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Retirees shouldn't banish stock funds from portfolios


Mutual funds are used to meet a lot of goals. One mentioned most often is saving for retirement.

But what about after retirement? For many retirees, the last day of work is the day they start concentrating on capital preservation and income. Funds that invest in U.S. Treasury securities, government agency securities and high-grade corporate bonds suddenly get all their attention.

Meanwhile, funds that invest in stocks are retired from the portfolio.

"That's a mistake," said Patricia A. Ganley, editor of Mutual Fund Preview, a newsletter published by the Financial Research Center in Holliston, Mass. Depending on how much risk a person can tolerate, half or more of the retiree's assets should be in stock funds, she said.

Risk should be one of the first factors considered when deciding whether to use mutual funds in retirement, and which funds to use, said David M. Leber, a financial planner in Allentown, Pa.

"You have to ascertain the risk tolerance of the client," Mr. Leber said. "You don't want people getting into things that aren't suitable." This is a subjective process, he admits; someone may have substantial assets, but because they are not familiar with mutual funds, they aren't comfortable with the risk. They should start with only 5 percent or 10 percent in stock funds, until they see how funds behave in different markets.

Also, he said, "if you don't have at least $100,000 to invest, you should be very conservative." Short-term losses of 10 percent to 20 percent are not uncommon in stocks, and that may be more than those with fewer assets can handle.

However, if there is at least $100,000 -- an amount some have in maturing CDs -- the advisers suggest a diversified mix of growth, growth-and-income and balanced funds, along with some bond funds to provide income and a cushion against a drop in the stock market.

"We've been fairly aggressive in our retirement portfolio," said Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter in Hastings-on-Hudson, N.Y. This means putting about 65 percent of the money in stock funds and 35 percent in bond funds, he said.

Mr. Jacobs is a little less aggressive than he was six months ago. Then he had 70 percent in stock funds, but with the stock market reaching several new highs this year, "We've been bringing down the risk level," he said.

Specifically, Mr. Jacobs recommends the Vanguard Index 500, not only because it follows the Standard & Poor's 500 index, but because it's also a good way to get big-company stocks, many of which pay dividends. He also includes the Financial Industrial Income fund, the Fidelity Convertible fund, the T. Rowe Price Equity-Income fund and the Lindner Dividend fund.

Ms. Ganley also recommends the Lindner Dividend fund and Financial Industrial Income. She also mentioned the T. Rowe Price Growth Stock fund and the Lindner fund, which puts more emphasis on growth companies, while Lindner Dividend looks for income-producing investments.

Mr. Leber suggests a number of funds from Vanguard, including its Growth fund, the Balanced fund, the Index 500 fund and the Asset Allocation fund. For people who can tolerate a little more volatility in their funds, Mr. Leber likes Twentieth Century's Select or Ultra funds.

An individual retirement account is a good place to be a little more aggressive, the advisers say, since any gains in IRAs, and IRA rollover accounts, are tax-deferred until withdrawals are made.

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