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

Peggy writes, "I'm retired at 68, with health problems that give me something like 10-15 years to live. My individual account and IRA's contain good, solid mutual funds of the growth and value variety, with international exposure and some fixed income. But shouldn't I concentrate primarily on the conservation of wealth, with only some growth?"

Sorry about your health problems, Peggy. I take it you want to avoid running out of money before you die, but otherwise enable your wealth to grow as fast as reasonably possible.

Let's see if we can't satisfy both objectives. Twelve years ago, the Dow Jones Industrial Average stood at around 4000. Now 12,600, it's more than 3 times higher. Assuming dividends averaging 1.5 percent, this amounts to a compound growth of about 11.5 percent a year. Note that the period included a serious bear market in 2002 and 2003.

The world's stock markets will probably be better in the next dozen years than they were in the last. Government economic policies are improving throughout most of the world. The top U.S. income-tax rate, for example, has fallen from 39.6 percent to 35 percent. Russia outdid us: Its tax rate has dropped from over 70 percent to a flat rate of only 13 percent.

Oh sure, terrorists can be deadly, but they can't derail the world's impending economic growth. They're like a gnat on a horse's back.

True, an explosion of the hot spot under Yellowstone, covering the West with lava, would kill U.S. economic growth. A direct hit on New York harbor by a level-5 hurricane would inundate the city's subway system. But the odds of such calamities are low.

In the next dozen years, I look for at least 12 percent a year. There's no guarantee that you won't run out of cash before you die, but rapid investment growth certainly helps to prevent it.

The portfolio of ETFs described in, Suggested Portfolio, should achieve annual growth of at least 10 percent. It calls for 30 percent in U.S. stocks of various types, 30 percent in foreign stocks of various regions, 20 percent in real estate investment trusts, and 20 percent in long-term bonds. The annual volatility of this portfolio is relatively modest, because the price trends of the various categories tend to offset one another.

The above mix of investments shouldn't be changed just because you've retired. You have many years to go.

For most people, becoming more conservative means acquiring investments that pay high interest with low volatility and less growth potential. Bad move. Here's why:

• Over the next few decades, interest rates will continue down, as they've generally been doing for 25 years. You'll be left squeezing blood from a stone.

• Each of the investment types you acquire should have relatively high volatility. The price action of each one to some extent offsets that of the others, cutting the volatility of the whole. When the volatility of some of the investment sectors is reduced, the volatility of the whole may remain unchanged, because the offsets are diminished.

Anything's possible, of course. Stock prices could drop by 30 percent this year. You could then become infirm and run out of cash. But the odds of all these things happening at the same time are low. Undue pessimism isn't my style. The prospects of rising stock prices are wonderful.

The portfolio I recommend throws off income of approximately 3 percent. If you need more, take it. In 2007 and 2008, I expect the market to gain something like 20 percent a year. If you remove 5 percent of the current value each year, the portfolio would still enjoy a net annual growth of 15 percent a year.

Consult with a fee-only planner (www.napfa.org) to prepare a financial plan, taking into account all of your assets, debts, and expenditures.

But don't hunker down, Peggy. With improved economic policies and fabulous technologies to come, we face a golden age of human experience.