Investing after 50: keep the "gold" in your golden years.

Wondering what's next for the market? Join the club. Most raging bulls think stocks will go up, up and away. The bears, on the other hand, cite a deadly combination of overvalued equities, moribund earnings growth and the possible onset of deflation to send the Dow tumbling anywhere from 3,000 to 6,000 points. Regardless of what you believe, one thing is certain--it will be a bumpy ride.

Three years into the bear market, it's certainly understandable that some investors, particularly those close to retirement, can't get over their fear of losing money. With only a few working years left, they anxiously view equities as a game of craps: The longer they stay in, the greater their chance of losing more. In fact, history shows the opposite is true. The easiest way to reduce the risk of investing in equities--and improve the gain--is to increase the length of time you hold your portfolio. Yet after age 50, many investors simply are afraid to stay the course.

A recent AARP (formerly the American Association of Retired Persons) report highlighted some major issues concerning the financial status and security of those 50 and older. It concluded the traditional concept of retirement has changed: The risk of ensuring sufficient retirement income now rests increasingly on employees. The limitations of private pension and 401(k) plans and of the Social Security safety net have pushed more people into the stock market to help them accumulate retirement capital. That means more Americans need to know about investing than ever before. Here are some suggestions for CPAs who advise clients 50 and over on their investments to make sure a once-secure retirement doesn't disappear in the blink of an eye.

SERIOUSLY SPOOKED

Market downturns typically require investors to pay more attention than ever to time-tested fundamentals. What makes good sense in ordinary times is even more important now. That means CPAs should have clients focus on leveraging tax-favored accounts, saving as much as they can, making smart investment choices and above all, staying the course.

Mary and John Jones both are 50 and plan to retire in five years. Their 401(k) plans, which are invested in Standard & Poor's 500-stock index funds, are not doing well. In fact the Joneses lost $180,000 in the last three years. Concerned that they are taking more risk than is prudent, they come to you for help. They think they may need to work more years and are worried about their investment choices. They aren't alone. A survey conducted last year by financial software provider Intuit found 13% of those surveyed anticipate delaying their retirement because of stock losses. A full quarter of these said they will have to work an extra five to seven years to retire comfortably. As the Joneses move closer to retirement, they want to be safe rather than sorry.

How can investors who have saved all their working lives only to choose a losing investment strategy replace the missing funds? We can take some comfort in history: Since the Great Depression, there never have been four straight years of losses in the broad stock market. It's important for both CPAs and clients to realize that from an investing perspective, we've faced uncertainty before and triumphed. As a financial planner you can help clients cope with investing in uncertain markets by getting them to spread their money among different types of assets that don't all move in sync.

For clients approaching retirement, some advisers mistakenly recommend a portfolio heavy on short-term bonds or money market funds--the least risky investments. Historically, the long-term return from stocks has been about 11% annually, while bonds--which are less risky--return just 5.2%. Over time that spread can make a huge difference in the earning power of savings. A client who follows the safer strategy will thus miss out on a significant amount of asset accumulation.

In advising the Joneses, it's important to remember that the longer clients have to invest the more the clock will make up for inevitable short-term losses. The couple's investing horizon isn't 5 years, but more likely 30 to 40 years. A 65-year-old man has a 50% chance of living to age 85 and a 13% chance of living to age 95. The chances that either Mary or John will be alive at age 85 or 90 are even higher. They need to invest their 401(k)s as if the funds had to last them at least 30 years and perhaps much longer.

If clients put all their money in a very liquid, safe stash such as money market funds or short-term bonds, the return they likely would earn over the long term won't exceed inflation by very much. And that margin will get even thinner, if it doesn't disappear entirely, after taxes on withdrawals. Stocks, on the other hand, have a proven track record of generating returns that beat inflation by a wide margin--indeed, enough of a margin so a client actually can have a positive return even after accounting for inflation and taxes. The conflict for investors over 50 is how to achieve high return and low risk at the same time. The solution: Invest in an efficient market, which lessens risk and increases the likelihood of return.

