Q. In May I made a 7 figure deposit with a very large Boston wealth management firm. They invested 60 percent in equities and 40 percent in their intermediate bond fund. I protested when I saw the intermediate bond fund and forced them to exit it. As an alternative, I bought 90 day Treasury bills earning 3.2 percent. I did not want to be in a fund with rising interest rates.

These Treasury bills have now matured and I do not know where to put the funds. In addition, I can't afford to pay them 1 percent to manage Treasury bills. Can you show me some alternate choices? I could handle a blend of AAA corporate bonds and possibly some preferred stocks.

What would you do?

---J.C., by email from Cape Cod, MA


A. One of the best tools for your situation is a "ladder," a sequence of fixed income securities that will mature on a regular schedule. When each security matures it is replaced with a new security at the long end of the ladder. The net result is that you will eventually have a portfolio with the yield of the longest maturity but an average maturity that is much shorter. Better still, if you have a need for cash, some part of the portfolio is maturing every year.

Many people don't understand this, so let me lay out a very simple ladder. Suppose you divide your fixed income portfolio into two parts and invest half in a 1 year Treasury note and the other half in a 2 year Treasury note. In the current market, according to Bloomberg.com, both securities would earn about 4.30 percent. Indeed, the "spread" between 6 months and 5 years is about 10 basis points--- one-tenth of 1 percent.

When the one year note matures it would be replaced with a new 2 year note because the maturity of the original 2 year note would be down to 1 year. If interest rates continue rising, the replacement note will have a higher yield. Either way, a ladder reduces risk and adds flexibility because part of it is always close to maturity.

Needless to say, you can structure your ladder so that securities mature every six months. You can also build a much longer ladder, say out to 5, 6, or 7 years. In most markets this would increase your interest income substantially. It won't today.

One guideline for creating such portfolios---particularly for people who have reached the age of Required Minimum Distributions from tax deferred accounts--- is to commit enough in each year to provide the cash for your distribution. Again, it will work to reduce your risk---cash will be there when you need it.

If you keep this account separate, you won't have to pay the 1 percent fee which is much too high for fixed income management.


Q. My brother will retire next year after 33 years working for the City of Memphis, TN. He says that unlike corporate pensions, his pension is "bulletproof" because it is a municipal obligation. He says they "must" honor it.

I say nothing is bulletproof. What are his risks?

---J.B., by email, Plano, TX


A. Tell your brother he needs to watch "The Godfather" again, with particular attention to the scene where Al Pacino notes that if history has proved anything, it is that anyone can be killed.

Nothing is "bulletproof," including public sector pensions.

When private and public pension funds are compared, public pension funds tend to be less well funded than private pension funds. This happens because city and state governments make even more generous promises than General Motors but seldom provide the necessary funding.

Your brother can be somewhat more relaxed than a private sector employee because private pensions are funded with corporate earnings while public pensions are funded with tax revenue. When a corporation has no earnings, it has trouble funding its pension and may seek bankruptcy protection. When a city or state has trouble funding its pension, it can raise taxes until taxpayers pick up and move.