Spreading investments cuts down on the risk

Q. At 37, I have a 200,000 condo with a 65,000 mortgage. I have a 20,000 car loan, 110,000 in an IRA and 10,000 in my 401(k), to which I now plan to contribute 13,000 a year. I'm also buying 500 of my company's stock every six months at a 15 percent discount from its lowest price of the previous six months. Should I stop buying the company stock and increase my 401(k) contribution to 14,000 per year? Also, overall, how am I doing?
A. It sounds to me like you're doing fine. Your situation is full of good examples for the rest of us.
These days, many people are mortgaged to the hilt. You're not. Either you've made extra principal payments to reduce your mortgage debt or you've stayed in your condo long enough to see its value rise substantially.
You've left yourself with a comfortable mortgage payment, and left money available for sizable investments, allowing you to reduce your risk by spreading it among many baskets.
If I were to quibble with any part of your situation, it would be the 20,000 car loan. But this, admittedly, is based on a personal bias -- I favor a good, used car over a new one because there is so much depreciation, or value lost, in a car's first few years.
Still, a 20,000 car debt is not so high by today's standards. Try to keep the car as long as possible. By making a car last seven, eight or even 10 years, instead of four or five, you can cut in half the number of cars owned in your lifetime. Invested, those savings could total hundreds of thousands by the time you retire.
Wise idea
As for buying your employer's stock, I think you're wise to keep buying unless you think the company's headed for catastrophe.
The 15 percent discount is a good deal. All else being equal, it brings you a 17.6 percent gain overnight. To see why, imagine the shares traded for 100 and you bought them for 85 and immediately sold them for 100. You'd make 15 on an 85 investment -- 17.6 percent.
In fact, you're probably making even more because you get the shares at their lowest price of the previous 6 months.
The real issue is what to do with the shares once you have them -- hold or sell?
If the stock looks better than any other investment you could find, keep it -- unless it has become too big a chunk of your portfolio. Generally, it's not good to have more than 10 percent of your holdings in any single stock. Given that you have 110,000 in your IRA and are only putting 1,000 a year into your company's stock, this probably isn't a problem for you.
If you decide to sell, you should look at the tax issues, which can vary depending on how your purchase plan is set up. If you hold the shares for at least 12 months, some or all of your profit can be taxed as long-term capital gains, at a rate no higher than 15 percent. Sell more quickly and your gains would be taxed at income-tax rates -- typically 25 percent to 33 percent.
Of course, it doesn't make sense to hold the stock for 12 months for tax reasons if the shares are likely to fall in value.
What about canceling your regular stock purchases and putting another 1,000 a year into your 401(k)?
Tax deferral
I do like 401(k)s, which offer tax deductions on contributions and tax deferral on investment gains. Generally, employees should put as much into these plans as they can afford -- certainly enough to get every dollar available in matching contributions offered by the employer, if there are any.
Nonetheless, the sizable, guaranteed profits in the stock plan are too good to pass up.
So I'd try to do both. Contribute another 1,000 to the 401(k) and try to squeeze another 1,000 out of your budget to do the stock purchase.
If this is a struggle, plan to sell the stock soon after getting it. You'll make a nice profit and have the cash for other uses. Ask your benefits people at work whether your stock plan is "qualified" or "non-qualified." That determines the tax treatment of profits and the benefits folks can explain the difference.
Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at brownj@phillynews.com.