Q.   I am retired, 72 years of age, and living in a small high-rise condo. We have savings of $400,000 and an IRA of $1,300,000. We also have two cars and no debts. Our account value has been on a decline for many months and my wife insists that we pull out of the market and buy a big home since real estate in our area has gone out of sight in the past few years.

What to do? Sure, I'd like to end our account hemorrhage, but I see an expensive home as a way to spend money, not as an investment. Any suggestions or advice (other than changing wife)?

--- N.F., Houston, TX

  

A. I'm glad you had the foresight to eliminate the spouse changing option. Most people find spousal changes worse than a bear market. You're also right in seeing that a larger house also means larger expenses, even if it appreciates in value.

Fortunately, buying a house isn't the only way to stop your investment losses. You can stop them by reducing your equity investments. You can also get a powerful handle on the future value of your investments by shifting to inflation protected Treasury obligations. These investments are indexed for increases in the Consumer Price Index. They also pay an interest rate between 2 and 3 percent.  

There are now four mutual funds that specialize in these securities--- American Century, Vanguard, PIMCO, and Fidelity. The first two have the longest track records and are no-load.   These funds fit particularly well with your age and IRA.

I also suggest that you go through an exercise about expenses with your wife. Take the annual expenses of your condo and compare them to the annual expenses of a more expensive condo or house. Each additional $50,000 of value will probably add about $3,000 of extra cost in after-tax income, if there is no mortgage.   This means you'll need about $4,000 of pre-tax income (assuming a 25 percent tax bracket) to deliver the $3,000.

With inflation protected Treasury securities yielding about 3 percent over inflation, you'll need to put aside $133,000 of investment money to support each $50,000 of higher house value.   If you ignore inflation and assume a bond yield of 5 percent, you'll need $80,000   of investment money to support each $50,000 of higher house value.

Either way, 'moving up' is an expensive proposition.

A significant improvement in your home value, say $200,000, would commit half of your $400,000 in savings and at least $320,000 from your IRA, $532,000 if you allow for inflation. Your substantial assets notwithstanding, you could learn all about being "house-poor."

My suggestion: spend more on vacations.

  

Q. I am 32 and married with three kids under age four and very interested in a couch potato type strategy. I have a strict investment philosophy in which I pay myself first at the combined rate of 24 percent of my salary. This is split between my company 401k, company stock, and outside mutual funds.

In the past I have been very aggressive with the majority of my investments in growth-oriented funds. I have watched my portfolio decreased by about 30 percent over the last 30 months and feel this aggressive approach may be a bit--- aggressive.

I have a goal of achieving a total portfolio value of $3.75 million by age 52. Based on my calculations, this is possible with a 12 percent yearly compound return. My challenge is to find a strategy that has a high probability of yielding this return. How do I do this?

---J.H., by e-mail

  

A. In spite of the incredible returns stocks enjoyed over the last 15 years, only 99 of the 1148 funds with 15 year track records provided a 15 year compound annual return of 12 percent or more.     In addition, only one asset class shows a long-term return greater than 12 percent--- small cap stocks.

If you want to make your goal you'll need to put virtually 100 percent of you investment money in small cap stocks, minimize expenses, and pray. If you don't make it by age 52, at least you'll have time to reorient your portfolio and set more realistic goals for age 68.