Q.   I have my 401(k) divided across four Fidelity funds: Value, Balanced, Diversified International and Contra. Its management fees range from .67 (Balanced) to .94 percent (Contra). Based upon the above choices and management fees, would you recommend that I try your "Margarita Portfolio" approach?

My thinking is that the above four funds give me good diversification and overall good returns annually.

---B.J., by email from Dallas, TX

  

A. Don't do a thing. You've got a hot hand. Or your plan sponsor has. Either way, your account is the exception that proves the rule--- your fund managers are adding value while collecting reasonable fees.   Fidelity Contra, the best of your funds, is rated 5 stars by Morningstar. It has ranked in the top 5 percent, 15 percent, 1 percent, 3 percent, and 2 percent of all domestic large growth funds over the last 12 months, 3 years, 5 years, 10 years, and 15 years, respectively. At its worst, the last 3 years, it has returned 1.89 percent a year more than the S&P 500 and has done better than 85 percent of its competition.

Fidelity Balanced and Diversified International are also solid top-quartile funds, ranked 5 stars by Morningstar. The weakest fund in your portfolio is Fidelity Value, a 4 star fund that has been in the bottom 50 percent of its peer group in 6 of the last 10 years. Categorized as a mid-cap value fund, it has done better than the broader S&P 500 index over all time periods, largely due to the stock universe from which it selects. But it has also managed to be in the top 50 percent of its peer group over all trailing time periods ending September 30, 2005. (This wasn't the case in other trailing time periods.   From 1996 through 2000 it was in the bottom 50 percent of its peer group in each year.)

Rather than thinking about indexing, you should start monitoring your funds on a regular basis so that you'll know if any need to be replaced with another managed fund or an index fund. There are several good tools for this. Sadly, few readers are in your position--- and that's why I write so much about index funds.

One good source is www.fundalarm.com, an independent website that tracks fund performance over different time periods and ranks poor performers as one-, two- and three-alarm funds. When a fund has become a three-alarm fund, trailing its category index for three time periods, fundalarm.com publisher Roy Weitz says you should consider selling the fund.

In addition to providing very valuable information, Mr. Weitz has a great sense of humor. In his site bio he observes, "On the day that I was born, in New York, Elizabeth became Queen of England. She's looking a lot older, and so am I, but I've been less embarrassed by family members."

Morningstar data on funds is available on its site, www.morningstar.com, and on MSN Moneycentral at http://moneycentral.msn.com/investor/home.asp

  

Q. You have frequently cited the value of buying Treasury Inflation Protected Securities (TIPs).   However, this is an acronym for two types of bonds that have an inflation factor intrinsic to the bonds.   Because I Savings Bonds are also inflation protected, which bond is better for the consumer?   TIPS are sold at auction, which make them awkward to buy for the average Joe Six-Pack, while you can buy I Savings Bonds online or through your bank. Please advise if you also recommend buying I Savings Bonds.

---D. G., by e-mail

  

A. I have recommended I Savings Bonds many times. They are easy to buy. They can be purchased in denominations as small as $25. There is no commission expense. Every May and November the yield on the bonds is reset to reflect (1) a yield over inflation and (2) the inflation rate for the trailing six month period. When the inflation rate rises, the total yield of the bonds rises.

At the beginning of this month the yield over inflation was reduced to 1 percent from 1.2 percent. But the inflation rate for the trailing six month period rose sharply to a semiannual rate of 2.85 percent. So the bonds now yield at an annualized rate of 6.73 percent until next May.

You can get current information on I Savings Bonds at www.publicdebt.treas.gov/sav/sbiinvst.htm.  

You can track the interest rate history of I Savings Bonds at www.publicdebt.treas.gov/sav/sbirate2.htm .  

The interest on I Savings Bonds is tax deferred until the bonds are redeemed.

Investors with tax deferred accounts who intend to invest for a relatively long period will benefit from investing in TIPS, because these provide a larger premium over the inflation rate at longer maturities. According to www.bloomberg.com, for instance, 10 year and longer maturity TIPS were recently priced to earn at least 200 basis points (2 percentage points) over the inflation rate.