Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 12, 1993 TAG: 9307130017
SECTION: BUSINESS PAGE: B6 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Long
It has been over a year, and I am willing to report the performance on two of the investments we made from the secondary limited partnership market:
1. American Income Partners 5A. My cost was $13.10 per unit and is appraised at $16.94. I have received $3.06 income, a 23 percent yield, and it is worth 25 percent more than I paid for it.
2. Tax credits. My investment in affordable housing (tax credit) limited partnerships has been $19,600, and we receive $3,700 in tax credits every year. That's an 18.8 percent yield with no income or capital gain as part of the return.
The above returns are similar to others. Are you, and others, interested in this actual performance, or are you only interested in theory. Is it possible that this investment strategy, although rare, is actually able to provide a return higher than most other investments?
A: It's possible to obtain a very high return on limited partnerships and some other types of ventures. But it's more than theory - it's the basic rule of investing - to say that very high returns come at very high risk. You played and won with two of your partnerships - so far. You will not know your actual outcome until you sell. You were able to gain on the secondary market only because the prior owners took a financial beating. Their loss gave you a low price and thus a higher-than projected return.
Your high return does not mean that every limited partnership investment will pay off. And the literature for them warned that some of the money may be return of principal rather than interest. This may not have been the case with you, but it's possible.
The market in limited partnerships is supposed to be restricted to sophisticated investors with annual income of $100,000 and net worth of at least $250,000. Perhaps you fit these criteria. Even then, they should fill no more than 10 percent of your portfolio. And you should have the diversification of more than two partnerships.
You still face two potential problems even if the partnerships continue to produce high yields.
One is the lack of a ready market if you want to sell. Limited partnerships are are what is called illiquid. They must be peddled until a buyer is found. You mention an appraisal, but there is no firm market price.
The other quandary is taxes. In most cases, some or all of your write-offs must be recognized as a gain in the year of sale.
\ Holdings too narrow
Q: Because I am a General Motors retiree, I'm eligible to purchase stock from the company at a discount.
Last month, I purchased $1,000 worth and received a discount of $15.22. This month my statement said I had received a net of $5 dividend plus the discount or a fair market value of $1,015.22.
Is this a good investment for me? I don't need the money now for other things.
A: It looks as if you can expect an annual return of only about 2 percent in dividends on your investment, although the discount also gives you a gain. You are really banking on an increase in the value of the stock, which nobody can predict.
The more compelling reasons for an alternate investment are lack of diversity and the fact that your pension and your savings come from the same source. Unless you have a portfolio of other investments, all of your eggs will be in the General Motors basket.
If you put your future money into one or more mutual funds, you will have diverse stock investments outside of General Motors. The best way to invest in mutual funds is dollar-cost averaging, or routine periodic investments over time. If you don't need the money, reinvest your dividends.
\ Time's running low
Q: I have owned an insurance policy for 40 years. I have taken out loans totaling $10,000 against the policy on which I pay 5 percent interest.
I have $20,000 in a cash management account at a brokerage house.
I am trying to decide whether to use $10,000 of that account to pay off the loan since that interest is not tax deductible. In the alternative, I could buy utility stock paying 5 percent interest, income on which I would be taxed.
I am 80 years old.
A: John C. Parrott II, a certified financial planner with Wheat First Securities, said an answer depends on the return you are receiving from the insurance policy. If you get a 2 or 3 percent return, the actual cost of your loan may be 2 percent or less.
He would guess, however, that you are getting a poor return from a policy that old.
Depending on your comfort level in owning stocks and on the nature of your other assets, he would invest in the utility shares because that should appreciate over time.
Most people, he said, are better off with active investments. His only question would be your age and the diversity of your investment portfolio.
\ Mag Poff will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010.
by CNB