Old Folks, Smart Money

Forbes.com: Matthew Schifrin, 11.08.07

Come retirement, most of us will be faced with two important decisions: what to do with our 401(k) or IRA money and how best to spend an abundance of free time. Some dream of adventurous vacations or beachside villas, others want to devote their days to a favorite charity. Some, no doubt, will while away hours on the golf course. However, for a growing number weaned on CNBC, E*Trade and buoyant bull markets, retirement will mean a chance to finally pursue a “second career,” actively managing their own money.

Of course, playing money manager with one's nest egg is not without risks. Take Nancy Wells, 62, a former manager for Pacific Bell who said good-bye to her life as a “corporate road warrior” at age 54 after 28 years. In 1999, just as everyone around her was getting rich on Internet stocks, Wells opted for early retirement and rolled her 401(k) into an IRA, which she planned to parlay into a fortune.

Having read Jane Bryant Quinn's Making the Most of Your Money in the mid 1990s, Wells's plan was to live off of her investments until her defined benefit pension kicked in. However, like thousands of other investors in Internet bubble stocks, Wells's plan backfired. By mid-2002 she had lost 40% of her IRA money.

"It became clear real fast that I needed to fix my finances or go back to work, says Wells, who now lives in Stonington, Conn. “They weren't exactly hiring many 57-year-old ex-road warriors.” So instead of packing it in, Wells went online and joined several online message boards, including AOL's, Yahoo!'s, and eventually, subscriber-only ValueForum.com.

On the Web sites, she became friends with more experienced investors, a number of whom were actively investing in yield-oriented stocks and willing to share strategies and ideas with her. Wells set a goal for herself of 12% annual returns, and she decided to keep 30% to 40% of her 401(k) funds in T-Bills and other “safe” investments.

Soon Wells began investing in mortgage REITs, including Annaly Capital Management, which was yielding 11%. She also began buying Canadian oil and gas trusts, shipping stocks and eventually ventured into precious metals miners, and Chinese and Indian shares.

Her timing was fortuitous. In 2003, her portfolio logged a total return of 60% compared to a 27% gain for the S&P 500. Today, Wells figures she has about doubled her 401(k) value from the dark days of 2002--despite having withdrawn funds for home improvements, travel and living expenses.

Denver's James Cummings, 73, a retired certified public accountant from Deloitte & Touche, is another nest-egg investor. Cummings took early retirement in 1992, sold off his mutual funds and currently spends up to four hours a day investing in stocks to supplement his pension and social security benefits. According to Marketocracy.com, a site that has tracked his performance since 2002, one of Cummings's portfolios has an average annual return in excess of 24% vs. 12.9% for the S&P.

Says Cummings, “I am an aggressive value trader. I certainly do not shy away from some speculation. I sell a lot of covered calls.” One of Cummings's biggest scores was buying into the IPO of electronic options exchange, International Securities Exchange, in March 2005. A few months ago, the company agreed to merge with Germany's Eurex at more than double the price Cummings paid.

Former Pittsburgh attorney Ed Stoner, 59, is one recent retiree who so far has been able to balance his passion for stock investing with a life of adventurous travel. Stoner and wife Mari live in Key Largo, Fla., and spend much time sailing and scuba diving. Since he retired in 2005, Stoner has traveled the world from Shanghai to Christchurch to Panama City to Kenya. Internet connections allow him to spend several hours a day monitoring his investments. “There are Internet cafés all over the world. It is very easy. You can be instantly connected to your broker from Hanoi, Tibet or Bangkok, just as easily as in Queenstown or Key Largo,” says Stoner.

Given his passion for the sea, it is not surprising that Stoner has recently concentrated his portfolio in shipping stocks and is an investment “groupie” of magnate John Frederiksen, Chairman of Frontline. His best recent winner is Golden Ocean Group, a Bermuda-based dry bulk shipping company spun off from Frontline. The stock has risen from less than $2 in January to over $7 today. Another Frederiksen play Stoner is bullish on today is SeaDrill.

While Stoner has been able to manage an active travel schedule, most retirees admit that playing portfolio manager with your nest egg is a big time commitment.

Nancy Wells, for example, rises at 5:30 a.m. each morning and logs on to see what happened in Asian and European markets. She then reads the morning news and checks for messages from her online investor friends. In addition, Wells spends about two hours during the market open and close investing via her Schwab account. “It's my day job,” quips Wells.

Some have even tried to turn their investing success and expertise into second careers. After he retired from St. Paul Companies in 1997 after 32 years, Shoreview, Minn.-based George Lang, 65, tried to parlay his expertise in real estate by setting up a REIT stock advisory for pension funds. Soon after, he set up a portfolio on Marketocracy.com, and seven years later, he has been able to use it as evidence of his 17% average annual return in REITs.

Lang closely follows about 50 of the 130 publicly traded REITs and is still selectively bullish despite a pullback in the sector. Says Lang, “I do not like to follow the crowd and often see opportunities to invest because of overreaction by those investors. In general, I do not have a great deal of faith in many investment analysts and have learned it is better to do the analysis myself.”

Lang currently likes Prologis, a large industrial REIT, which yields 2.7% and is growing like gangbusters overseas. Another REIT he thinks is undervalued is NYC-based Lexington Properties, which is a “triple net” REIT, meaning its tenants bear all of the expenses, from operating to taxes and capital improvements. Lexington currently yields 5.9%.

More so than professional money managers who trade other people's money, these retired investors have little tolerance for losing stocks. Indeed, they are almost unanimous in their preaching about not becoming too attached to any single equity and selling portfolio dogs.

Says Wells, “I learned during the tech craze that investments have their time in the sun, but most do not stay there forever. Buy and hold doesn't work for me."

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