by Archie M. Richards, Jr., CFP^®
May 7, 2001

Tom and Nancy, in their early-60s, write, "This is our first email to anyone. Hope it works." They have $34,000 in the Vanguard Health Care Fund and $236,000 in cash or cash equivalents. They "know little about investments and are concerned about what to do next."

All told, Tom and Nancy, you have 13 percent invested in a single industry and 87 percent in cash. Nothing wrong with health care, but that's just one industry. How about all the others, not to mention thousands of foreign companies? If you yourselves require health care for long periods in the future, your $270,000 won't last long, not long at all.

You're overloaded with cash. Invest it. Take it for granted that the prices will fall after you buy. But buy anyway. No one can predict short-term swings in the market.

The long term is another story. After inflation, there has never been a ten-year period in American history when a broad portfolio of stocks didn't return more than bonds and lose less. Since we know the long term and don't know the short term, the right time to buy stocks is always when you get the money. Besides, prices are lower than they were a year ago; take advantage. If you can't stand plopping the money in all at once, put it in over a few months.

Should you buy bonds as well as stocks? The prices of both fluctuate, but they don't do so in the same direction at the same time. To some extent, the prices of stocks and bonds offset each other, reducing your risk. If the volatility of stocks sets your nerve endings on fire, put some of the money into a bond fund. But the fewer bonds in your portfolio, the better, because for long-term appreciation, nothing beats stocks.

Okay, here goes. Keep your health care fund, if you like. Retain whatever cash you know you're going to need as a reserve in the next five years. Of the balance, buy the percentage you feel you must have of a low-cost bond fund - as little as possible. Place what's left one-half in the Vanguard Total Stock Market Index Fund, which tracks the broadest index of U.S. stocks, the Wilshire 5000. For the other half, acquire Vanguard's Total International Stock Index Fund.

When you need regular income from your investments, by all means, take it. On a quarterly basis, withdraw, say, 1.5 percent from each fund, a total of 6 percent per year. You'll be removing more than the dividend income, but that's okay. Over the years, the markets will almost certainly add value in excess of the withdrawals.

Get that cash working. Ride on the sturdy back of the world's economy. It'll carry you a long way.

Let's say, dear reader, that you and your spouse have several young children. Your salaries are low, and you can't seem to save a dime.

Or can you? Do you buy a ton of soda? Can you cut down on that sugar water that'll dissolve a metal nail in a week? Can you purify your own water and avoid purchasing bottled water? Can you knock off some of the salt-filled snack food? If you don't buy it, you won't eat it. If you put your mind to it, couldn't you save $3.50 a day? A lousy $3.50?

That's $105 bucks a month to be invested in your company's thrift savings plan. Let's say the company matches 50 percent, making $157.50 a month. You invest this in a couple of index funds that cover as many of the world's stocks as possible. I expect such investments to grow at 12 percent a year for the next couple of decades, but let's assume 10 percent. It's vital to continue holding the funds even when the market goes down.

In thirty years, the account would be worth - get this - $310,000. With longevity improving so much in the next few decades, you might go on working for longer. In forty years, you've got a whopping $836,000.

Not a bad trade for a bunch of junk costing $3.50 a week.