Building Confidence in Your Investments

Diane Randon has it made. A civilian comptroller for the Pentagon, she earns six figures, owns a house in Alexandria, Va., that's worth three times her $200,000 cost, and owes money only on the mortgage and a car loan. Diane, who is single and 41, is on track for a $90,000 annual pension if she serves in the government another 19 years.

Yet, despite an MBA and a career in finance, the whole investing thing perplexes her. Diane's made a series of bad stock picks, mostly in tech, that litter a variety of accounts (she owns Cisco, Microsoft and Time Warner in five places). She and Uncle Sam add a total of $14,000 a year to her federal Thrift Savings Plan, but she has no idea whether her choices make sense. She's open to change but fears she'll do the wrong thing. "Everything I touch turns to mud," she says. "I don't know enough to make intelligent decisions, so I'm all over the map."

Diane's situation is common. She has all the ingredients for financial comfort: nice income, good saving habits, a house, a pension and debt discipline. But past investing mistakes are sapping her confidence and causing paralysis. The solution is to list each problem and deal with it directly.

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Dump away. For starters, it's time for Diane to kick the individual-stock habit. All told, she's invested $44,000 in ten stocks since 1998; they're now worth $21,000. Dan Danford, head of Family Investment Center, an advisory firm in St. Joseph, Mo., says small positions in individual stocks matter little to Diane's future, so she should sell them all. She'd benefit in three ways: She could deduct the losses. She could stop bemoaning her misadventures as a stock picker. And she would have $21,000 to bolster her retirement-savings program.

As always, a key issue is how Diane divvies up her investments. Scott Leonard, of Leonard Wealth Management, in Redondo Beach, Cal., suggests that she place 85% of her kitty in stock mutual funds. Even 90% is justifiable. Why so high? Diane already effectively holds a big slug of bonds through her federal pension. Moreover, she wants to retire at about age 60, which means she'll need significant growth from her portfolio to fund a retirement that could last for decades.

Diane has $175,000 in the thrift plan and $45,000 in mutual funds. If she moves the proceeds of her stock sales into funds, continues to feed $14,000 a year into the thrift plan and $4,000 into her IRA, and earns 7% annual returns, she'll accumulate $1.5 million by age 60. That should be enough to achieve her dream.

All three of the stock accounts in the thrift plan are index funds. Diane should place $100,000 in the fund that mimics Standard & Poor's 500-stock index and divide the rest evenly between the overseas-stock fund and the one that invests in small and midsize companies. (She should invest new cash in the same proportions.) Outside the thrift plan, Diane should use actively managed funds to complement her index accounts. She should hang on to Vanguard Health Care, her one holding that isn't at all muddy, and add such fine funds as T. Rowe Price Growth Stock, Masters' Select Value, Muhlenkamp fund and Dodge & Cox International Stock.

Kosnett is the editor of Kiplinger Investing for Income and writes the "Cash in Hand" column for Kiplinger Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.