Q. My husband and I are retired and aged 79 and 71.  We have a good chunk of change that has been invested in three-month Treasury bills for a couple of years.  As you know, the interest is nearly non-existent at this time. Do you have any suggestions for alternatives?  We are very conservative in our life style and investing.

---J.W., by e-mail


A. I understand the desire for stability and safety but having all your money invested in 3 month Treasury bills is a bit like being prepared to leave the country at any moment, with your bags packed and waiting at the door. I bet that's not part of your plans.

One thing you can do is establish a "ladder" of Treasury obligations with maturities of one, two, three, four, and five years. If you buy them all to mature at the same time of year you will be able to roll the ladder forward with a single replacement with a new five-year maturity each year. Since your intention will be to hold to maturity, you won't have any worries about a decline in their value if interest rates rise.

Recent Treasury yields were 1.70 percent for 3 months, 1.90 for one year, 2.78 for two years, and 4.13 for five years. While your ladder will start with an average of all five maturities, each replacement will be a 5-year maturity, so the yield will rise.

You can get higher yields with modest risk by investing in a government-backed mortgage fund such as Vanguard GNMA (ticker VFIIX). This fund provided a yield of 6.3 percent last year. In 1994, the worst year for bonds in history, this fund lost 0.95 percent, so the risk is not terrible. (The average loss for all government bond funds in 1994 was 3.31 percent.) You can learn more about this fund on the web at www.vanguard.com and on the funds section of MSN MoneyCentral.


Q. I haven't adopted Couch Potato investing yet but I was wondering how can one re-balance one's portfolio now or in the future (after retirement) without getting slammed for good old capital gains?

---V.C., Houston (by e-mail)


A. While you are accumulating money, taxes from rebalancing your portfolio are minimal for two reasons. First, much of your investing can be in qualified plans where you can make changes without incurring a taxable gain. Second, even in taxable accounts your new money can be invested in the asset that needs to be increased, reducing the need to sell any of the appreciated asset.

Here's an example. In 1995 the S&P 500 Index provided its highest return in the last decade, 37.53 percent. If half your money had been in the index and half in fixed income (Total Bond Market Index was up 18.47 percent in the same year) and you had started the year with $10,000 in each for a 50/50 mix, you would have ended the year with $13,753 in equities and $11,847 in fixed income.

Do the math and you learn that your portfolio would be 53.75 percent equities, 46.25 percent fixed income--- a slight imbalance that many would not feel compelled to "fix." You could also bring it into perfect balance by adding $1,906 to the fixed income portion. Even if the portfolio was larger, a good deal of the rebalancing could be done by simple cash additions because most years have much smaller changes in value.

If you are retired and making withdrawals the process is even simpler. You withdraw from the appreciated asset for income. In the example above, you can rebalance to 50/50 by simply transferring one-half of the difference to the fund with the smaller balance.

The last step for reducing taxes would be to make certain that you identify tax lots when you sell fund shares rather than simply averaging costs. That way you can sell the highest cost purchases. You need to pay more attention to record keeping and management to do this but it can help reduce the tax burden of selling.

Bottom line: rebalancing costs aren't a big deal.