Suddenly, the rules of investing seem to have changed. Recession and terrorism have taken their toll, and the stock market isn't the sure bet that it once was.

By Frank Bilovsky
Democrat and Chronicle

(Sunday, January 27, 2002) -- There are some financial planning rules that are absolute. Just as a Realtor will chant, ''Location, location, location'' as the first rule of real estate, a financial planner is likely to repeat, ''Diversification, diversification, diversification'' when it comes to an investment strategy.

It's a game plan that proved its importance over the last two years, when investors who went heavily into tech and aggressive stocks and mutual funds suffered as those tanked and value stocks moved to the forefront.

So with all the commotion in the economy now, what can you do to get your financial house in order?

There are some basic rules, such as saving and spending wisely and having the proper insurance. But a lot depends on your individual circumstances -- age, family status, health, income, risk tolerance, etc.

To give you some ideas, we asked three families of different age groups to discuss their financial circumstances. We then asked local financial planners to offer some advice.

Andre Jenkins may have made his smartest investment at the bookstore. The 26-year-old Navy veteran and single parent of two 3-year-old boys was smart enough to realize he wasn't nearly as smart as he needed to be about personal finances.

So he spent less than $20 to buy the paperback Personal Finance for Dummies, which he read from cover to cover.

DANESE KENON Andre Jenkins helps his sons Jordan, left, and Andre Jr., right, as Jenkins' sister, Imani Monroe, 5, colors nearby. Jenkins, a single dad, plans to pay off his credit cards and save for a down payment so he can buy a house in July.

Unlike many his age, Jenkins is carefully planning his future. He wants to buy a house, is saving for his sons' education and is taking steps to secure his retirement.

''I'm trying to purchase a house in July,'' said Jenkins, who works full time as a Time Warner converter repair technician and part time as a dietary worker at the Friendly Home.

''I'm trying to save enough for the down payment. Right now I have about $3,500 in savings. A friend of mine purchased a home recently and he was telling me the requirements you need, so I'm trying to pay off a couple of credit cards, trying to clean up my credit report.

''The balances are not too high right now. They should be paid off by March. So everything should be cleaned up when I take my paperwork to the Veterans Administration.''

Jenkins has a savings account and a Roth IRA with one bank, a checking account with another and savings accounts for his sons, Andre Jenkins Jr. and Jordan Vigne, with a third.

''I also have Putnam Voyager mutual fund accounts for them,'' he said. ''It's a long-term growth fund in a lot of tech stocks. I contribute to it monthly, but the amount varies depending on how much I have left over once I pay my bills.''

Jenkins, whose income is in the $30,000-$40,000 range, participates in the 401(k) plan offered by Time Warner. It matches $2 for every $3 that he contributes, up to 10 percent of his pay.

''Right now I'm contributing 8 percent, but I'm going to max out,'' he said. ''Personal Finance for Dummies says you should max out your 401(k) if you can. And I have the Roth IRA on the side.''

Jenkins buys Series EE saving bonds for his sons occasionally to offset losses that the growth mutual has suffered recently. He says he has heard about the state-sponsored 529 education savings plans but knows little about them.

The boys are named as beneficiaries of his insurance policies from the Navy and Time Warner.

''Before my sons were born, I didn't have a clue,'' he admits. ''But I thought right away that I wanted them to be able to go to school. And I know people who are going to college and struggling because they are trying to work as well. So anything I can set up for my sons, I want to.''

Jenkins drives a 1988 Cadillac that runs well but knows it could be a future problem. ''It's reliable but it's getting old,'' he says.

He owns no individual stocks.

''I'm trying to get more familiar with the stock market before I put my money into it,'' he says.

Analysis

Michael Masiello, president of Michael A. Masiello & Associates Wealth Preservation Council of Greece:

''He's ahead of where most 26-year-olds are, big time. I like the fact he's a saver.'' Masiello says Jenkins should have life insurance policies totaling between $300,000 and $350,000 and should carry disability insurance that covers roughly 70 to 80 percent of his current income.

''Potentially he has 40-some-odd years of no income if something happens to him. That's a huge risk. He should get a fixed rate with a cost-of-living adjustment and the option to purchase additional coverage as his income goes up.''