Another thing CPA/financial planners should remember is that, unless the economy is about to go through an unprecedented 20- to 30-year stretch where prices don't rise, inflation will push up the costs of the goods and services Mary and John buy during retirement. That means they need at least some of their savings in the stock market earning a return that grows faster than inflation.

At age 50 and beyond, a good investment strategy takes into account a client's specific retirement needs. It's a good idea for CPAs to sit down with clients and help them evaluate their retirement goals. Start by collecting information on existing retirement plans including 401(k)s, IRAs and Keogh accounts. This is also a good time to assess the client's risk tolerance and factor in variables such as inflation, interest rates and prevailing market returns. CPAs must actively help clients decide what assumptions they want to make in their retirement projections--for example, how much longer they will work or how much income they will need at retirement.

One key assumption clients and CPAs should look at together is the client's expected Social Security retirement benefit. Because the individual benefit projections the Social Security Administration provides are based on future wage increases of 4% to 6% annually, the projections may not be realistic for many clients. The Social Security Administration makes a calculator available on its Web site at www.ssa.gov/planners that allows users to change these assumptions and come up with more realistic estimates.

As CPAs and clients approaching retirement work together to develop the best investment strategy to meet the client's retirement needs, they often must perform a difficult balancing act to meet the client's current lifestyle objectives while he or she also is saving for retirement. In doing so, CPAs will find the three classic defensive strategies--diversification, dollar-cost averaging and asset allocation--described below to be crucial in helping older clients maximize their gains while limiting their risk.

DIVERSIFICATION

The only way to really protect a client is to diversify, diversify, diversify. While this strategy is important for all investors, it is particularly crucial for those over 50 because they have a shorter investment horizon than those in their 30s. The single best way for investors to protect themselves from a meltdown in one stock or industry is to spread the risk across several different investments. The more diversified a portfolio is, the less any one stock can hurt it.

A balanced portfolio should include small-company exposure. Typically, large- vs. small-cap performance runs in cycles, with the big companies leading the pack for a few years and then the smaller companies taking their turn. Trying to forecast which will lead the way and for how long is a waste of time. But by owning both types of securities, a portfolio benefits no matter which does better. However, clients should not go overboard when buying small companies. Basically, small-caps should represent only 10% Or so of their stock holdings--about the same percentage they represent in the value of the U.S. market. Many investment advisers suggest clients get that exposure by buying a small-cap index fund or one or more broadly diversified, actively managed small-cap funds.

Since stocks generate the best returns over the long run, people just entering retirement generally need to keep the bulk of their assets in equities. Given that most of us probably will spend 20 to 40 years in retirement, CPAs need to recommend clients allocate a good percentage to stocks to prevent the purchasing power of a portfolio from being whittled away by inflation.

Clients may want to hedge their bets even more by adding an international fund to their portfolio. Even in today's global economy, not all stock markets around the world move in sync. Purchasing a fund that invests outside of the United States increases the odds that part of the portfolio will continue to grow even when the U.S. market is struggling.

Bonds. CPAs should make sure clients include bonds or bond funds in their portfolios. As the past three years have shown, stocks go through periodic downdrafts. At times like these, having a position in bonds can add stability to a portfolio. Many advisers generally recommend short- to intermediate-term bonds or bond funds so the portfolio doesn't sustain too much damage if interest rates rise. Core holdings might include a mix of quality municipal, government and agency bonds.

How much money should be in bonds? The answer depends on a variety of factors, including how comfortable the client is seeing a portfolio's value drop during market downturns, what size annual withdrawals he or she plans to make during retirement and how much he or she can reduce withdrawals during periods when returns are low. For many clients a bond allocation of 25% to 40% of a total portfolio is a good starting point.

CPAs should consider personal factors when recommending a client's stock and bond allocations, including current and future income needs, tax bracket and what return the client expects. Sometimes a client's expectations are unrealistic given his or her risk tolerance. Stocks are good for growth when clients need to increase their assets, but they need to be ready to ride out market fluctuations. Bonds are for income when clients need money to live on and for diversification. For risk-averse clients money market funds and bonds lessen the vulnerability of a 100% stock portfolio.

