Risking Your Money Again?

Wow, what a quarter! Growth took off in the past three months, thanks to tax cuts, low interest rates and rising incomes. Now you know what the stockmarket rally that started last March has been trying to say: "Hey, kids, the government's jazzing the economy. Don't you know there's a big election coming in 2004?"

By now, your stock and mutual-fund investments should be on the rise. Standard & Poor's 500-stock average has grown 31 percent from its October 2002 low. The bad news: it's also off 31 percent from its March 2000 peak, so long-term holders aren't anywhere close to break-even yet.

The question to ask yourself is what you learned during the painful, three-year bear market that has apparently passed. Are you a better investor now? Do you have a backup plan in case business slows down again?

For many, the answer seems to be no. The hottest financial fire today burns under, yes, the 1990s tech-stock stars--up a whopping 123percent (that's high enough to pass the whop test in anyone's book). But they're still 70 percent beneath their top of three and a half years ago--and their prices look bubble-ish again. Anyone who wants Juniper Networks at 220 times earnings or Yahoo at 130 times earnings can be my guest. Stocks priced higher than 50 times earnings will probably do worse than the market over the long term.

To do better, you need to develop what's known as an investment policy. It may not have crossed your mind before. But smart institutions, such as pension funds, charities and college endowments, all have a formal investment policy, and so should you. If followed, it can keep you out of a lot of trouble. As you've probably learned, you're not as risk-tolerant as you thought.

An investment policy answers the question "How do I organize my savings and investments so that I get what I want from my money?" Instead of a hodgepodge of funds and stocks, your investments are aligned with specific, personal goals. "Without a plan, you'll make money in bull markets and lose it in bear markets," says planner Bedda Emous of Fiduciary Solutions in Andover, Mass.

To develop a personal policy, start by writing down what you want the money for. (House? College? Retirement? Ready cash? Repaying debt?) Estimate how much you'll need and--importantly--when you're going to need it. Investing without specific goals is like having surgery without a prior X-ray or MRI, says planner Brent Kessel of Abacus Wealth Management in Pacific Palisades, Calif. Your spouse should make a separate list so you can talk differences through.

Second, learn which investments are most appropriate for each time frame. Cleveland planner Molly Balunek, of Spero-Smith Investment Advisers, recommends that money you must have within the next five years be secured in bank CDs, money-market funds or very short-term bonds. (No stock funds. Over three to five years, stocks can fall and not come back--a fact we didn't believe in 1999.)

Five- to 10-year money might be in bonds, bond funds or balanced mutual funds holding both stocks and bonds.

Money you won't need for 10 years or more can go primarily into well-diversified stock mutual funds--especially index funds that mimic the performance of the stock market as a whole.

Your final portfolio--including a 401(k)--might hold, say, 15 percent cash for upcoming college tuition; 40 percent bonds, in case you have to retire early, and 45 percent stocks, divided among three index funds: one for the U.S. stock market, one for small stocks and one for real estate. That's diversification. If clients grow too aggressive (less diversified) for their own good, "I knock them upside the head," says planner Scott Brewster of Brooklyn, N.Y.

Both spouses should sign the agreed-on policy. If one of your funds grows much faster than the others, sell some shares and reinvest in the underperformers. Follow the discipline! You'll then be buying and selling in line with a long-range plan, instead of on your irrational hopes and fears.

Anyway, that's how it ought to work.

Because investment policies are more art than science, the discipline can be more important than the plan itself, says planner Scott Leonard of El Segundo, Calif.

Individuals find it hard to decide how much to save. Here's where good financial planners can help (fee-only advisers might charge $150 to $190 an hour, or less than 1 percent to manage your money directly; fee-based planners charge fees and also try to sell you commissioned products). Do-it-yourselfers can try the calculators www.choosetosave.org. One of your biggest risks is outliving your money. A snarky proposal, from Thomas Carroll of the Alpine Financial Group in Cincinnati: smoke in order to shorten your life.

A confession. I sometimes think I've wasted my life and typing fingers when I see what investors hold. Too much debt, no savings, 401(k)s packed with company stock, individual stocks that folks can't analyze. Ambrose Bierce was right when he called advice "the smallest current coin." Still, you could cheer me up. Quit chasing techs and develop a real investment plan.