Q: I'm a 64-year-old grandma who messed up bad. My money was in the Vanguard 500 index fund, but in August everything was going south. So I moved my money to a money market account. Now stocks are doing well again, and I have no idea how to get back into the Vanguard 500 without losing a lot of money.

Also, in 2000 I sold my house and invested quite a bit in stocks like Cisco Systems, CMGI, Motorola, Oracle, etc. I'm still holding them, thinking that is the only way to get my money back. I'm still $35,000 in the hole. Any suggestions? -- B.H., Austin, Texas

A: One of the most painful exercises an investor can do is to compare the performance of an investment that has been sold with the investment that replaced it. Often, the sold investment will do better.

The basic idea of index investing is that you can't guess which stocks to buy or whether the market is going up or down. You can only be fairly certain that you are likely to get a good return over a long period of time.

I think you need to think about the decisions you made differently. First, you did not lose money when you sold your S&P 500 fund. You lost an opportunity to make MORE money than you made in the money market fund. Losing an opportunity isn't the same as losing money.

My suggestion: Buy the index fund again and pretend that you are now living on a desert island, far removed from our reliable sources of worry.

One of the best reasons to own index funds is that you don't have to worry about the fate of individual companies. The value of your stocks is their price today. Not what you paid for them. Not what you hope they will be worth tomorrow. Just their price today.  

Every day we choose the horse we're going to ride. If you choose individual horses, you'll have a lot of exciting races and you'll lose a lot. If you own the track, you'll enjoy all the races. And you have a really good chance of making some money.

  

Q: I have a fair amount of cash waiting for a market drop. I'm fascinated with the Couch Potato portfolio, but should I continue to wait for a drop, or would you advise investing in all, or some, of the funds now?

I'm comfortably retired. My husband has a substantial portfolio, but I have a relatively small one that I enjoy working with. I do not consider it "play money," by the way. Is the Couch Potato suitable as is for investors in a higher income bracket? -- K.M., Franklin, Tenn.   

A: Lots of people are waiting for the market to drop. Unfortunately, waiting for the opportune time doesn't work for most people. When the market does drop, they will worry that it will go lower. So they'll wait some more. Then the market will pop upward. They won't believe the rise is real. Later, they will kick themselves for not having invested at the bottom. So they will wait for prices to drop again.

Waiting for a big market low is a good way to avoid "pulling the trigger" and making a commitment.

That's why I think we need to select an asset allocation and invest. If it makes you feel better to invest over a period of six to 12 months, then invest over a period of six to 12 months.

Whatever you do, the only thing certain is that you will worry. You will have misgivings regardless of what happens. One of the reasons equity returns are higher than CD returns, long term, is this uncertainty.

The basic Couch Potato portfolio is suitable for investors who want to have minimal expenses and returns that are superior to most of the managed competition. If domestic equities return 10 percent to 11 percent (dividends and price appreciation) and domestic fixed-income securities return about 5 percent, your long-term return should be close to 8 percent a year.

Year by year, however, there is a good chance that you will lose money in some years and make a bundle in others.