Diversification is as important in bond investing as in stocks. Some advisers say it's best to spread risk over a series of different maturities while maintaining an average maturity of the client's liking in the portfolio. The best way to do this is to set up a bond ladder--essentially a series of bonds with a range of maturities.

Here's an example of how it works. A client buys equal amounts of Treasury securities due to mature in one, three, five, seven and nine years. That portfolio has an average maturity of five years (1+3+5+7+9=25 divided by 5). The next year, when the first bonds come due, the ladder is reset by having the client put the money into new 10-year notes. The portfolio then has an average maturity of six years.

Two years after that, when the 3-year notes mature, the client buys more 10-year bonds and continues to do so whenever a note matures. That keeps the average maturity in the 5- to 6-year range.

The advantage of such a strategy is that there is no worry about interest rates--especially if the ladder has notes coming due every few years. If rates do rise soon after the client buys a bond, he or she can take comfort in the fact money soon will be available to take advantage of the change. Similarly, if rates decline, the client has managed to lock in the higher rates for that portion of the portfolio. The bottom line is that clients don't get stuck one way or the other.

CPAs can help clients build a bond portfolio with any kind of bond, but Treasurys are commonly used since they have relatively little risk and are widely available either on the secondary market (from another investor) or directly from the government through a program called Treasury Direct. The beauty of buying from Treasury Direct is that there are no transaction costs. The minimum investment also is a low $1,000. To open an account, just download an application from Treasury Direct's Web site, www.treasurydirect.gov/ and mail the completed paperwork to the nearest Treasury Direct office. You can also obtain general information and maintain an account by calling Treasury Direct's toll-free number (800-722-2678).

Unfortunately, there's a catch. Since an investor can buy only new issues from Treasury Direct, creating a neat ladder is pretty much impossible. That's because Treasurys have maturities of 6 months and 2, 5 and 10 years. So if you create a ladder with these durations you could miss some big interest-rate swings between the times the 5- and 10-year Treasurys come due.

To avoid that, investors have to use the secondary market to buy at least some bonds to fill in the needed durations. Any large, reputable broker with a trading desk dedicated to Treasury bonds should be able to get the desired maturities at a competitive price. Unfortunately, due to the extra transaction costs the client will pay (plus commissions, in many cases), this method might not be worthwhile for Treasury purchases of $1,000 or less.

Clients also can build a ladder of municipal bonds, but that typically would require a minimum of $100,000 in capital to buy a diversified group of issues. Trading in munis through most brokerage firms or specialized money managers also creates higher transaction costs, but if the client's tax rate is above 27% the tax savings likely will make the costs worthwhile.

If these bond transactions seem a bit more complicated (or costly) than many investors anticipate, a low-fee bond fund is a fine alternative. While no bond fund usually will come out and say it has set up a laddered portfolio, money managers stagger bonds within their funds so different maturities come due at various times. One bond fund that mimics the ladder example above is the Vanguard Intermediate Term U.S. Treasury Fund. In addition Thornberg Investment Management manages nine pure bond funds. Within each, Thornburg ladders the maturities of the securities it holds. And all Thornburg bond funds invest in short- to intermediate-term investment grade bonds (municipal, corporate or U.S. government) to earn "attractive yields without incurring excessive market price risk." Vanguard funds have very low expenses and an average maturity of 5.4 years. But because the fund holds approximately 65 bonds with maturities of 3 to 27 years, it's a bond ladder.

DOLLAR-COST AVERAGING

Another classic strategy, dollar-cost averaging, also is a form of diversification. Instead of spreading money over different stocks or bonds, it diversifies investments over time. The natural human tendency is to buy stock when prices are rising and to stop buying when prices are on the downswing. Dollar-cost averaging forces investors to do the opposite--buy the most stock when prices are low. It's a strategy that over-50 investors saving for retirement will find useful.

