by Archie M. Richards, Jr., CFP^®
June 16, 2003

Tom is 64 years old, with his wife 62. They've accumulated $225,000, mostly in index funds. The percentages are as follows:

Broad U.S. stockmarket	13 percent
European stocks	10 percent
Pacific stocks	4 percent
Healthcare stocks	26 percent
Money market funds	47 percent

Their investments have lost money, and Tom wonders what they should do now. He says they want to make correct decisions for late in their lives.

Why so much cash, Tom? That won't earn back what you've lost. The perfect time to buy stocks is when investors are pessimistic. There's been a lot of that going around lately.

Meanwhile, Congress is reducing tax rates, and amazing new technologies are approaching. Except in Israel, terrorism is being cut down to size. Don't wait until newspapers are filled with good news. By then, stock prices will be much higher.

Don't reserve cash for unexpected events. For big expenses you anticipate within five years, fine, set aside cash in a short-term corporate bond fund. But when large unexpected needs arise, pay for them with credit cards and withdraw from your investments to repay the cards a week or two later. This enables you to get your cash working now.

Why do you have such a heavy concentration - 26 percent - in healthcare? The industry amounts to only 10 percent of the economy and 15 percent of all personal consumption. Your proportion is way above those numbers. This seems unrealistic.

Healthcare is expensive because of faulty government policies. Let's say the government realized that it's doing more harm than good. It backs off and treats healthcare with relative disinterest, as it does, for example, the hardware business. The cost of healthcare would fall by about half, and the quality would increase. The prices of big pharmaceutical stocks, which are high because of Uncle Sam being such a healthcare busybody, would fall, and you'd be left holding the bag.

I wouldn't rely on government continuing to go wrong. After a few decades, voters catch on. Spread your money as widely as you can; it's safer.

I like the fact that your investments in U.S. and foreign stocks are about equal. Beef up your holdings in both segments. Include an index fund or exchange-traded fund that tracks the stocks of emerging markets, like China, India, and Chili. Developing nations have no where to go but up.

Finally, where are your real estate investment trusts and long term bonds? These investments act differently from stocks. When stocks are falling, REITs and bonds might be rising, as indeed they have done in the last several years. The risk of your entire portfolio is reduced.

Every 13 months or so (waiting longer than a year avoids short-term capital gains), sell a portion of the investment groups that have performed particularly well and buy more of those that have done poorly. With such rebalancing, your total return will be almost as good as that of stocks alone, but with considerably less volatility.

You're only 64 and 62 years old. Forget about your being late in your lives. Barring serious illnesses you're aware of, you're only in the middle of your lives. Expect to live until your wife attains age 100. That's 38 years. Not counting dividends, I expect the Dow to grow at about 9% a year. In 38 years, it would stand at 240,000. Don't miss out!

When you retire, you may need cash payouts from your investments. If you withdraw 4 or 5 percent from each sector, the portfolio should continue growing indefinitely. For higher payouts, you might purchase a variable annuity. Annuitize the policy immediately and continue with approximately the same kind of investments within the policy. You'd have an income that would probably continue growing, but which you couldn't outlive.

The key is, get your cash working in a variety of index mutual funds or exchange-traded funds and rebalance periodically. The approach is called asset allocation. It'll make you a long-term winner.