by Archie M. Richards, Jr., CFP^®
October 28, 2002

Joan's email includes the following: "My husband has poor health and cannot obtain more life insurance. I want to feel financially comfortable if I end up alone. Our stocks have dropped 60 percent in the last few years. Our financial planner is trying to arrange our affairs so that the income distributions to us in retirement are tax free. He wants me to buy an $850,000 universal life insurance policy. The future is so hard to think about. What should we do?"

If your main objective, Joan, is to have security in event of your husband's death, why are you considering a large life insurance policy on your life?

The values in a universal life policy grow because of interest rates. In the long run, I expect rates to fall to new lows. If this occurs, the growth within your policy would be very slow.

I suggest term life insurance instead (www.SelectQuote.com). Then invest as much as you can in an asset allocation program (www.ArchieRichards.com). This will provide the best chance of good growth with moderate risk.

Had you used asset allocation in the last few years, you would lost less. The types of investments that went down, the domestic and international stocks, would have been partially offset by those that went up - the Real Estate Investment Trusts (REITs) and bonds.

Invest within a Roth IRA. The distributions to you in retirement from a Roth are tax free. You can achieve the objective your planner wants without high-cost, cash-value life insurance.

Taxation, investing, and financial planning are complicated. Your planner is not to be blamed for this. The government is to blame, especially with regard to taxation.

Because of the complexity, those who advise about financial matters are generally well educated and well informed. They want to get paid as professionals. But clients who are not very wealthy generally prefer not to pay for the planning up front in cash - in your case probably $5,000 or more. Commissions are disclosed, but usually not discussed in detail. Cash-value life insurance, including universal life, is a common way for planners to receive behind-the-scenes pay at a professional level.

Vanguard (800-662-7447) offers low-cost index funds. It also offers financial plans for only $500.

Henry writes, "Earlier this year, I placed my IRA money into Vanguard's Total Stock Market Index Fund and Total International Stock Market Index Fund. They're both down, as you know. Should I invest more money now or wait until early next year? Also, should I invest in each account equally or put more into the account that's lower?"

First, about diversification, Henry: Include the REIT and bond index funds. Spread your money among four funds, not just two. You want as many different classes of investments as possible. In IRAs, Vanguard's minimum is only $1,000 per fund.

The right time to invest, even in stocks, is always when you get the money. If your IRA is fully funded for the year, open an account in your own name. (For accounts owned outright, Vanguard's minimum is $3,000.)

To delay an investment when you don't have to is to make a prediction that prices will decline. You're not qualified to make such a prediction. Neither am I. Nor is anyone else. In the short term, the market is smarter than all of us. (In the long term, it goes up.)

As to the allocation of the additions you make to your funds, balancing is the right approach. Put more money into the accounts that are down. You want each fund to be a certain percentage of the whole portfolio. I recommend domestic stocks 30 percent, foreign stocks 30 percent, REITs 20 percent, and bonds 20 percent. Each time you invest, beef up the funds that are below the desired percentages.

To align the portfolio perfectly, you might also sell a portion of those funds whose percentages exceed the desired amounts. As to funds you hold outside of an IRA, engage in such selling only every 13 months. This keeps your capital gains long term, taxed advantageously at low rates.