by Archie M. Richards, Jr., CFP^®
June 18, 2001

Retiring, vigorous, at age 65, you're transferring your 401(k) money to an IRA account at a brokerage firm. The new account form asks for your investment time horizon. Is it five years, five-to-ten years, or more than ten years?

For some people, the answer is obvious. Let's say, A) you're 43 years old, B) your 15-year old daughter is smarter than you ever were, C) she'll probably attend an Ivy League college that'll cost you the equivalent of $150,000 or a stealth bomber, whichever's larger, and D) you have $150,000 in investments.

Unless you can obtain financial aid, you're stuck, my friend. Your investment time horizon is two-to-six years. You have what you need. If you invest all the money in stocks and lose it, you'll have less than you need. Place a quarter of the money in stocks, to cover years five and six, with the rest in short-term bonds. If the stock market takes a tumble and panic selling occurs in the next year or two, you might divert $60,000 or so to stocks. The risk of investing in stocks at such a time is low (although everyone else will be scared to death).

But at retirement age, pinning down your investment time horizon is not so obvious. Does it mean, when do you expect to die? With so many advances in medicine, dying is getting harder these days. The teacher of a class I attended asked at what age we expected to die. I was prepared to answer 120. But before my turn came, someone else answered 160, so I lifted the age of my demise to 140.

But say you don't make it for even a century. We'll miss you, of course, but as far as your investments are concerned, so what? Unless you own and manage a closely-held business without key man insurance, your death won't cause your investments to lose a penny of value. Death is irrelevant to your investment time horizon.

How about serious illness or a nursing home? Nursing home?? Man, you're only 65! You have more things to do than you can count! Continuing education courses. Golf. Organ lessons. Hiking with the grandchildren. Sharing with them your interest in woodworking. You want to see the Andes Mountains in South America . Maybe some consulting work. You're going to have the best time of your life. The way to pay for your future nursing home is to make long-term diversified investments.

"But," you say, " if I own stocks and I'm cut down by illness prematurely, I'll need extra cash."

Okay. You sell some of your stocks, and there's your cash.

"But if stock prices are suffering from a bear market, I'll lose!"

Sure, sure. As Casey Stengel said, go with the odds. Here they are:

1. Not once in U.S. history has there been a ten-year period when stocks, after adjusting for changes in the cost of living, didn't gain more than bonds and lose less.

2. Yes, you could encounter serious illness in the next ten years. But the chance of your doing so immediately is low.

3. The chance of the stock market having a serious drop immediately is low. Most of the time, stock prices trend higher.

4. Your serious illness and a bear market occurring right away are what smart folks refer to as independent variables. The chance of both of them occurring immediately is very low. A bear market will occur eventually. But by then, you should have gains to absorb the losses.

Go with the odds, tiger. Your time horizon is considerably more than ten years. To increase your future income, buy index funds of domestic and foreign stocks, REITs, and maybe 20 percent long-term bonds. When the market falls, concentrate on making a large wooden cabinet. There, that'll divert your attention.

If your estate involves any kind of complexity, which is likely, consult with a specialist in estate planning. A reliable sign of competency is membership in The American College of Trust and Estate Counsel, which practitioners can join only by invitation. To find a member in your area, check www.actec.org.