Here's how it works: Suppose a client decides to put $400 a month into a mutual fund that invests in the stocks of large companies. CPAs can help the client set up an automatic investment account, and the client's money is pulled straight from his or her paycheck on the same day each month.

If a share of the fund costs $40 in October, $400 will buy 10 shares. If the price rises to $80 in November, the client will buy 5 shares. If the price drops to $20 in December he or she will buy 20 shares. The idea is that money buys more shares when the price is low and fewer when the price is high. That lowers the total cost and, if the fund's overall trend line is upward, your client captures more of the upside potential.

That's not to say dollar-cost averaging protects your client from a falling market. If a fund's value declines, so does the overall investment. But the strategy does ensure the client invests new money when prices are low so he or she can enjoy the run-up when the market recovers--as it always does in time.

Many advisers recommend dollar-cost averaging for clients who want to move a big chunk of money into the market--perhaps from an inheritance or yearend bonus. The idea is to protect them from putting everything in at once and having the market crash days or weeks later: It's true that if the market moves sharply higher, the clients have missed an opportunity, but in volatile times that risk can be worth it.

ASSET ALLOCATION 

Asset allocation is yet another classic strategy that is a good idea for all investors. For those over 50, the difference is in how CPAs implement it based on the client's personal needs. Asset allocation takes advantage of the fact that when it comes to risk and reward, financial vehicles such as stocks, bonds and money market accounts all behave quite differently.

Stocks, for instance, offer the highest returns among the three asset classes, but also carry the highest risk of loss. Bonds aren't as lucrative, but offer much more stability than stocks. Money market returns are small, but clients will never lose their initial investment. An asset-allocation strategy looks at a client's particular goals and circumstances and determines what asset mix gives the optimal blend of risk and reward. The key here is for clients to have the appropriate mix of investments based on age and other factors. As they draw closer to retirement, most will want to become more conservative and add more cash and bonds to their investments.

Allocation models also help clients buy low and sell high. For instance, if small-company stocks are on fire one year, but large-company stocks are merely standing still and the stock portion of the allocation model calls for a 50/50 mix between the two, this sudden surge in small-company values upsets the balance. To "rebalance," the client would have to sell some expensive small-company stock and buy some cheaper large companies. If clients did this each year, they always would be trading expensive assets for those with more growth potential.

Once a CPA gets a client's asset mix to where both feel comfortable with it based on the client's goals and life expectancy, he or she shouldn't "muck things up" by changing it around each time the market hiccups. The CPA should rebalance just occasionally--say, once a year--to bring the proportions back to their target allocations. But given most clients' resistance to change, overmanaging the portfolio won't be a problem.

ENSURING A COMFORTABLE RETIREMENT

Planning for retirement can be a daunting task, especially for clients over 50. Their nest eggs have taken some big hits in the last three years, their investment returns look smaller and the clock is ticking. With a growing number of people putting retirement on hold while their portfolio catches up with their needs, planning has gotten trickier for everyone. CPAs may need to help clients adjust their assumptions about things such as how long they will work (to age 60, 65 or even beyond) or where they will live (in the same home or a retirement destination such as Florida or Arizona). According to the AARP, nearly 28 million older Americans rely on their investments for at least some of their retirement income. The right advice from CPAs and an improving economy will ensure the term "retirement planning" doesn't become an oxymoron and that more Americans will be able to live out their golden years in peace and comfort.

EXECUTIVE SUMMARY

* AS THE BEAR MARKET CONTINUES, IT'S NO WONDER some investors, particularly those close to retirement, fear losing their money in the stock market. When advising clients age 50 and over, CPAs need to emphasize fundamental investment strategies more than ever before.

* DESPITE RECENT MARKET LOSSES, IT'S STILL NOT A good idea for investors who are nearing retirement to switch all of their assets to money market funds or short-term bonds. Stocks still have a proven track record of generating returns that beat inflation by a wide margin, even after taking taxes into account.

