by Archie M. Richards, Jr.
March 12, 2007

Eighteen years ago, Japanese citizens swarmed into Japanese stocks, confident they couldn't lose. They did indeed lose. From 1989 to 2003, the Japanese market fell about 80 percent.

According to the 3/19/07 issue of BusinessWeek, similar rampant speculation is occurring now in China. The Shanghai Composite has doubled in only 7 months, and the number of new brokerage accounts has risen tremendously.

A 59-year-old airline pilot for China Air told the BusinessWeek reporter, "There are no risks for me in investing in the market right now." A 28-year-old bank investment manager said, "Picking a company with an IPO is easy. You can't lose." Many corporations are using corporate funds to trade stocks as well.

The unqualified optimism signals that China will soon suffer a serious bear market. I think this will surprise Wall Street and knock U.S. stocks to new lows.

But the U.S. decline will be temporary. 2007 should still be a positive year.

China will prove no exception to the rule: No nation can sustain a relatively free economy with unfree politics. In China's case, the politics will give way.

Bobby raises several issues:

• "The small company I work for has no pension plan. But I have two 401(k) accounts from previous employers. Last year, one gained 6.5 percent, and the other lost 3.5 percent. I'd like to consolidate those funds. Several investment advisors have expressed interest in managing my money. But I gather from your columns that I can do it myself and save costs. How should I proceed?"

  I'm biased, Bobby. I think the investment portfolio given in my Suggested Portfolio, is the best around. Other readers who have followed the suggestions for a while are very pleased. Last year, the portfolio gained far more than 6.5 percent.

  Plus, my recommendations cost you nothing. Use the spreadsheet I provide. If this proves difficult, hire a bookkeeper to help you with the spreadsheet until you can do it yourself. The bookkeeper will cost a lot less than an investment advisor.

  My book, "Understanding Exchange-Traded Funds," just released, may be helpful.

• Bobby continues, "If I understand your columns correctly, I should roll over my 401(k) accounts to a standard IRA. Correct?"

  Yes. Open an IRA with Foliofn (annual cost just $25). Ask the administrators of both of your 401(k) plans to close the accounts and transfer the cash to the IRA. Acquire the exchange-traded funds (ETFs) I suggest.

• "I'll be making additional investments in the future. Should I add them to the IRA or to a regular account in my name?"

  Use a Roth; they're the best of the IRAs. You can contribute up to $4,000 a year ($5,000 if you're over 50). The contributions are not deductible, but you can keep the money in the plan for as long as you like. Plus, withdrawals are generally not taxable. For more Roth IRA rules, see my column dated 6/26/06 and IRS Publication 590 (www.irs.gov).

  Purchase the same set of ETFs inside the Roth as you do inside the traditional IRA. Arrange for Foliofn to obtain the money electronically from your bank account and deposit it in the firm's money market fund. Use the spreadsheet periodically to transfer the funds from the money market fund to the nine ETFs in the proper proportions. Every time you do this, the investments revert to the correct percentages, because the spreadsheet adds relatively more to the investments whose values are below the desired percentages and relatively less to those whose values are above the desired percentages.

  The traditional IRA is a different story. No new money is added there. That account should therefore be rebalanced every year and a day.

  If you're adding more money each year than the Roth IRA permits, use a regular account in your name. Unfortunately, the tax rules make it impossible to transfer money among the various accounts. You have to keep them separate.

You'll be far better off with this program than with the two poorly-performing 401(k) plans.