Q. Now retired, most of my asset allocation is in fixed income mutual funds with Vanguard. Several friends use financial advisors, who invest primarily in stocks. Is one method recommended over the other, and why? I suspect many asset allocation investors would like your responses on costs, returns, and outlook in the next 4 to 5 years for stocks and bonds versus bonds. We definitely are in a new era for investing and returns.

---B.B., by e-mail from Dallas


A. Over long periods of time, equities have provided significantly higher returns than bonds. Adjusted for inflation, the real return on equities has been about 7 percent a year.   The real return on bonds has been about 2 percent according to Ibbotson Associates in Chicago. For that reason, most portfolios are constructed with a mixture of stocks and bonds. Even a small "leavening" of stocks can have a significant positive impact on the long-term performance of a portfolio.

This is true whether the portfolio is one that is accumulating assets (with regular new principal additions) or one that is distributing income and principal for a retiree. If you check the portfolio survival information on my website, you'll find that portfolios that are 25 to 50 percent equities have a better chance of long term survival than all-fixed income portfolios.

That said, there is good reason to believe that (1) future returns on equities may be lower than the historical average from 1926 to the present and (2) that individual and pension investors may reduce their commitment to equities in the future, though they will be doing it for different reasons.

While the average return on stocks from 1926 through 2001 is about 11 percent, a number of prominent researchers believe that the rise in price to earnings ratios and the decline in dividend yields during that period means future real returns will be lower--- closer to 3 to 5 percent than 7 percent.

Individual investors may reduce their equity allocation to reduce risk as they approach retirement. The assets held by those over 50 are greater than the assets held by those under 50. Pension investors may reduce their commitment to equities to achieve a better relationship between pension assets and pension liabilities. This started to happen in England about a year ago.

Bottom line: equities may play a smaller role in future financial plans. They are still likely, however, to provide a higher long-term return than bonds.


Q. Do you know of any software that will track, quote, graph, and figure profit or loss by my personal stocks, mutual funds, bonds and equities? Also, one that will warn you of rising and falling stock prices?

----B.C., by e-mail


A. There is a wide variety of software out there for different levels of investors. The best way to learn about it is through the American Association of Individual Investors and their publication Computerized Investing.

As a practical matter, I doubt that most investors need to buy software.

Most of what you are looking for is available free on the web, with or without a brokerage account. You can, for instance, set up accounts and follow them on MS Money Central. One of the facilities their advanced portfolio features is the calculation of returns on individual securities and the portfolio over a variety of time periods. It's a very handy tool. A number of other sites also offer interesting tools.

You can get most of the facilities you are looking for as part of an electronic brokerage account with an investment house. Fidelity Brokerage, for instance, provides online reports showing your taxable income year-to-date. Another report shows unrealized gains and losses by security--- all with virtually no data entry.

Bottom line: check out the capabilities of the on-line brokers before spending money on software.