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John Waggoner
USA Today
Apr. 9, 2004 10:04 AM

You hate investing. You cover your ears and sing when TV news gives stock reports. You think a prospectus is something a dentist uses. This column is for you.

No matter how much you hate investing, sooner or later you'll have to make a few choices. Like next week, for example. You'll have to open an individual retirement account and make your contribution for 2003 by Thursday or the opportunity will be gone.

So today we're going to tell you how to do it as painlessly as possible.

First: You'll be asked to choose between a traditional IRA and a Roth IRA. Take the Roth.

"Roth IRAs are one of the most powerful tax-free savings accounts created by Congress," says David Campbell, financial planner at Bingham Osborn & Scarborough in San Francisco.

A Roth IRA offers three big advantages.

• Your earnings accumulate tax-free.

• When you take money out of a Roth at retirement, you pay no taxes on your withdrawal. It's a clean, no-hassle transaction.

• You can withdraw your principal tax-free at any time, and you can also withdraw $10,000 without penalty for the first-time purchase of a home.

You can put $3,000 into a Roth - $3,500 if you're 50 or older. If you're filing jointly, your modified adjusted gross income has to be less than $150,000 to make a full contribution.

If you're single, the limit is $95,000.

Your modified adjusted gross income is the amount on line 34 of your tax return, plus a few deductions: student loan interest, tuition and fees, and traditional IRA deduction, to hit the highlights. And if you don't have $3,000, you can contribute less - as little as $50, in some cases.

Your next decision: Where to invest. You can open an IRA pretty much anywhere: Banks, mutual funds, brokerage houses. A large no-load mutual fund company, such as Fidelity, Vanguard or T. Rowe Price, will spare you commissions and calls from brokers.

Avoid the temptation to buy the top-performing funds for the quarter. Short-term performance lists are increasingly littered with goofy funds. For example, the hottest fund of 2003 was the American Heritage Fund, which has more than 40 percent of its assets in one stock: Senetek, a health care technologies company whose stock currently sells for about $1. The fund has a 10 percent expense ratio and has managed to lose 88 percent the past 10 years.

Instead, consider an asset allocation fund. Sure, you're probably not comfortable using words like "asset" or "allocation" or "fund." But they're fairly simple. They're an all-in-one investment that mixes stocks, bonds and money market securities, or cash. You have no decisions to make - the fund makes them for you. You have a choice of three types of asset allocation funds:

• Target funds. These funds base their investments on the amount of time you have before retirement. You pick a fund that's geared toward your retirement date. As that day approaches, the fund's portfolio becomes increasingly more conservative. Vanguard Target Retirement 2045 fund (800-662-7447), for example, has 10 percent in bonds. Vanguard Target Retirement 2005 has 65 percent in bonds.

Fidelity's Freedom funds (800-544-8888) and T. Rowe Price's Retirement funds (800-225-5132) follow a similar philosophy.

• Flexible portfolio funds. These mix stocks, bonds and cash according to the manager's outlook. As you might expect, stock-heavy funds did best last year, but got smacked harder during the 2000-2002 bear market. The top-performing flexible portfolio funds are in the chart.

• Balanced funds. These stick with a mix of 40 percent bonds and 60 percent stocks, and, by and large, hold up well in most investment environments. Oakmark Equity Income (800-625-6275) has the best record the past five years, gaining 92 percent. Another good choice: Dodge & Cox Balanced (800-621-3979).

Investing aficionados say flexible portfolio funds are only for nitwits who can't stand investing. But you might point out that the average nitwit who bought a flexible portfolio fund five years ago gained 14 percent vs. an 8 percent loss for funds that track the Standard & Poor's 500 stock index.

Then see who's covering his ears and singing.

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