One of the things I am thankful for every day is the kindness of readers. Thank you for your trust.

Question: Should I continue investing in the stock market if I can make more than 6 percent in I Savings Bonds and retire in the next five or six years?

We have invested in Fidelity Funds since 1996 and earned a 3 percent total return. (We invested in equity income, growth and income, and tech sector funds through 2002. Now we are invested in Total Stock Index, S&P 500 index, and a bond index fund. The bond index fund is losing money.)

Should we pull out of the market if we have accumulated enough to live comfortably in retirement? Is this situation of no loss but no real gain worth it?

E.B., Houston

  

Answer: Discouraging, isn't it? Many people are thinking the same thing. More important, I Savings Bonds are beating a lot of the alternatives cold.

I Savings Bonds will be earning at a 6.73 percent annual rate between now and April 2006. The yield is based on the trailing rate of inflation plus a premium over inflation. That premium was reduced from 1.2 percent for the May to October 2005 period to 1 percent for the November 2005 to April 2006 period.

That 6.73 percent yield is 200 basis points (there are 100 basis points in 1 percentage point) higher than the yield on Treasury bonds, well over the 6.24 percent yield on government-guaranteed mortgages, and right in the ballpark with General Motors Acceptance Corp. paper.

So it's a really good deal.

Change ahead

Be aware, however, that the yield will change in May when the trailing inflation rate changes. The next rate may be lower. Then again, the yield can decline to an annualized rate of only 4.50 percent and still be competitive with current five-year Treasury notes.

If interest rates continue to rise, I Savings Bonds are likely to be the best fixed-income choice in the near future.

If interest rates continue to rise, the 1 percent real annual return on I Savings Bonds may also beat the return on equities. Here's the math.

Currently, the Standard and Poor's 500 index yields 2 percent. To beat the return on I Savings Bonds, all the S&P 500 companies need to do is increase their earnings at the rate of inflation and have no change in price-to-earnings multiple. Since earnings have shown long-term growth rates well over the rate of inflation, stocks are still likely to provide a higher return if you are patient — I'm talking about patience that lasts three, four or five years.

Reducing risk

The way to reduce your risk while waiting is to use some of the money in your qualified plans — your tax-deferred money in 401(k), 403(b) and IRA plans — to buy Treasury Inflation Protected Securities that are maturing in each of the next five years or so.

If you check current prices for TIPS, you'll find that the real returns are about 2 percent for maturities of one to five years. Buy them and you have securities that will mature when you need the money, protecting your purchasing power on the way.

Your equity investments, meanwhile, will have five years to deliver a higher return. They may or may not — but I've never liked all-or-none investing, so I'd keep some position in domestic equities.

Real diversification

You should also think about real diversification.

Owning the Total Stock Market Index and the S&P 500 index funds is like owning two funds with an overlap of about 70 percent because the S&P 500 index stocks represent about 70 percent of total U.S. market capitalization. You can achieve broader diversification in equities by retaining the Total Market fund, selling the S&P 500 index fund and replacing it with a total international stock fund. Had you done this, year to date you would be in somewhat better shape.

The iShares EAFE index exchange-traded fund (ticker EFA) has returned 7.33 percent year to date through Nov. 11, while the iShares Total Market Index (ticker IYY) has returned 3.3 percent and the SPDR 500 ETF (ticker SPY) has returned 2.4 percent. The Lehman aggregate bond index ETF (ticker AGG) has lost 2.3 percent.