Q. About your recent column on the Northrop Grumman 401(k) lawsuit, I was laid off from Northrop Grumman back in May. I wasn't thinking about moving my 401k, but I think differently now.

I am very green in the subject of money and have not found a local financial adviser I trust. I have visited several websites that offer 401k rollovers, but do you have any suggestions on what to look for? I have nearly $70,000 in the 401k account.

My husband is a great saver of money, but would rather clean the toilet than think about investments. I just opened a Vanguard Roth IRA account for him. We, like you, believe in being debt free and currently have no mortgage or car payments. I am 32 and my husband is 44. We have almost $100,000 in our savings account earning about 4%. We are conservative, and my husband's risk tolerance is very low. Do you think it is best for us to leave the money there or invest it? If invest, where? ---M.R., by email

A. In your shoes, I'd do a rollover to one of the major low-cost providers such as Fidelity or Vanguard. My personal preference is for Fidelity because it has branch offices in many locations where you can get help doing a rollover if you are nervous about doing it online. Many people are.

If you visit the Fidelity website you will find a page that will tell you the office nearest to your ZIP code.

Then you need to have a long talk with your husband. There is nothing wrong with being risk averse. Had more people taken risk seriously, the 2000-2002 bear market would not have done the damage to retirement portfolios that it did.

Unfortunately, avoiding all risk is a virtual guarantee of retirement failure because money market returns are only slightly higher than the rate of inflation. To accumulate a meaningful nest egg, you need two ingredients: (1) regular savings and (2) a return substantially higher than the rate of inflation.

So ask your husband how much risk-free money he needs to have. With $100,000 in a savings account and $70,000 in your 401(k), you could invest 100 percent of the 401(k) account in equities, and it would still take a fairly bad year to cause you to lose money.

As a practical matter, you should invest much of your $100,000 savings in equities to reduce your current tax bill while concentrating your IRA rollover investments in a mix that is dominated by fixed income and REITs that are taxed at ordinary income tax rates.

A very simple portfolio would be the following:
  1. Keep $30,000 of your savings account in a money market fund.
  2. Put $70,000 of your savings account into Fidelity Four in One index fund (ticker: FFNOX).
  3. Divide your 401(k) rollover into a $35,000 investment in a REIT exchange traded fund and an additional $35,000 investment in Fidelity Four in One index fund. This would give you a diversified portfolio holding U.S. large and small equities and International equities, bonds, cash, and real estate. You could make your overall portfolio more conservative by using Fidelity Balanced fund (ticker: FBALX) instead of Four in One Index fund.

Q. I have a question about some information I've been reading at different websites regarding foreign stocks and small cap value indexes. Basically, I've read that small cap value indexes and foreign stock indexes perform better historically than the S&P 500. Is this true? I understand that there is a greater degree of volatility, but most professionals use domestic large cap funds as the "core" of their portfolios. Will an equity portfolio based on small cap value indexes and foreign stock indexes outperform the S&P500? Is it worth setting up a portfolio based on these asset classes? ----C.G., by email from Dallas, TX

A. Yes, it is likely to be quite worthwhile. The Ibbotson Associates data shows that U.S. large cap stocks have returned 11.2 percent annually (compounded) since 1972 with a standard deviation of 17.5 percent. Small cap U.S. stocks have returned 14.9 percent compounded annually over the same period with a 22.8 percent standard deviation.

If you mix cash, small cap stocks, and large cap stocks you will have a portfolio that will provide a higher return, with slightly less risk, than a portfolio that is 100 percent large cap stocks.

Ibbotson Associates data also shows that adding international stocks or equity REITs will provide a further benefit in diversification and risk reduction. According to their 2006 Yearbook, for instance, equity REITs provided a return of 13.4 percent compounded annually over the 1972-2005 period, with a standard deviation of 16.7 percent.

Building portfolios with different asset classes is the main task of modern portfolio theory. Add some geopolitical reality and the danger of a declining dollar, and you can understand why the portfolio that economist Larry Kotlikoff and I recommended in "The Coming Generational Storm" (MIT Press, 2004) included international stocks, equity REITs, international bonds, and energy stocks.

On the web:

Here is the URL to a Fido page that will help you locate a nearby office

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