Q. I am 65 and plan to work for another 5 years, but don't want to loose the money I have accumulated to date. I have about $500,000 in money market funds and I don't need the income now.

Since interest rates may increase--- possibly next year - - - back to the 7 to 8% range of the last few years, would it be appropriate to leave my money in a money market fund until interest rates return to a more normal rate? (I.e., bond fund values will decrease as interest rates rise again.)

What should you do if you have all of your savings in money market funds now to reinvest in bonds & stock funds? (I.e.. wait until the stock market stabilizes for 6 to 9 months and just sit tight in the safety of money market funds?)

---J.H., by e-mail

A. It may be of some comfort for you to know that Vice President Cheney faces the same dilemma--- the bulk of his assets are in cash.

One of the best features of the Couch Potato Portfolio is that it keeps you out of such all-or-none positions. You won't make a killing but you won't lose your shirt, either.

While it is reasonable to expect interest rates to climb in the next economic recovery, putting bond prices at hazard, the long term favors intermediate maturities. Basically, you get the same return with less interest rate risk as long maturity bonds. So I would move a good portion of your cash to a fund like Vanguard GNMA.

Another step is to take some measure of how much money you can afford to risk. I bet it's more than zero. Suppose, for instance, that you put 10 percent of your money in a fund like Vanguard Total Market Index. Even if it declined, you would have to spend the other 90 percent of your money before you would be faced with a forced sale at low prices. With no spending planned for 5 years and a withdrawal rate (pick one for yourself) of, say, $50,000 a year after that, it would be more than 14 years before you would be forced to sell any of your equity position. Probability dictates that stocks would show a positive return over that time period.

Do that exercise--- time and withdrawals--- and I think you'll come up with a larger equity position.

Q. I am retired and am a convicted couch potato. But I'm apprehensive about switching from the S&P 500 to the Russell Value Index iShares as you suggested in a recent speech. Has there been back testing of the Russell Value Index in this type of market and in all markets in general? How does its average rate of return and risk (std.dev.) compare with the S&P 500?

In the above referenced speech, you gave strong technical reasons to switch to the Russell Value Index at this time. Does this not imply market timing (a counter couch potato concept)? In the future are we going to switch back to the S&P 500? If so, when? iShares are a relatively new type of financial instrument. Is there a risk in investing in a new instrument?

---N.A., by e-mail

A. There are three reasons investors should "tilt" to value investing at this time. Only one of those reasons could be called "market timing."

Here are the reasons:

• The S&P 500 Index is still priced at a relatively high valuation level relative to its long-term history. A move to low price to book value stocks can reduce some of that risk exposure.

• A significant body of research supports the idea that investing in low price to book value stocks--- value stocks--- is likely to produce a superior return in the long run. Value stocks, by definition, have far less investor optimism in their prices than growth stocks.

• Growth stocks have outperformed value stocks for years but this trend< appears to have ended last year, sometime between spring and fall. Since then, value stocks have provided higher returns than growth stocks, whether we are talking about large, mid, or small capitalization stocks. You can see the shift by taking a close look at the table below. I think playing this shift would be called market timing.

The Shift from Large to Small, Growth to Value
Index or Group YTD 12 mos. 3 years
Small Value 7.1 20.9 2.6
Mid-Cap Value 3.1 17.5 6.5
Large Value -0.2 6.3 4.1
S&P 500 -5.0 -13.0 5.3
Small Growth -8.5 -16.6 6.6
Mid-Cap Growth -12.7 -22.8 9.9
Large Growth -12.2 -25.5 6.1

Source: Morningstar Principia Pro, April 30 data (bold italic indicates 50/50 CP did better)

Investors who are anxious about trying new investment media such as exchange-traded funds (ETFs) can accomplish much the same "tilt" by using traditional index funds from a number of mutual fund firms. Vanguard, the pioneer in consumer index investing (Wells Fargo started it for institutions) offers a large cap value index fund (Vanguard Value Index Fund) that delivers the performance of value stocks in the S&P 500 index. They also offer a Small Cap Value Index fund that duplicates the performance of the Russell 2000 Value index. Unfortunately, they don't offer a Mid-cap value Index fund.