* THE ONLY WAY FOR ANY INVESTOR TO PROTECT AGAINST losses is to diversify. The more diversified a portfolio, the less any one stock can hurt it. Diversity means buying stocks in different kinds of companies as well as including some bonds in the portfolio.

* DOLLAR-COST AVERAGING IS ANOTHER FORM of diversification. Instead of spreading money over different stocks and bonds, it diversifies investments over time. By investing the same amount of money at regular intervals, the goal is for investors to buy the most stock when prices are low.

* ASSET ALLOCATION TAKES ADVANTAGE OF THE FACT that stocks, bonds and money market accounts behave differently under different conditions. An asset allocation strategy determines what asset mix gives a particular client the optimal blend of risk and reward.

Market Downturn Hits Retirees Hard

In a survey of people ages 50 to 70,

* 70% said they had lost money in the market over the past two years. Over one-third lost more than 25% of their portfolio.

* 67% said they were changing their lifestyles as a result of their losses, including budgeting daily expenses more carefully and taking fewer vacations.

Source: AARP, Washington D.C., www.aarp.org.

Resources for Investing Over 50

Books

Investment Advisory Relationships: Managing Client Expectations in an Uncertain Market, Robert Doyle and Phyllis Bernstein, AICPA, New York, 2002.

J.K. Lasser's Strategic Investing After 50, Julie Jason, John Wiley & Sons, New York, 2001.

Straight Talk on Investing: What You Need to Know, Jack Brennan, John Wiley & Sons, New York, 2002.

The SmartMoney Guide to Long-Term Investing: How to Build Real Wealth for Retirement and Other Future Goals, Peter Finch and Nellie S. Huang, John Wiley & Sons, New York, 2002.

The Ultimate Safe Money Guide: How Everyone 50 and Over Can Protect, Save and Grow Their Money, Martin D. Weiss, John Wiley & Sons, New York, 2002.

Wealthy & Wise (Secrets About Money), Heidi L. Steiger, John Wiley & Sons, New York, 2002.

You're Fifty--Now What? Investing for the Second Half of Your Life, Charles R. Schwab, Three Rivers Press, New York, 2002.

Miscellaneous Resources

Investing for your retirement. The National Association of Investors Corp., a nonprofit educational group, helps people learn more about investing with a free information kit about investing in stocks. Get the kit by calling 877-275-6242 or going online to www.better-investing.org. NAIC offers members investment tools, resources and online publications. Nonmembers can subscribe online to the group's magazine Better Investing.

E-mail newsletters. Follow this URL and find newsletter offerings from the self-billed "leader in e-mail discussions and publishing solutions": www.topica.com/dir/?cid=4968. (The newsletter Segunda Juventud has free financial information of interest to Hispanics 50 and over.)

Web Sites

www.aicpa.org/members/div/pfp/memb.htm. AICPA members can join the PFP membership section and subscribe to publications such as the PFP Practice Handbook, The PFP Library of Technical Practice Guides and PFP Pointers.

www.bankrate.com/dls/news/moneymatters/20020813a.asp. This page includes links to Bankrate's retirement calculator.

www.drummondmoores.com/issue7/investing. Drummond Moores, an independent financial consulting firm, offers an overview of what investors of various ages should know--"Investing for the 20-to 50-Somethings."

www.agingpotential.com/products.htm. Women interested in investing and retirement planning resources can find articles such as "Reaching 50 and New Heights: The New Vision of Adulthood in America," handbooks including Employment and Retirement Issues and videocassettes titled "Women and Money" and "Our Turn: Planning for a Divorce Transition."

www.ssa.gov. The Social Security Administration Web site provides retirement planning information as well as links to statistical research and congressional testimony CPAs might find useful in helping clients plan their retirement.

www.aarp.org. The AARP Web site offers a money and work section with links to information on credit and debt, creating a financial plan and retirement income.

PHYLLIS J. BERNSTEIN, CPA, is president of Phyllis Bernstein Consulting in New York City where she provides services to CPA/financial planners. She previously was director of the AICPA personal financial planning division. Her e-mail address is [e-mail].