Q. I retired over twelve months ago and moved all of my 401k money to a financial planner to invest. It amounted to $700,000. I agreed that I could accept moderate risk. By the end of August, the funds had decreased to around $560,000. On September 10th I told him to move the funds to a money market account. When the market reopened, the transaction executed. A small amount of money was lost before the completion of the transaction. I paid him $1,500 to manage the account. As far as I am concerned, he did nothing for me!

A few days later I moved the entire account to TIAA/CREF. (My wife had an account there, which made it possible for me to open an account.) I am now earning 6.25 percent on the account.

At this point I would like to invest 50 percent of the $545,000 (I had to draw funds for expenses) in a stock mutual fund using the following logic to select the funds to invest in: (1) The fund would be 5 to 2 years old. (2) Growth would have averaged over 20 percent annually. (3) Earnings for the last six months must have exceeded 10 percent. (4) The fund must have a Morningstar rating of 4 or 5 stars. Your opinion please.

---R.C., Dallas, by e-mail

  

A. I think you've got some problems. Let's start with your four-step fund screen. I applied it using Morningstar's PrincipiaPro software and found that only seven domestic funds survived. The funds were growth oriented small cap and mid cap funds along with two specialty funds--- Bender Growth, Credit Suisse Global Communications, Deutsche Micro Cap Institutional, Dresdner RCM Global Health Care, FMI Focus, MFS New Discovery, and Munder Micro Cap. It's an interesting list, though the Deutsche Micro Cap fund requires a minimum investment of $250,000.

That said, your screen is what I call a comfort screen, not a predictive screen. Don't feel badly about this--- most screenings are like that. While we would like screens to predict the future, what many screens really do is make us feel comfortable. They show us funds that did well during a past period of trauma. But that's all.

  Unfortunately, if your screen has any predictive value, it's probably accidental. The fact that a particular fund had a particular performance in a particular period has virtually no relationship to how it may perform in a future period.

What has predictive value?

Here's a short list:

•            Funds that have lower costs tend to provide superior returns to funds                that have higher costs. This doesn't mean that a high cost fund can't                outperform a low cost fund. It just means that the long-term odds favor                low costs.

•           Value oriented funds tend to have higher returns than growth funds.                Researchers believe that out-of-favor stocks tend to discount dismal                futures when some stocks actually recover while in-favor stocks seldom                live up to market expectations. By systematically avoiding the stocks                people are paying too much for, you raise the odds of a higher return.

•           Small capitalization stocks tend to produce higher returns than large                capitalization stocks. One reason is that there is more risk and you                should expect a higher return for more risk. Another is that small                companies can grow faster than large companies. If we expect General                Electric to grow faster than the economy, we are expecting a great                deal. If we expect Krispy Krème to grow faster than the economy, it                is more likely.

•           High management ownership is another measure that tends to give                superior returns because there is a better chance that the manager                thinks of himself as a shareholder first.

A portfolio you are going to hang your retirement on should have a mixture of fund types, with significant weight going to deep acceptance of the idea that none of us can predict the future, including portfolio managers. As a result, your portfolio could have a large cap index fund (low cost), a large cap value fund (low cost indexed or low cost managed), a small cap value fund (low cost indexed or low cost managed), and a small cap fund (low cost indexed, low cost managed).