Masiello suggests that Jenkins hire an independent mortgage broker and get himself pre-qualified by an expert.

Rather than funding savings accounts, Masiello would rather see Jenkins put money into 529 education accounts, which grow tax-free.

He says the growth mutual should work out over the 15 years before the boys are ready for college.

And he suggests that the Series EE savings bond money be converted to stocks or mutuals.

He likes the idea of maxing the 401(k) as long as Jenkins can afford it, especially with the 66.7 percent company match. Once Jenkins buys his house, he may be able to save enough on income taxes through his mortgage interest and property tax deductions to max the 401(k).

Jenkins should have a proper will drawn and should have an independent trustee who will dole out the proceeds of insurance policies and other distributions to the children's benefit if something happens to him, Masiello said. He also should procure a health care proxy and a durable power of attorney.

''I like the idea of him learning about stocks before doing. What a concept that is! Come here, Andre. I need to clone you and get 100 of you a month.''

Michael Albert and his wife, Valerie, know that they are going to need a sizable amount of money so their 10-year-old son, Marquis, can achieve his goal.

''I have eight years to go before Marquis goes to college -- and he's talking that he wants to go to Syracuse,'' Michael Albert, 40, says. ''That's very expensive.''

MAX SCHULTE Michael Albert sits with his son, Marquis, and wife, Valerie, in their living room. Albert is saving for his son's college education.

At least the Alberts got a jump on the potentially costly education. Five years ago, they began making monthly contributions to an American Century growth fund for Marquis.

In recent months, Michael has kept up the contributions but stopped checking the assets -- the growth sector has been under tremendous pressure over the last two years.

''I haven't looked at it lately because it's a long-term investment,'' he said.

The Alberts, who moved back into the city after living in Hilton, are long-term investors. Even the stocks they buy are not the kind likely to generate immediate profits.

''With the stocks I'm taking a chance,'' says Michael, a salesman for Perry's Ice Cream. ''My risk tolerance is higher than the average person. I used to invest in penny stocks. Now I'm more into some Chapter 11 turnaround situations, hoping to get a long-term benefit.''

That's the same strategy that he plans to apply to his next big investment -- rental property.

''I bought a cheaper home when we moved back into the city and worked at fixing it up,'' he said. ''Now I want to start buying doubles in the city for income and investment. By the end of the year, I plan to own one double.''

Albert plans to rent both sides.

Michael and Valerie, a coordinator with Roberts Communications, are funding their retirement through 401(k) plans at their jobs, which provide the family with the bulk of its $50,000-plus household income.

Michael maxes his 401(k) at 12 percent of his salary and Perry's does a 50 percent match. Because of their 401(k) contributions, they have opened no IRA accounts.

Analysis

John K. Best and Cynthia Harrington, of Best Times Financial Planning in Penfield:

Best has no problem with the goal of owning rental property, since Michael already understands the potential pitfalls.

''The positive side: It's a good tax write-off,'' Best says. ''It includes some depreciation that will help him. The tenants end up paying the mortgage and he ends up getting his equity built.

''On the other hand, much of the equity he will gain is his sweat equity. He's going to have to do a lot of maintenance. Also he has to keep the place rented. A lot depends on the type of tenants you get and their ability to pay the rate, so he doesn't have to be concerned about evictions and defaults. Because then, he ends up paying the mortgage.''

Best likes the fact that Michael is maxing his 401(k).

''He has to be sure he allocates his investments because he's been into speculative (individual stocks),'' Best says. ''And he owes it to himself in his 401(k) plan to be sure he has a combination of large and small stocks and that some will have value and some growth orientation.''

Best says that, at age 40, it's prudent for Michael to have all his 401(k) money in equities. But he suggests that the mutual fund may not necessarily be the best vehicle for Marquis' education fund.

''Conceivably the fund could be worth less than what they have put into it,'' he says. ''And even if there are some profits, he might want to consider the 529 plans. The best part is that the money will grow income-tax free.

''He says he hasn't been looking at the fund lately -- but he should. The 529 gives him an option that he didn't have five years ago. And even if he had to pay some capital gains on that growth fund, the tax-free benefit going forward is beneficial to him.''

Speculating in stocks of turnaround-situation companies is fine, as long as the Alberts don't put more than 5 percent of their usable assets there.

