, a Honolulu certified financial planner. From a financial planner's perspective, "he has a huge piece of the equation together," she said.

So, what's to make over?

He lost about $40,000 in the bear market, something Hayase tries not to worry about.

"I've lost money in the last few years," he said as he scanned through a stack of monthly account statements. "But I don't sweat it because I know there's a good chance it will go up before I need it."

That attitude is certainly better than lying awake at night fretting over every dip in the Dow — especially at age 26. Still, it shouldn't preclude Hayase from taking steps that could give him some protection from market fluctuations, Lee-Driscoll said.

Hayase concentrated most of his investments in stocks and stock mutual funds. That strategy worked through much of the 1990s but has bombed in the last two years when the Standard and Poor's Index of 500 stocks fell by nearly 40 percent.

So the first change he needs to make is to add bonds to his investment mix, Lee-Driscoll said.

"He has a $230,000 portfolio and only $5,000 in bonds," said Lee-Driscoll. "I'd like to see a minimum of 20 percent in bonds."

Hayase's mistake was he thought having his money in a variety of stock mutual funds would give him the most growth while providing enough diversification. Stock mutual funds pool the money of thousands of investors to buy shares selected by a professional money manager.

"Stocks provide the best performance over time," wrote Mary Rowland in her 1996 book "A Commonsense Guide to Mutual Funds." "Long-term investors should put the bulk of their assets in a variety of stock funds."

And that's just what Hayase did. For him, diversification meant buying different types of stock funds, or asset classes, such as large company, small company, international and emerging market.

That helps, but it is not enough, Lee-Driscoll said.

A balanced portfolio needs to include bonds, which tend to do better than stocks when the economy is slowing. That is a lesson many people have learned the hard way in the past two years as stocks declined and bonds rose.

A bond is an IOU issued by a company or government. It pays a set interest rate (or coupon) and you get your initial investment back on a specific date, known as the maturity date.

The price of bonds fluctuate based on interest rates. That will concern you if you sell your bond before it matures. It could be worth more than it was when you bought it if interest rates have been falling. If you bought a bond three years ago with an 8 percent interest rate, and today the same government entity is only paying 6 percent when it issues bonds, your bond has most likely increased in value. Who wouldn't rather own your bond that pays 8 percent than the 6 percent bonds they are selling now?

Christian Weller, a retirement specialist at the Economic Policy Institute in Washington, says a good rule of thumb is to have the same percentage of bonds in your portfolio as your age. If you are 50, you would have 50 percent of your savings in bonds.

Hayase needs to review his entire portfolio and gradually add bonds, Lee-Driscoll said. He should take a look at corporate bonds, U.S. bonds, municipal bonds and bond funds. While government bonds offer a tax break, corporate bonds sometimes have an interest rate high enough to compensate for the tax cost. Lee-Driscoll also suggests investing in bonds with staggered maturities — five-year, 10-year and 15-year bonds — to reduce the risk of interest rate fluctuations.

"I don't want him to rush out and dump a whole lot (of his stock holdings)," said Lee-Driscoll. "Any time you are redoing your portfolio, you have to go back and review everything." When you decide on a plan, invest gradually, she said. Hayase could buy bonds over six months, she suggested.

In addition to buying bonds, Lee-Driscoll offered Hayase this advice about life: Get one.

Hayase's frugal ways may help him reach his goal of being able to retire comfortably at an early age, but they aren't likely to help him attain another goal — having a family.

When Lee-Driscoll asked Hayase how much he spends on entertainment per month, he replies, "Zero."

Vacations? Who needs them.

"When I take a vacation from one job, I work more at the other job," said Hayase. He is a full-time communications technician with the Hawai'i Air National Guard and works part time at the nonprofit Parents and Children Together, where he helps low-income families get off of welfare.

While Hayase looks for the right person to build his family, Lee-Driscoll suggests he sets up a budgeting system.

"When you get a girlfriend, your budget will go out of whack," she tells him.

She wants Hayase to track his spending no matter how meager it may be.

"I would force him on Quicken," she says, referring to the budgeting software. That lets him track how much he spends in different categories, such as food, transportation and entertainment.

"I take hula classes that cost $40 a month, and I think that is all I spend," Lee-Driscoll said. "But when I look at Quicken, I see I spent $1,200 on hula last year."

She also suggests Hayase pay his credit cards by check. He pays his bills in full each month directly from a broker account. His lack of credit-card debt is impressive, but the automated system lets Hayase ignore the monthly statements, which could lead to problems.

"Low-tech forces you to be pro-active," Lee-Driscoll says.

These habits should serve him well once he has started his family, something Hayase's grandmother is anxiously awaiting.

"My grandmother says, 'Isn't there somebody who wants to share this house with you?'" Hayase quipped.

A few more bucks in the entertainment column of his new budget might help solve that problem.