by Archie M. Richards, Jr.
April 23, 2007

A recent ad by a brokerage firm said, "Too many people follow a four-word investment strategy: eeny, meeny, miney, moe."

An important way people do this is by searching for individual stocks. Forget about individual stocks. They have unnecessary risks, as follows:

• Firm Risk: The market rises, but the stock you own falters.

• Industry Risk: The market rises, but the industry dominating your portfolio falters.

With just a few individual stocks, you suffer both risks but receive no corresponding rewards!

Instead, buy and hold exchange-traded funds or index mutual funds. Many have hundreds of stocks from dozens of industries. Presto! Firm risk and industry risk disappear. You're left with only Market Risk.

Now market risk is plenty rewarding, but you have to stay in for the long term.

In the short run, the stock market is unpredictable. In the long run, it goes up. Therefore, the time to buy stocks is when you get the money.

To deal with the uncertainty, assume that in the short run you're going to be wrong. If you buy, the prices will fall. If you don't buy, the prices will rise. Any short-term losses you suffer are not your fault. It's that pesky Ms. Market going out of her way to make you a loser.

In the long run, Ms. Market is altogether different. As wealth is created all over the world, she meekly follows along, moving up.

Get into ETFs or index mutual funds and, except for annual rebalancing, stay in.

If you have no debt, an emergency may arise in the future that requires borrowing. Without a good credit score, a loan may be unavailable.

Use a credit card every six months or so to buy something like a tank of gas. Pay it off without interest. The three credit bureaus - Equifax, Experian and TransUnion - will then consider you a good credit risk. If the need arises, you can readily obtain a home-equity loan and pay a low rate.

Traditional IRAs have many disadvantages. Oh yes, they enable you to deduct your contributions. If everything goes well, the tax advantages leave you perhaps 25 percent ahead after tax. Nevertheless, the disadvantages outweigh the advantages. Here's why:

• Traditional IRAs have horrendously complex rules, especially concerning their inheritance. People make big mistakes, incurring high and unnecessary taxes. The cost of an expert to prevent mistakes can be substantial.

• Unlike regular accounts, the tax bases of IRA assets are not stepped up to the date-of-death values. Heirs pay ordinary income tax on all distributions - a heavy burden.

• Since sales within an IRA incur no tax, investors tend to trade stocks more often within an IRA than they do outside. The more trading, the worse the long-term performance.

• People accumulate high-interest debt they'd be inclined to pay off if their IRA money could be tapped without the distributions being taxed. If you have credit-card debt costing 18 percent and investment funds growing at only 8 percent, you're throwing money out the window.

• Distributions are treated as ordinary income. In a regular, non-IRA account, most of the income is long-term capital gains, taxed at only 15 percent. The IRA converts low-taxed capital gains into high-taxed ordinary income.

In a recent column, I said that distributions from traditional IRAs aren't required until age 71½. Thanks to Susan for pointing out the error; 70½ is the correct age.

Distributions should begin by December 31 of the calendar year during which you attain 70½. But you can delay that first distribution until April 1 of the following year.

Let's say you attain 70½ during 2007. Your first distribution must be made by April 1, 2008 and your second by December 31, 2008 - two distributions in one year.

The date, note, is April 1, not April 15 - another example of income-tax complexity. Maybe the IRS just likes to keep people on their toes.