When investing, always consider ability, willingness, and need to take risks

Q. I thought you were an investment guru. Instead, you apparently park a lot of money in the bank. Do you recommend safety first and not getting involved in stocks and bonds?

A. First, I am no investment guru. My success has come by keeping things simple and following basic rules.

I have diversified broadly and kept investment costs low, mostly through no-load, low-cost mutual funds. I have kept my asset allocation (broadly speaking, the mix between stocks and bonds) in line with my risk tolerance.

"Never take more risk than you have the ability, willingness, or need to take," says Larry Swedroe, an investment adviser in Clayton, Mo., and author or coauthor of seven common-sense investment books.

"Stocks are high-risk investments, no matter how long the investment horizon, he says." Never treat the unlikely (a major, prolonged bear market) as impossible, or the likely (stocks eventually always go up) as certain, he cautions.

I've interviewed Swedroe over the years and taken his advice to heart, drawing the distinction among the ability, willingness, and need to take risks.

For example, you may be able to take a fair amount of investment risk if you won't need the money for a long time and also have a steady, good-paying job.

But you may still not feel comfortable with too much risk, preferring to give up potential gains to sleep better at night.

On the other hand, you may need to take at least some risk to generate the returns to meet your goals. An all-cash portfolio may feel safe but likely is inadequate for long-term needs.

Swedroe's advice is to consider all three factors separately (ability, willingness, and need to take risk) and choose the least risk consistent with them.

Since retiring from full-time work in 2000, I've kept no more than 30 percent of my portfolio in stocks - just 20 percent since last year - as my need and willingness to take risk have decreased. Thirty years ago, while building up my career (and portfolio), I had 80 percent in stocks.

What's the most appropriate asset allocation for you? Good advice would have kept a 70-year-old I met recently from having most of his retirement money in the single - and sinking - stock of his former employer, Wachovia Corp.

While that's an extreme case, research by the Employee Benefit Research Institute and Investment Company Institute shows many older Americans are heavily exposed to the stock market.

Based on the most recent figures as of Dec. 31, 2006, almost a third of 401(k) plan participants in their 60s had 80 percent or more of their 401(k) money in stocks, including company stock and mutual funds.

In the 56-65 age group, 27 percent had more than 90 percent in stocks. Another 15 percent had between 80 and 90 percent, and 11 percent had between 70 and 80 percent.

Humberto Cruz is a syndicated columnist. He can be reached at askhumberto@aol.com.