April 19, 1998

Q. My wife and I are planning on giving each of our three children $2,000 to start Roth IRA accounts. Their ages are 39, 36, and 31, and each has other outside investments in the area of $350,000 apiece. What suggestions do you have for an investment vehicle -- with the stock market at such high levels, I'm concerned about picking a fund that will do them well over the next 25 years or so.

V.A., White Salmon, Wash.

A. I'm afraid that all I can suggest is that you grit your teeth and hold your nose -- and go with a stock fund. Since all of your children are likely to be a couple of decades or more away from retirement, this is a case when it's best to acknowledge that you can't time the market, and that when people try to time it they usually end up losing money over the long run.

But I will suggest a strategy they might employ. This involves investing in the three Vanguard funds that focus on the Standard & Poor's 500 index stocks.

Vanguard Index 500 holds a portfolio designed to track the index as a whole. Vanguard Index Value holds only about two-thirds of the S&P 500, selecting those with the lowest price-to-book ratios, while Vanguard Index Growth builds its portfolio on the remaining third of the stocks. My suggestion is to limit market timing efforts to three simple judgments -- that the market is either high, neutral, or low. When the market is high Vanguard Index Value would be the ticket. When you decide it has moved to a neutral territory, perhaps when the dividends on the S&P 500 reach 2 percent, you might switch to Index 500. And when you deem the market cheap and the economy good, perhaps carrying an average dividend level of 2.5 percent or more, you could switch again, this time to Index Growth.

What is the danger of missing strong markets by using this strategy? I think it's relatively low. Suppose that five years ago you misread the market and decided it was overpriced.

You would thus have gone into Index Value, and reaped average annual returns of 20.53 percent. Had you selected Index 500, the average annual return would have been 21.55 percent, and Index Growth, which was the right place to be as things turned out, would have brought you average annual returns of 22.36. The point is that it seems to me you are not likely to lose a terrific amount of money by using this strategy if your sense of the market is wrong, but if you are astute you could average out with better returns than if you simply stuck with any of the three. I am not suggesting frequent changes; anticipate moving the funds no more frequently than at 24-month intervals.