Q. I am one of thousands of Dallasites who has watched his 401(k) holdings vanish at an alarming rate.   Now, more than a year after the dot.com bubble burst, I am still losing approximately one out of every five dollars invested.   My 401(k) investment is divided evenly between Invesco Dynamics Fund and Janus Worldwide Fund.   I made these selections years ago when the account was opened, with a belief that the higher risk would equate with a higher yield.   The

How can I stem the tide, and what do you suggest for the long haul?   I am 39 years old, and need to start tucking acorns away for retirement!

---J.I., by e-mail

  

A.   While little would have saved you from some level of loss in the last year, your losses have been multiplied by the fact that you've got two funds but virtually no real diversification.

Let me explain. Both Invesco Dynamics and Janus Worldwide are equity funds. The only diversification you have is that about half of Janus Worldwide is invested outside the United States. So your combined portfolio is 75 percent U.S. stocks, 25 percent foreign stocks.

But the problem is worse than that. If you visit the Morningstar website and get a report on each of these funds you will find that they invest in virtually the same areas. For instance, both funds have over 30 percent of their assets in technology stocks. The next heaviest investment sector is service stocks--- in both funds. And neither fund owns any utility stocks. So you've got different managements that invest in the same industries, with the same focus on growth.

That's not diversification.

You can diversify by substituting a fund with a different style and asset class concentration for one of your funds. If available, for instance, Dodge and Cox Stock fund would make a good alternative to Invesco Dynamics. Unlike Invesco Dynamics, Dodge and Cox has a long and attractive track record. It also has a value orientation that has served it well over long periods of time.

For still greater diversification, consider Dodge and Cox Balanced fund. With about 40 percent of its assets in cash and bonds, it would add a 20 percent fixed income component to your combined portfolio. All together, your portfolio would then be about 20 percent fixed income, 30 percent domestic value, 25 percent international growth, and 25 percent domestic growth.

You can still lose money, but you'd avoid the really deep potholes.

  

Q. I have read with interest many of your discussions on the percent of investments that can be withdrawn during retirement. At retirement, ones assets include three categories: investments, house and land, and everything else (cars, jewelry, etc).   I have assumed that the 4-5% withdrawal rates only apply to the investments.

In my case and many others, however, at some point I intend to sell the house and move into a retirement community. This, in effect, makes the house a part of the investment portfolio since I fully intend to use the proceeds of my property for my retirement in future years. If I add my house value to my investments, it makes a substantial difference in the withdrawal percent.

Right now, for instance, my withdrawal rate is about 4.7% of my investments. If I include the house as a part of the calculation, it is about 3.9%. In one case, I probably should cut back; in the other, I am OK.

It would seem that if the plan is too live forever in the current house, then the house should not be counted--- but if the plan is to eventually sell for a different lifestyle, then the house value should be used in the calculations.

I would appreciate your comments on this logic.

---M. K., by e-mail

  

A. Your logic is fine--- with some caveats. One thing to bear in mind with any of these retirement withdrawal exercises is the other side of the question--- the less you withdraw, the higher the probability of portfolio survival and the greater the odds the Internal Revenue Service will be a beneficiary in your estate. That tells me to err on the slightly high side--- toward 5 percent. Then use the home equity as a cushion against being on the wrong side of the probability tables.

The first caveat about plans to sell your house is that selling is NOT something that most people want to do. Indeed, as they get older most people become increasingly reluctant to sell their home even though it makes great sense.

The second caveat might be called Burns Law of Inverse Value: The value of your house is always inversely proportional to your need to sell it.

Finally, some retirement communities require substantial up-front payments. These payments may absorb the bulk of your home sale proceeds. Your investment fund may only be the investments you start with--- and end with.