by Archie M. Richards, Jr., CFP^®
July 8, 2002

Tom, a Certified Financial Planner, writes "Your suggestion that ordinary folks should use only index funds is too simplistic. Your readers would benefit from independent, objective advice from ethical financial planners. Otherwise, when they run into difficulty, to whom will they turn to ask questions?"

Financial planners do help people to determine their goals, Tom. But I don't often recommend them in this column, because (A) financial planners make most of their income from commissions, which is a conflict of interest, and (B) readers might think I continue to be a professional financial planner, which I am not.

My investment recommendations are hardly simplistic. They enable readers to participate in the world's economic growth with reasonable risk.

I suggest the following Vanguard mutual funds, which pay no commissions and have rock-bottom costs. (See www.vanguard.com or call 800-662-7447.)

30 percent in the Total Stock Market Fund (3,000 U.S. stocks)

30 percent in the Total International Stock Market Fund (1,500 foreign stocks)

20 percent in the Real Estate Investment Trust Index Fund (114 REITs),

20 percent in the Bond Index Fund (194 U.S. bonds).

Each of these funds represent a different class of investment whose price fluctuations don't match. The up and down cycles partly offset one another, reducing the risk.

Every 13 months, any fund that has advanced more than 30 percent from the original percentage should be trimmed. For example, if the U.S. stock fund becomes more than 39 percent of the total value of the portfolio, it should be brought back to 30 percent. The proceeds of the sale should be added to the funds that have underperformed. This insures sales at relatively high prices and purchases at relatively low prices.

My recommendations are derived from what academics refer to as Modern Portfolio Theory, for which a Nobel Prize was awarded. The suggestions are based most closely on the work of Roger C. Gibson, a respected investment manager.

I've talked with Roger and read his book, "Asset Allocation." My ideas do not align with his completely. I don't, for example, expect a return to the high inflation of the 1970s and 1980s. He is not responsible, of course, for anything I say.

Gibson's phone number is 412-369-9925. He's a fine person, but he doesn't accept accounts of less than $1 million.

Let's say a reader sets up the asset allocation program I suggest above. But several years from now, a bear market occurs, and 20 percent of her portfolio value disappears. For most people, a 20 percent loss has about twice as much emotional impact as a 20 percent gain.

She talks with a financial planner. The planner genuinely wants to help, but he's nervous about the market too.

Do you suppose the planner will try to persuade her to stick with an investment program described in a newspaper column? Do you think he'll simply reassure her and charge for his time?

It's possible, but it's highly unlikely. The planner will be more inclined to relieve her anxiety and his own. He therefore suggests selling at least some of the index funds and acquiring commissioned products that reduce her exposure to stocks.

This would be a mistake. When bear markets occur, readers should stick with their their asset allocation program. Strangely enough, the more unfavorable the news, the more likely the market will begin rising.

When readers become nervous about holding a diversified portfolio of stocks, they should see a mental health professional, not a financial planner. They should also turn off the business news. If they insist on seeing a planner, they should choose one who's at least 55 years old, has witnessed many bear markets, and knows they don't last forever.

Regarding investment advice, financial planners are just great - for people who don't read this column.

On the day of this writing, Monday, July 8, all four headlines on the front page of the Money & Investing Section of the Wall Street Journal imply pessimism. This, despite a tremendous advance of stock prices on Friday the 5th. I love it when most investors, including the press, are bearish. Bull markets, as the saying goes, climb a wall of worry.