Investor With Taste for Risk May Do Better Limiting Her Options

Gina Garoogian has let her hair grow down to her waist. She’s cropped it close to her head. She’s painstakingly applied a multitude of colors, including violet, to her tresses--all to reproduce her natural shade of warm brown.

The 32-year-old Santa Barbara hairdresser has been equally adventuresome with her finances, investing thousands of dollars in risky stock options and technology stocks. She’s also a landlord, having acquired two rental properties, although she herself has spent the last decade living simply, often in a low-rent room.

After a decade of building her stock portfolio to a value exceeding $250,000 last year, Garoogian spent some of the money on a car and mobile home. Those purchases, along with substantial losses in options and frequent trading, has cut her portfolio to about $100,000.

A self-proclaimed aggressive investor, Garoogian has attended seminars and read books to learn about stocks and real estate. She heard about stock options and a special class of options called LEAPS (long-term equity anticipation securities) from one of her wealthy hairdressing clients. The strategy of spending a small amount of money for an options contract rather than spending more for the underlying stock appealed to Garoogian.

The wild volatility of options prices causes the value of Garoogian’s portfolio to fluctuate daily, and her portfolio currently shows some significant paper losses, as much as 35% from its peak. A continuation of the recent downturn in technology stocks could further devalue her holdings.

However, the free-spirited Garoogian likes to look on the bright side, noting that she has made big profits in options, too, and those earnings bought her first new car and home, albeit a mobile home.

After this roller-coaster ride, Garoogian may be on the brink of settling down. She plans to get married this year, and she wants some guidance on investing. “Am I on the right track or do I need different strategies?” she asked. “What’s the quickest way I can make $1 million?”

Idealism, rather than acquisitiveness, drives her desire to attain wealth quickly. If she had $1 million, Garoogian said, she wouldn’t change her standard of living. Instead, she would spend less time cutting, coloring and perming hair and more time doing volunteer work.

David “Tony” Kirkpatrick, a certified financial planner in Ventura whom The Times asked to evaluate Garoogian’s finances, found her enthusiasm refreshing. Nonetheless, he called one of her goals, to become a millionaire in five years, unrealistic.

Instead, Garoogian should concentrate on one of her less lofty objectives: maintaining a portfolio that allows her to continue working part-time so she can pursue community service.

To bring some stability and diversification to her investments, Kirkpatrick urged Garoogian to reduce her exposure to options and high-tech stocks. He advised Garoogian to move some money into a high-quality mutual fund composed of large U.S. companies across many industries. Later, she could consider adding more variety, perhaps high-yield bond and international stock funds. Kirkpatrick calculated that the thrifty Garoogian has as much as $1,000 a month in discretionary income she could invest.

The question of whether to sell the options is a “tough call,” Kirkpatrick said. Garoogian’s options give her a set amount of time to buy a specific stock for a fixed price. Because the prices have dropped below the fixed prices in her contracts, Garoogian has lost tens of thousands of dollars. Because the options don’t expire until January, they still offer some value to other investors if she sells them now.

However, they agreed she should not immediately sell, betting that a recovery in technology stocks could reverse the paper losses.

“I think she ought to hang in there for a little bit,” Kirkpatrick said. “Gina could do well if these LEAPS turn around. She bought these things when technology was going through the roof. Now they’re way upside-down.” But there’s risk in waiting: Technology stocks could deteriorate further or the entire market could tank, increasing Garoogian’s losses if she sells for even less money or waits until the options expire worthless.

James B. Bittman, a senior instructor at the Options Institute in Chicago, said there are conservative ways to use options contracts to protect stock portfolios from downturns, but Garoogian has used her LEAPS in a risky way.

She doesn’t own the stocks underlying her “call” contracts; she’s just speculating that the prices will rise.

If her prediction comes true, she can sell her options contracts for a profit or exercise the options to buy the stocks cheaply. But most of Garoogian’s contracts have dropped in value. When an option declines, the loss is more dramatic than that of the underlying stock.

“That’s a leveraged situation. If the stock goes down 10%, you could lose half the value of the LEAPS,” Bittman said. “Financial planners usually restrict that kind of investing.”

Garoogian said she is not averse to Kirkpatrick’s suggestion that she groom her portfolio so her options account for only 10% to 20% of the mix. Currently worth around $65,000, they represent about 65% of her equity holdings and 26% of her net worth. Scaling back would still leave her some play money.

She originally spent about $100,000 for her current options. “I have gambling in my blood,” Garoogian explained. “I like the idea of leverage, paying a small amount of money to own something bigger.”

