May 25, 1997

Q. I am a 61-year-old professional. I have accumulated approximately $500,000 in IRA funds, currently invested in Vanguard's Life Strategy funds, with 40 percent in the Conservative Growth portfolio and the rest in Moderate Growth. I will probably not draw on these funds for another four to six years, as I plan to continue working that long. I am not interested in actively managing -- switching and closely watching these funds. Are these reasonable choices for my age and needs? I should add I expect these funds to provide about a third of my retirement income, which I anticipate at $60,000 a year. How would you compare these funds to the Spectrum group in the T. Rowe Price family or the new Fidelity ``fund of funds''? Do they all need constant watching, evaluation, switching, and so forth?

G.P., St. Paul

A. I think an investor can be fairly comfortable with a portfolio based on these fund-of-funds offerings -- provided the right balance is chosen at the outset. But I'm not sure you've quite done that.

Let's approach the problem backward, presuming that in five years you'll need a $20,000 annual income stream from your IRA accounts. Estimating (very conservatively) that you'll achieve a 6 percent return from a fixed-income portfolio, this means that two-thirds of the IRA money will be required to provide the income, and that the balance can be invested to provide long-term growth as a hedge against inflation.

Although five years represents the far end of a short-term investment period, the current high and jumpy state of the market seems to call for extra caution. I would align the portfolio now exactly as it should be once you actually retire -- two-thirds for fixed-income and one-third for growth.

The Life Strategy Conservative growth portfolio holds roughly 17.5 percent stocks, with the balance in bonds and other fixed-income investments. Therefore, this holding will likely provide roughly $165,000 worth of fixed-income securities.

Using the same estimates for Asset Allocation, the Life Strategy Moderate Growth portfolio represents 57.2 percent stocks and the rest is fixed-income holdings -- thus adding another $127,500 worth of income securities to your IRA, totaling $297,55.

But if you reversed the positions -- to 60 percent Conservative Growth and 40 percent Moderate Growth -- the estimates show $332,500 in fixed-income holdings, which is, as they say, close enough for jazz. I suggest you make that move now, forgoing possible gains through heavier stock holdings for more security in bonds.

You could achieve much the same portfolio with T. Rowe Price, investing two-thirds of the portfolio in its Spectrum Income fund and the balance in Spectrum Growth. I think the group of Fidelity funds you cite is the Freedom Group, begun late in 1996. These funds haven't made much of a splash, with the five offerings averaging less than $18 million in assets, as of the latest figures from Lipper Analytical Services Inc.

None of them quite fills the bill, although you might reach your desired allocation by investing $125,000 in Freedom 2000 (45 percent equities) and the rest in Freedom Income. Four of the Fidelity Freedom funds bear the names of years representing target retirement dates, and the managers reallocate the portfolios as those dates grow nearer, so such a move would require regular rebalancing if you wanted to maintain a one-third/two-thirds stock-to-bond allocation. So your goal of establishing a long-term holding with little need of monitoring the portfolio or switching would be better served through Vanguard or T. Rowe Price.