Q. When I left my previous company I rolled my $400,000 401(k) into a Merrill Lynch IRA with the broker who represented the 401(k) plan. He wants me to put the money with one or more money managers who would charge a 2% fee and has given me information on 6 available money managers with which I could place $100,000 or more.

I'm just not comfortable with money managers. I've never heard anything good about them. I've always been more comfortable with equity mutual funds (I've had money in Mutual Shares Z for 15 years).

To compound the problem, I have another IRA from a previous 401(k) rollover in a broker managed account. He's almost doubled the account in just over 2 years. However, he only invested half of the account in equities, out of 10 stocks he has picked to date, 4 have been losers and 50% of the value of the account is in 3 stocks. This account has grown from $218,000 in 10/97 to $395,000 today and I'm pleased by the growth but the failure of the manager to take profits and diversify the portfolio worries me.

I'm 49. My wife is 53. I worked for the same company for 21 years and left due to a merger last August. I'm doing consulting for the acquiring company (in Tampa) while I figure out what to do next. This $800,000 IS my retirement fund.

What is your opinion of my situation? I know you like the couch potato approach, but I would prefer to be more aggressive.

---A.R., Dallas


A. The argument that routinely comes from the sell side of money management is a macho, "What do you care about a 2 percent annual fee if you're getting top returns with top managers?"

It's a question that inexperienced investors have trouble answering, particularly since they'll be afraid of sounding cheap.

The problem is that most people, including those who sell investment services, don't like to think in terms of probabilities. I personally would be happy to pay management fees of 5 percent if I was certain it would net me superior long-term results. Unfortunately, I have seen no evidence suggesting that high fees will buy superior performance. But I have seen a great deal of evidence indicating that high fees hinder performance. Worse, the longer the period of investment, the higher the odds that high fees will take your performance down materially--- perhaps from the top 25 percent to the bottom 25 percent of comparable investments.

So let me suggest an alternative. First, manage the bulk of your money through mutual funds and do it in low cost, passive vehicles. Pick an asset allocation--- the proportion of stocks, bonds, and cash you want to hold. Then hold it. Second, keep a portion of your money in a portfolio of individual stocks. Unlike your current individual stocks, have it be no less than five but no more than 15. Then track your brokers' selections and measure the performance of that portfolio against a universe of comparable mutual funds.

Suppose, for instance, that you wanted to take more risk. You could do this by adding a $100,000 technology portfolio of ten stocks to your more conservative portfolio of index funds. Think of it as an aggressive Couch Potato.


Q. I am 50 yrs. old and earn about 60k per year. The following is my estimated cash and real estate assets: Real Estate, $136,000 incl. my own home, (no mortgage); an investment fund of $500,000 with my former employer; $12,000 in Savings Bonds; $134,622 in Mutual funds; $52,000 in an IRA account; $100,000 in a money market account; and $7,000 in checking. I also have rental income of $12,000 a year.

I am considering investing 50k in 4 different stocks. Looking at my current situation, do you think this is a good idea? Or should I invest more money in mutual funds?

---R.M., San Antonio, TX


A. I think you'll a little ahead of yourself, on the way to creating great confusion and uncertainty. With $800,000 in financial assets you need to start thinking about an over-all plan for how the money is invested rather than thinking about $50,000 in 4 stocks. What counts is what ALL the money does over the course of several years.

How, for instance, is the $500,000 with your former employer invested? Stocks? Bonds? Cash?

Ditto the $134,622 in mutual funds and the $52,000 in the IRA account. Where is it invested? You can start figuring this out with a single sheet of paper that lists each of your accounts and identifies how much is invested in each category.

The sheet would have headings like this:

Account     Account Value     Amount in Equities     Amount in Bonds     Amount in Cash

When you have completed a list like this, you total the amounts in each column and find the percentage of your financial assets in equities, bonds, and cash. Then you will be ready to think about changes in your investments.