While Bittman agrees with that concept, he cautioned that speculating with LEAPS, or any options contract, can be dangerous. Buying options requires extreme discipline and careful planning, he said.

The love of leverage also prompted Garoogian to buy two rental properties during the early 1990s: a condominium near her parents’ San Luis Obispo home and a house next-door to her brother in Fresno. The condo has appreciated nicely, but the house has lost value in Fresno’s soft real estate market.

In reviewing Garoogian’s real estate holdings, Kirkpatrick suggested that she consider selling the Fresno house and stop making extra payments of $400 a month to pay off the condo early. Its 7.8% interest rate “is cheap money,” Kirkpatrick said, betting that she would earn more on other investments. However, a more risk-averse investor might prefer to pay off the loan.

Kirkpatrick also recommended that she drop her earthquake insurance because it costs too much for too little coverage. Instead, he urged her to buy an umbrella liability policy in case of lawsuits.

“Gina is a good saver. She’s a good investor,” Kirkpatrick said. “Now that she’s gotten a dose of market reality, she needs diversification.”

One reason Garoogian has attained a net worth of about $250,000 at a relatively young age is that she used to work 12 hours a day, six days a week. Her annual income as a hairdresser reached $45,000 a year, and a spartan lifestyle enabled her to save much of those earnings and invest them in this decade’s bull market.

“I’m the kind of person who brings my lunch to work every day. I make dinner at home,” Garoogian said, noting that her parents set a good example of watching their expenses and saving money. “People can’t believe I’ve never purchased a stereo or CD player in my entire life.” She has never paid more than $300 a month for rent, opting to live in boarding houses. Once, a generous and wealthy client gave Garoogian reduced rent in a Santa Barbara mansion in exchange for hairdressing service.

Garoogian formerly drove used cars, too, until last year, when she paid $22,000 cash for a 1999 Honda Accord. In May she spent about $60,000 for a mobile home, which suits her simple tastes. To make those large purchases, Garoogian tapped the investments that gave her the freedom to reduce her hours as a hairdresser a few years ago. She would like to do even more community service than her volunteer work at the YMCA and Love on a Leash, a program providing pet therapy to senior citizens, the disabled and hospital patients.

Kirkpatrick called Garoogian’s wish to increase her community service “very, very admirable.” Her no-frills lifestyle makes that possible, he said, and she doesn’t even need $1 million to quit her job entirely. Kirkpatrick figured that with Garoogian’s annual expenses of $18,000, she would need a nest egg of only $300,000 to $400,000. But before she gives up working altogether, she should realize that she might take on new expenses as time goes by--new hobbies, unexpected medical costs or the desire for a more comfortable retirement.

Armed with this information, Garoogian has modified her desire to make $1 million in five years. “I’ve changed it to 10 years.”

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Suzy Hagstrom is a regular contributor to The Times. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 or to money@latimes.com.

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This Week’s Make-Over

Investor: Gina Garoogian, 32, hairdresser

Gross annual income: About $30,000

Goals: Become a millionaire, work part-time

Current portfolio

Real estate: New mobile home with $60,000 equity; rental home in Fresno with $11,000 equity; rental condominium in San Luis Obispo with $68,000 equity.

Debt: Mortgages totaling $140,000

Cash and savings: About $1,500

Investments: Long-term equity anticipation securities, or LEAPS, of America Online, Cisco Systems, DoubleClick, Loews Cos. and MCI WorldCom, with a value of about $65,000.

Individual stocks of Donna Karan International, Petsmart, Safeguard Scientific and Charles Schwab Corp. and mutual funds, with a total value of about $35,000.

Retirement accounts: A simplified employee pension-individual retirement account, or SEP-IRA, worth about $8,400; a Roth IRA worth about $2,200. Both IRAs are primarily invested in individual stocks, including @Home and Charles Schwab.

Recommendations

Reduce options to 20% of portfolio and diversify holdings to include a broader range of companies.

Drop earthquake insurance on rental properties and buy umbrella liability coverage instead.

Consider selling the rental home in Fresno.

Stop making extra mortgage payments on the San Luis Obispo condo.

Draft a simple will and consider a trust.

Meet the Experts

David “Tony” Kirkpatrick is a certified financial planner in Ventura, where he works on a fee-only basis. He is affiliated with Financial Network Investment Corp., a broker-dealer. James B. Bittman is a senior instructor at the Options Institute, the educational division of the Chicago Board Options Exchange. He is the author of “Options for the Stock Investor.”