a summer financial makeover

FOOL’S CORNER

http://biotech.nature.com • JULY 2002 • VOLUME 20 • nature biotechnology

Let’s have a heart to heart. We love delvingdeeply into the DNA (now there’s a turn ofphrase!) of biotechnology investing eachmonth with interim president PaisleyMcTort and the Sitting Pretty InvestmentClub. But it begs one question: should we beinvesting in individual companies at all?

We at Fool.com trumpet the eternal truththat potential investors should never evencontemplate putting hard-earned money (oreven ill-gotten gains) on individual compa-nies until they have completed three simplesteps: paying down their credit card debt,emergency-proofing their finances, andinvesting in their future. Please. Althoughthe steps outlined here are geared to the USfinancial environment, people in any coun-try can apply the same basic principles.

Step 1: Pay down your high-interestcredit card debt Shocking, but true: the average Americancarries $5,800 in credit card debt frommonth to month, and Brits have comparablelevels of debt. By making only the minimum payment each month, a cardhold-er would take 30 years to pay off this debtand cough up an average of $30,000 in inter-est—straight into the lender’s pocket. (My,aren’t we all generous?)

The first pre-investing rule of thumb: payoff your entire balance if you can, and thencommit to paying off each month’s balance

in full when the bill arrives. If you must carrya balance, call your credit card company andpolitely suggest that you will move your bal-ance to another company’s card if they donot lower your interest rate. Shoot for a per-centage rate in the low teens (or even in sin-gle digits, but good luck!) and act on yourthreat if they refuse. Then, bite off your bal-ance in pieces. Lather, rinse, and repeat untilyour debt is paid off. You can do it.

Step 2: Emergency-proof your financesMost people should maintain a rainy dayfund of three to six months of living expens-es, although the exact amount should varyaccording to how many people depend onyour income or if your surname is Knievel(as in stuntman Evel) and you are followingin your father’s tread marks. Some considerthe equity in their home an emergency fund,but we strongly caution against that line of

thought. Using your property as fallback isakin to using a credit card to pay for your liv-ing expenses—except that your mortgagecarries a lower interest rate.

Most homeowners’ number one source ofwealth is their home itself. It’s far better tomaintain a rainy day fund stashed in amoney market fund, bank certificate ofdeposit, or high-interest online bankaccount, and leave the house to your kidsshould your next stunt motorcycle gig goawry.

Step 3: Invest in your futureHardly a day passes without more news thatpeople are not saving enough for their retire-ment, in part because fewer people are nowcovered by traditional employer-paid pen-sion schemes. Added to that is the troublingfact that government pension schemes(Social Security in the United States andstate pensions elsewhere), which have uncer-tain futures themselves, will not provideenough to see you through your dotage. Formany people working today, a company401(k) (in the United States) or pension (inthe United Kingdom) plan will be their pri-

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mary source of income during retirement.You contribute a certain percentage of yoursalary (regulated by the government), andyour employer almost always graciouslymatches a part of it. (And that, my friends, iswhat we in Fooldom call “free money!”)Because the pension contributions arededucted from your salary before tax, ineffect you make an immediate profit on thatinvestment by an amount equivalent to yourtax rate (in the region of 20–40% for most ofus). There is not one biotechnology invest-ment that guarantees that kind of return.

Where to put the money? Your employeror personal pension provider may offer arange of funds. Depending on how far youare from retirement, you will want to have asubstantial to very large percentage of yourmoney in a broad stock market index fund,such as one that tracks the Standard & Poor’s500 in the United States or the FTSE 100 inthe United Kingdom. If your company doesnot offer that, lobby for it. Point out that thevast majority of actively managed fundsunderperform the plain old stock marketindex fund.

In the meantime, choose a stock marketfund with the broadest range of companiesand a low portfolio turnover. If your employ-er offers its own shares as an option, limitthat investment to 20% of your total pensioncontribution. (Does the word “Enron” sendchills up your spine? Good.)

What next?After you pay off The Man (Mr. Visa, thatis), stash away a tidy little emergency fund,and are taking full advantage of youremployer’s retirement plan, count yourcents and pennies and open a Roth IRA(United States) or ISA (United Kingdom).Here you can put in up to $3,000 (Roth) or£7,000 (ISA) each tax year, and the invest-ment will grow, tax free. This is where thefun begins. You can either invest in an indexfund, or start your illustrious stock-pickingcareer along with the Sitting PrettyInvestment Club.

Libraries of books cover the principles laidout here, and we have written a fair numberof those informative texts. I unabashedlyoffer up the resources of Fool.com for yourfurther reading pleasure. Plug aside, these areunchanging principles: reduce debt, save fora rainy day, and prepare for your retirement.Once you have these financial rooms inorder, your house may be ready to makespace for individual stocks. We will check outthe furniture next month!

Tom Jacobs, of the Internet site

Motley Fool (http://www.fool.

com/), provides his angle on

biotechnology investments. As

Jacobs points out, “Industry

insiders may know about biotechnology, but (as

the song should go) ‘it don’t mean a thing, if you

haven’t learned sound investing principles.’”

Read on and become “Foolishly” informed*. He

can be contacted about biotechnology and

investing at TomJ@Fool.com. Jacobs cannot

give individual investment advice but welcomes

any.

A summer financial makeover

*Nature Biotechnology does not guarantee theveracity, reliability, or completeness of anyinformation provided on this page; it is notresponsible for any errors or omissions or forany results obtained from the use of suchinformation; it will not be liable for any loss,damage, or investment decision arising from areader’s reliance on the information provided.

Using your property as fallbackis akin to using a credit card topay for your living expenses—except that your mortgagecarries a lower interest rate

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