by Archie M. Richards, Jr., CFP^®
October 15, 2001

Have your investments gotten killed because you went whole hog into "growth" stocks?

Do not, ever again, concentrate in a single market sector.

Oh, this is easy to agree to now, while the agony remains fresh. But when value stocks or small stocks or South American stocks or God-knows-what stocks turn into the latest rage, you'll be tempted once again to climb on the bandwagon. Don't.

Instead, allocate your long-term investment money among several contrasting sectors, each broadly diversified. Here's a simple portfolio that nicely balances reward and risk:

• Thirty percent into an index fund or exchange-traded fund that tracks the Russell 3000 Index. It represents about 98 percent of the value of all U.S. publicly-held securities. Big, small, value, growth; they're all there, in appropriate proportions.
• Thirty percent into the Vanguard Total International Stock Market Index Fund. This is the broadest aggregation of foreign stocks I know of, including those from Europe , the Pacific Rim , and emerging markets.
• Twenty percent into a real estate investment trust index fund or REIT exchange-traded fund. Real estate cycles differ from those of stocks. When one group is falling, the other may be rising. The overall volatility is reduced, making it more comforting to buy and hold during bad times.
• Twenty percent into an index fund that tracks long-term corporate bonds. Another offsetting cycle is involved here. Helps to sleep nights. If you can't stomach much in the way of stocks, increase the bonds and cut down the stocks and REITs proportionately. But don't do this because you happen to be bearish about stocks now, only to increase your exposure later when the prices are soaring. Twenty percent in bonds is quite sufficient all the time.

As prices fluctuate, the sectors won't remain at the above percentages of the total portfolio. Here are the permissible ranges I would choose:

• Domestic and international stocks: 23% to 37%
• REITs and bonds: 15% to 25%

Once a year, sell those sectors that exceed the permissible range and add to those that have underperformed - an automatic system for selling high and buying low.

Other than figuring percentages, no skill is required for asset allocation. Nevertheless, your long-run performance will outpace almost all other investors.

Emotions - that's the hard part. During bear markets, you must not sell. And do not follow your sheep-like friends when they plow their money into the latest hot numbers. Instead, as that particular market sector exceeds the top of your permissible range, sell some of it off. You'll be selling high and buying low, while your friends will foolishly be doing the opposite.

Going against the crowd sounds easy, but it isn't. If it's difficult for you, choose a financial planner who doesn't like crowds and work with her.

Sharp-eyed Harold Baker, of Waterbury , Connecticut , spotted an error in my column from two weeks ago. Companies that treat expenses as "special" or "nonrecurring" cause their pro forma earnings to overstate actual earnings, not understate them. Sorry.

If you like guaranteed interest, consider U.S. Savings I-Bonds. The rate is the sum of two parts, a guaranteed portion and an inflation portion. On November 1, 2001 , the guaranteed portion will probably decline from 3 percent to about 2.8 percent. The inflation portion (which changes every six months, based on inflation's recent rate) will probably decline from 2.88 percent to about 2.2 percent.

If you contact a bank to buy the bonds before November 1, 2001 , the guaranteed portion remains at 3 percent for you indefinitely.

Even if you buy after November 1, a rate of 5 percent isn't bad (providing you can't stand stocks). The feds don't tax the interest on I-Bonds until they're cashed in. Municipal and state governments don't tax them at all, and even the feds don't tax them if they're used for certain educational purposes.

I-Bonds can be redeemed after six months. You forfeit three months of interest if you redeem within five years. But you can hold them for up to 30 years.

Air marshalls are a waste of money. Instead, allow crew members, including stewardesses, to choose between mace and a pistol. Provide training in the weapon chosen. Terrorists wouldn't stand a chance. The more guns, the less crime.