Q. I've read cautions against buying into funds toward the end of the calendar year because of year-end distributions and the taxes they cause. Ok, I understand that--- but what about funds that pay distributions quarterly or even monthly? From a tax standpoint, would it be OK to invest in these funds in mid-October, then wait until January to buy into a fund that pays distributions annually?

Also, I've read that if it's late in the year and the realized gains of a fund are more than 5 percent of net asset value, one should wait until January to buy. Having spent hours on the websites of Morningstar and Vanguard, I still haven't been able to figure out how to calculate the realized gains.

--L.N., by e-mail from Dallas


A. Some fixed income funds have monthly distributions but it is not the practice of equity funds. What investors worry about is "buying a tax liability"--- buying a fund just before it makes a substantial capital gains distribution. This happens because most people don't understand that a capital gains distribution is a tax accounting event, something that simply recognizes what has happened during the year.

Worse, while you can get information on the capital loss carry forwards a fund has (and most equity funds have them) and information on net unrealized gains or losses, that's not the same as knowing the distribution.

As a practical matter, most equity funds started 2003 with significant loss carry forwards and unrealized capital losses. This is likely to be a year of small year-end distributions. At the end of October, for instance, the Morningstar Principia database showed that the 1,000 largest domestic equity funds had no potential capital gains exposure.


Q. I am an Internist in private practice in Texas for the last 15 years. As you know, the medical field is no fun. I am 45 years old and am planning to retire in two or three years. Right now, my asset allocation includes 90 percent in money market funds and 10 percent in stocks and mutual funds. I am hesitant to put money in the stock market because I feel it is over-valued. I'm not comfortable with the bond market either because of the danger of rising interest rates. And I feel real estate is a bubble about to burst.

Can you help me with asset allocation? I have a daughter, 19, who is in her second year of college and a son, 13. I am very conservative and would like to put my money in a very safe investment with a 6 to 7 percent interest return.

---N.P., by e-mail from Dallas


A. That's what everyone wants! Three years ago it was a stock that would double in a month or less. Today, everyone will settle for a safe 6 or 7 percent. Unfortunately, neither is available. Remember, the after-inflation return of safe government securities has averaged only 3 percent in the long term. The after-inflation return on common stocks has averaged only 7 percent.

The first thing you need to do is work on your psyche. The world isn't going to end. Practicing medicine may be less remunerative and less fun than 15 years ago but I'll bet most readers would happily trade places with you. Their income is lower, their jobs are far less secure, and many work at jobs that give them no community respect. As therapy, I suggest renting a copy of an old movie, Zorba the Greek, where the response to disaster is to dance.

Why not?

Life is a tough, risky business. We cope by working hard, earning trust, and making certain that we diversify our investments. Remember, simply having some savings puts you way ahead of most people because most people don't have any savings to invest.

Bottom line: when in doubt, diversify more. A 90 percent cash portfolio is just like a 90 percent tech stock portfolio---over concentrated. Buy more equity funds. Buy an inflation protected securities fund. Buy some gold shares. Buy an international equity fund.