by Archie M. Richards, Jr.
March 19, 2007

Brent wrote, "What mutual fund would you suggest for an investment of $25,000. I am very conservative."

I wrote back: "What does 'conservative' mean to you?" I also asked, "What's been your investment experience? Do you pay a lot of attention to your investments? Are you adding money on a regular basis?"

He responded, "Conservative means I want to be well diversified. I've had training in technical analysis (stochastic, macd, and the like), and I watch my investments daily. I am prospering, and I plan to add $40,000 to $50,000 to my investments each year."

I wrote, "Nice going on your success. Will the one mutual fund be the whole ballgame, or are there others? Do you intend to trade the fund I suggest?"

His response: "I will initially put the $25,000 into one fund and go from there. I do trade frequently."

Thanks for being a willing correspondent, Brent. Most investors who call themselves conservative favor investments that pay income and have relatively low volatility and risk. You use the word in a more sophisticated way. You know diversity reduces risk. You also know that a mutual fund holds many stocks, some of which are rising in price while others fall. The volatility of the fund is therefore less than the average volatility of the stocks it holds.

But you can be more conservative by acquiring (SET ITAL) several (END ITAL) mutual funds of different types. As some of the funds are zigging, others may be zagging, limiting the portfolio's volatility all the more.

In other ways, Brent, you're not conservative at all - far from it. Here's what I mean:

• Anyone who trades frequently incurs tremendous risk and will almost certainly reduce his long-term returns. Conservative, my eye! Trading may make you feel you're in control, but it actually reduces your control. The short term is always a surprise. If you buy when you feel optimistic and sell when you feel pessimistic, you'll be wrong most of the time. But in the long term, Ms. Market meekly tracks the world's creation of wealth. Make your investing boring. Achieve control by holding.

• Technical analysis assumes that historic price trends have predictive value. They don't; you can't tell what a stock price will do by knowing its past. I used to know the meanings of "stochastic" and "macd." But I'm no longer familiar with these techniques because in the long run they don't work. Technical analysis also induces you to trade rapidly. It's guaranteed to turn you into a loser.

Instead of mutual funds, acquire exchange-traded funds (ETFs). They're less expensive than mutual funds. Although they can be bought and sold during the trading day, leave the trading to others. Rebalance annually, but otherwise just hold.

Here are my recommendations. All but the last are Vanguard ETFs. The names given here are not the formal names, but the symbols are correct: 15 percent big growth (VUG); 5 percent big value (VTV); 7 percent small growth (VBK); 3 percent small value (VBR); 10 percent European (VGK); Pacific (VPL); 10 percent Emerging Market (VWO); 20 percent REIT (VNQ); and 20 percent long-term Treasurys (TLT).

Use the brokerage firm Foliofn (www.foliofn.com). You can submit your orders in terms of the number of dollars rather than the number of shares.

Foliofn's costs are low. For $199 a year, you can do all the trading you need with no commissions. $199 is 0.8 percent of $25,000. The average annual operating costs of the above ETFs are only 0.15 percent a year. You total costs in the first year are therefore 0.95 percent. When your account reaches $100,000, your total costs will run only .35 percent - way less than those of most mutual funds.

The spreadsheet in my Suggested Portfolio enables you to make the allocations easily at no cost. For more about all this, order my book, "Understanding Exchange-Traded Funds," just out from McGraw-Hill.

This is truly a conservative investment approach. It's the right way to go.