New endeavor.

Mutual funds are the right prescription for this doctor

Dr. Michelle L. Smith, 42, wants to turn her fledgling writing business from a hobby into a second career. She recently reduced her hours as an internist to devote more time to writing--mostly health-related articles.

As a result, she has experienced a decrease in her income but maintains a portfolio of mutual funds to pad her future. She invests 15% to 20% of her income, including 9% per pay period, in her employer's 401(k) program.

She began investing in the stock market 12 years ago, but it was 10 years ago that she maxed out contributions to her 401(k) and decided to expand and diversify her portfolio by opening an account with Charles Schwab & Co. She used $50,000 of her savings to establish the Schwab account, which now consists of a variety of equity mutual funds and a short-term taxable bond fund. Among the equity funds, she owns Fidelity Advisor Diversified International Fund (FDVAX), Dreyfus S&P 500 Index (PEOPX), Schwab 1,000 Select Index Fund (SNXSX), and Vanguard U.S. Growth Portfolio (VWUSX).

Smith also has a separate, discretionary Schwab account, which she whimsically refers to as "The Michelle Fund." She uses this account to dabble in technology and speculative stocks--within boundaries. "I am not a big risk-taker," she admits, adding that this account represents just 20% of her net worth. It is within this account that she has significant holdings in technology stocks such as Intel (Nasdaq: INTC), Motorola (NYSE: MOT), and Oracle (Nasdaq: ORCL). At the time, Smith had more resources to invest. She had finished paying off a combined $80,000 in loans to the private college and medical school she attended.

Moderately aggressive investors like Smith should hold a balance of mutual funds, individual stocks, and fixed-income products to ensure a good foundation, according to Bobby Whiteside, branch manager at Charles Schwab's Greenbelt, Maryland, branch.

For a moderate investor looking for long-term growth and capital preservation, he said the typical asset allocation mix should be 60% equities, 30% bonds, and 10% cash. Within the equities portion, investors should own 30% in large-cap stocks, 15% in small-cap stocks, and 15% in international stocks.

By the same token, however, investors like Smith should limit their exposure to one particular sector to 25% or less to avoid any undue risk and increased volatility, he adds. Smith did suffer about a 25% loss in 2000 with some of her more speculative names, among them Priceline.com (Nasdaq: PCLN), Teligent Inc. (Nasdaq: TGNT), and Centra Software (Nasdaq: CTRA). "They bottomed out right after I bought them," she recalls. Now she is buying more large-cap companies with proven track records.