Q. I am so tired of taking devastating losses in stocks and bonds. I am 66 years old and was wondering if buying long term CDs (even at today's low rates) makes sense? I have accounts at Vanguard, Fidelity, T. Rowe Price and Schwab. One Vanguard newsletter advisor suggests Vanguard Health Care and Capital Opportunity funds. What are your thoughts? Also, if I keep most of my assets in U.S. dollars, won't I lose buying power constantly since the U.S. Treasury prints more and more dollars every day?

--W.V., by e-mail from Dallas

  

A. As we close the quarter it's becoming clear that many investors have been hit coming and going. Over-invested in equities at the start of the bear market, equity investors lost money in 2000, 2001, and 2002. If they held on until the miserable drop in 2002   (when the average domestic equity fund lost 20.4 percent) and then moved to bonds, they did a real frying pan-to-fire move.

For 2004 year-to-date it's difficult to find a bond fund that hasn't lost money. Indeed, many have lost money over the preceding 12 months. According to the fund category average figures on the Morningstar website, only the "ultra short term" bond fund category shows a positive return in either period.

And that's about the return of a money market fund--- next to nothing.

Instead of withdrawing from bonds and going to entirely safe but low yielding bank CDs, I suggest that you stop trying to guess which asset class is going to be the winner (or loser) and diversify your assets.

That means hold both stocks and bonds. The best way to do it is to own both a stock and a bond fund. That way you can rebalance. My Couch Potato Portfolio, for instance, uses the Vanguard Total Market Index for stocks (or the Vanguard 500 Index) and the Vanguard Total Market Index for bonds. Own both and gains in one are likely to offset declines in the other.

You can also make your life really simple by owning a balanced fund that invests in both stocks and bonds. Vanguard Balanced Index (ticker: VBINX) lost money in 2000, 2001, and 2002--- but in much smaller amounts than equity funds. As a consequence, the fund has modest but positive returns over the last 3 and 5-year periods while the vast majority of pure stock funds still show losses.

Vanguard Capital Opportunity, a mid-cap growth fund, is currently closed so you can't invest in it. You can invest in Vanguard Healthcare, however, through either the mutual fund or the ETF. Demographics alone--- the aging of the boomers--- means a bit of "over-weighting" in healthcare is likely to be a good bet. The fund, ticker VGHCX, has a minimum investment of $25,000 but you can buy smaller amounts through the ETF shares, ticker VHT. (Full disclosure: I own shares of VHT in one of my retirement accounts.)

  

Q. I have been approached about refinancing my condo with an interest only mortgage loan. Other than lowering my monthly payment, what are the advantages and disadvantages for a 67 year old, single individual to participate in this type of financing? I owe $101,000 on my place and it's worth over $200,000. My current mortgage interest rate is 6 3/8 percent.

---W.C., by e-mail from Houston

  

A. The LIBOR (London Interbank Offered Rate) mortgage loans are very flexible, allowing a variety of options in monthly payments. The problem we face in housing is a potential double whammy. First, with the trailing rate of inflation 3.1 percent and rising while the one year LIBOR rate is only 2.4 percent, borrowing is simply too cheap. Rates are likely to rise to some premium over inflation.

These artificially low rates, however, are setting the stage for future damage.

How?

By encouraging people to buy more house than they can afford and creating a pool of future anxious sellers when higher interest rates rise and increase monthly payments.

Ironically, this will probably work to create a future overhang of unsold houses.

That, in turn, will work to suppress--- flatten--- future home prices in many areas.

Basically, today's low rate mortgages have borrowed against future appreciation.

Bottom line: at 67 your best move would be to pay the mortgage off--- if you have the ready cash.