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- Gail Liberman and Alan Lavine

Expect the next 10 years to be different from the past 10 years. Between 1990 and 1999, interest rates dropped dramatically and stock prices doubled almost every four years.

If you were fortunate to be socking away money into your company 401 (k) pension during that time, you did well. You may have given back some of those gains in the past two years. Nevertheless, the stock market grew at an impressive 12.7 percent annual rate over the past decade through February 2002.

But if you are among those who happened to put money into stocks or stock mutual funds over the past two years, you took a licking. The average common stock fund is down about 20 percent since 1999!

"People have to understand the risks and returns of investing," says John Wasik, author of The Bear Proof Investor (Owl Books). "If you take big risks, you may not always be rewarded with big returns. It's important to have a well-balanced investment plan that includes stocks, bonds and cash. You can still earn solid returns, but it is a less risky investment."

Wasik serves up 10 tips on saving and investing for the long term.

  1. Keep plenty of money in cash for personal needs. Stocks beat bonds over time--but not all the time. Over the next several years, long-term stock returns may be lower. So you need to be prepared.

  2. Cash and bonds are essential for short-term income needs, and offer a buffer against stock market losses. However, over time, these investments do not beat inflation, which has been running at about 3 percent annually. Owning real estate helps make your stock investments less risky and allows you to take advantage of inflation.

  3. Mixing stocks and bonds will cut the risk of losing money if the stock market plunges. A good mix is 60 percent stocks and 40 percent bonds. So you might consider balanced mutual funds, which keep those proportions. Historically at 60 percent-40 percent stock-bond mix has grown at an 8 percent annual rate.

  4. Fine-tune your combination of stocks and bonds. Own undervalued stocks that sell at bargain-basement prices. You also should own growth stocks, which represent companies with fast- growing earnings. Owning mutual funds that invest in cheap stocks and/or growth stock also accomplishes this objective.

  5. Over the long term, you can rack up the best track record by picking undervalued stocks or bonds. Do the research yourself or invest in a well-managed mutual fund.

  6. Investing in small-company and mid-size company stocks will boost returns over the longer term. Actually adding a small and mid-size stock fund to your holdings of large company stocks will cut the volatility of your investments.

  7. You can grow your stock investments cheaply by investing in company dividend reinvestment plans (DRIPs). With DRIPs you invest directly with the company and don't pay brokerage commissions. Plus you can reinvest your stock dividends in more shares.

  8. If you want to supercharge your investments, put money into sector funds. These are funds that invest in specific industries such as finance, technology, and biotechnology. But these investments are risky. So only do this if you can invest in them for at least 10 years.

  9. Keep your investment costs to a minimum. Invest in low-cost mutual funds. Buy securities from discount brokerage firms.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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