by Archie M. Richards, Jr., CFP^®
February 12, 2001

Ed writes, "My Thrift Savings Plan offers the following choices of mutual funds:

• U.S. Treasury Securities
  

• Barclays U.S. Debt Index Fund (a bond index fund)
  

• Barclays Equity Index Fund (a S&P 500 stock index fund)
  

• Small Capitalization Stock Index Fund (a Wilshire 4500 fund)
  

• International Stock Index Fund

"What mixture of funds would make our money last the longest? With all the layoffs and the sky-high natural gas prices, one wonders how to invest. We will draw out money in small, equal monthly payments. Our time horizon is 8-to-10 years."

A nice combination of funds you're offered, Ed. No one at an index fund spends money researching which stocks will outdo the others. It just buys 'em all. Except for small operating costs, the fund tracks a particular market index closely.

I would place half your money in U.S. stocks and the other half in foreign stocks.

"What?" some readers would say. "Half the money abroad? There are risks out there. Stick with America , the greatest country in the world!"

America certainly is the greatest country in the world, and I'm proud of it, even when the members of Congress act like jerks. But of the world's total stock market values, more than half are outside the U.S. Why limit yourself?

Sure, political risks are higher in many foreign countries than they are here. But the people who buy the stocks of those nations already know that the risks are higher. They buy them anyway because the prices are lower in relation to the company earnings than they are in the U.S.

The Philippine people, for example, just ditched a corrupt president. The uncertainty has sent the prices of Philippine stocks spiraling downward. But from here, the nation may have nowhere to go but up. Without a tiny fraction of your funds invested in Philippine stocks, you could miss a nice opportunity. Having a little bit here and a little bit there does not increase your risk; it reduces it.

Now for the U.S. half of your portfolio. Yes, companies have been laying off, and natural gas prices have risen. But when the news is bad, prices are lower. Risks get discounted in America just as they do abroad. This could be a great time to buy.

I prefer a fund that tracks the Wilshire 5000 Index, which is based on stocks selected by Wilshire Associates of Los Angeles to reflect the values of about 98 percent of all publicly-held U.S. companies.

Your thrift plan does not offer a Wilshire 5000 fund, but it does offer a fund that tracks the S&P 500 and another that tracks the Wilshire 4500. Combined in the proper proportions, these two indexes make up the Wilshire 5000 in entirety.

The proper proportions are 76 percent and 24 percent. The S&P 500 Index, based on the 500 largest U.S. companies, constitutes 76 percent of the value of all the companies counted in the Wilshire 5000; the Wilshire 4500 makes up 24 percent. As mentioned, I would place half the money in the equivalent of the Wilshire 5000. Therefore, put 38 percent (half of 76%) in the S&P 500 Index Fund and 12 percent (50% less 38%) in the Wilshire 4500 Fund. The 38 percent and 12 percent would total the U.S. half.

In the last two centuries, after adjusting for inflation, stocks have never failed to beat bonds and lose less than bonds over periods of at least ten years. There have been five-year periods when bonds lost less, but not many. It's essential that you stay in the market for at least five years, preferably ten. Therefore, the fund selections I recommend above require that when the stock market falls, you keep on holding! When television reporters are saying that the economy is just terrible, take bathroom breaks except during the commercials and don't sell.

I myself don't care for bonds. But if you feel you can't follow the aforementioned advice about holding during bear markets (you won't know until you try), place a portion of your funds - say, 30 or 40 percent - in the U.S. Debt Index Fund and reduce the amounts in the other funds proportionately. If you choose 40 percent bonds, for example, 60 percent remains for stocks. The International Fund would get 30 percent (60% of 50%), the S&P 500 would get 22.8 percent (60% of 38%), and the Wilshire 4500 would get 7.2 percent (60% of 12%). If the international fund includes U.S. stocks, cut down the others to achieve half foreign and half domestic. Diversity pays.

If nothing major occurs, we'll talk next week about monthly withdrawals.