Q. I have three questions. First, why would retirees with pensions they could survive on (especially pensions with cost of living increases) want any bonds at all? Second, why would anyone in, or approaching retirement, load up on growth stock paying little or no dividends? Third, since all distributions from an IRA are subject to the same tax, why would anyone load up an IRA with more than 30 percent "growth" stocks?

---H.C., by e-mail.


A. If 100 percent of your income needs were met by inflation adjusted pension income you would still want some fixed income investment.

Why? Because you could meet unexpected needs or emergencies by selling assets that are not as volatile as equities. To be sure, your fixed income holdings could be relatively small--- perhaps only 20 or 30 percent--- but they would still be a good idea.

Retirees still need to own stocks that pay little or no dividends because they are likely to be retired for about 25 years. A few equities that have grown at 15 percent a year will have doubled in value 5 times by the end of 25 years. This would offset a great deal of inflation since the stocks would be 32 times more valuable. Money earning 6 percent in bonds, if you could get it, would only have become 4 times more valuable over the same period.

Big difference.

You will never benefit from the lower tax on capital gains from investments in a tax-deferred account but you will still benefit from higher long-term returns.


Q. You often talk about the Vanguard S&P 500 fund.   I am curious why would anyone buy an S&P 500 fund instead of simply buying Spiders ("SPY")?

---G.T., by e-mail


A.   One reason: commission costs. When you buy ETF shares--- such as iShares S&P 500 (ticker IVV) or S&P 500 Depository Receipts (ticker SPY)--- you have a conventional stock transaction. This means you will pay a commission on each transaction.

You pay a commission to acquire the original shares. If you add new money on a monthly or quarterly basis, each addition will require another commissionable transaction. Long-term investors who are building a portfolio will be able to avoid all commission costs by investing in the mutual fund rather than the ETF.   This also applies to investors who are starting to make regular withdrawals.

While ETF expense ratios for this major index are lower than all but Vanguard's "Admiral" shares (which require a high initial investment) the ongoing cost of commissions gives a cost advantage to the mutual fund form.


Q. Some of us "Couch Potato" investors are confused.   A couple of years ago you suggested that we might be better off if we invested the equity portion of our "Couch Potato" fund in the "Total Stock Market" fund rather then the "500-Index" fund.   I notice, however, that you continue to quote the "500-Index" fund when reporting the performance of the "Couch Potato" funds.   Which fund are you recommending for the equity portion of the "Couch Potato" funds, or does it really matter?

  -S.H., Garland, TX (by e-mail)


A. It's a matter of history. When I started writing about Couch Potato investing Vanguard had not yet started the Total Market Fund.   So I didn't have data.

The Vanguard 500 Index Fund now accounts for about 75 percent of the total market value of all publicly traded companies in America. It accounted for about 85 percent of all value when I started this exercise.

Either way, you're getting most of the "action" in equities with this index.

A passive purist, however, would go for the Total Market Index because adding the other 4,500+ companies means you get 100 percent of the American equity market.

Is there a difference in returns?

There should be a slight positive difference for substituting Total Market for 500 Index because the long-term return on small stocks is 12.4 percent rather than 11.0 percent. Remember, you won't gain the full 1.4 percent difference because the small stocks are only about 25 percent of the total market.