Harrington suggests a Roth IRA as a great way to augment Michael's 401(k) retirement fund -- and supplies the math to prove her point.

A contribution of $3,000 a year for the next 20 years, assuming a 10-percent return, would lead to a value of $189,000 tax-free when he reached the age of 60. If the family is in the 15 percent tax bracket, the Alberts would have given up $9,000 in income tax that they would have had to pay on the contributions. Bottom line: a gain of $129,000 tax free.

The worst of the college expenses are over for Lonny and Elizabeth Tucker.

Daughter Rebecca is in graduate school, paying her own way. Son James is a junior at SUNY Oswego, and son Jon is a senior at Lima Christian Academy with plans to go to Monroe Community College.

CARLOS ORTIZ With three children in college and on their way to becoming independent, Lonny and Elizabeth Tucker are now able to focus on planning for their own retirement.

So at this point, the big goal is retirement planning.

''I hope to retire at 62,'' says Tucker, of Scottsville. He is 52 and a patent attorney earning a ''comfortable'' middle manager's salary at Eastman Kodak Co. Elizabeth doesn't work outside the home.

The Tuckers have 10 years to get their retirement house in order. Lonny will collect a traditional pension from Kodak. He also has a 401(k) that Kodak does not match.

The bulk of the Tuckers' other retirement money is in mutual funds.

''I'm pretty much diversified,'' Lonny says. ''I have mostly growth funds, but I also have some income and growth, one tax-free fund, one international fund and a Vanguard balanced fund.''

Lonny did sell an aggressive growth fund last year. The Tuckers own no individual stocks.

''I've never really been excited about dealing with brokers,'' he says, ''and I just haven't gotten into studying any particular stocks because I have most of my money tied up in mutual funds.''

Lonny funds a Roth IRA any year in which he is eligible. Elizabeth has a traditional IRA that is in a certificate of deposit.

''I also have money market funds -- not a lot but it's someplace to park money,'' he says. ''It's paying 1 or 2 percent at most.''

He used CDs, money markets and mutual funds to finance his children's education.

''We didn't save as much as we would have liked, but we started out early enough,'' he said. ''And we lucked out by getting relatively low SUNY tuition. We'll have to take some money out of our current income for our last child as he goes through college, but it's affordable.''

The Tuckers finished paying off their house a few years ago.

Lonny's parents are in their 70s and healthy. ''But if something happened to them, that could change my retirement plans,'' he says.

On the drawing board this year: Exploring long-term care insurance, updating wills and obtaining durable powers of attorney.

Analysis

Cheryl Johnson of Sutter Johnson & Associates, a branch of American Express Financial Advisors:

The way the Kodak pension works, Tucker needs to think about whether to choose an annuity or a lump sum, Johnson says. That decision will affect his insurance needs.

Tucker should be aware of the increases in maximum contributions in the 401(k) and the Roth IRA if he's eligible in 2002. And this is a good time for him to be looking at long-term care insurance.

''If his youngest son is still under 18, he could contribute to an Education IRA,'' she says. ''However, to buy a New York state 529 plan and be eligible for the state tax exemption, there is a 36-month period before he can withdraw any money.''

Thus, Jon Tucker would be in his junior year before the money could be used.

''But it still might be worth it for them to fund one because you can always change the beneficiary if you don't use the dollars,'' Johnson says. ''With three kids, chances are good that they'll have a grandchild or two down the road.''

Even though Lonny says he is well diversified, Johnson is concerned that the Tuckers may have too much money in growth mutuals.

On long-term care insurance, Johnson would encourage the Tuckers to look at the parents' situation, assess their potential liability and evaluate long-term care insurance for the parents. She also suggests that the Tuckers review their property and casualty coverage to be sure the deductibles are appropriate for their assets.

''A lot of times people will set up a $50 or $100 deductible on car insurance, for example,'' she says. ''When you look at the reduction of the premium, they can save money over the long term if they increase it to $500 or more. And they should check on umbrella coverage to make sure their assets are protected.''

One potential savings vehicle is often overlooked. They should consider Kodak's health care reimbursement account if they aren't doing that already, Johnson says. They can figure out health care expenses they will accrue during the year and have that amount deducted from his pay.