Question: When I left my previous company, I rolled my $400,000 401(k) into a Merrill Lynch IRA with the broker who represented the 401(k) plan. He wants me to put the money with one or more money managers who would charge a 2 percent fee, and he has given me information on six available money managers with whom I could place $100,000 or more.

I'm just not comfortable with money managers. I've never heard anything good about them. I've always been more comfortable with equity mutual funds (I've had money in Mutual Shares Z for 15 years).

To compound the problem, I have another IRA from a previous 401(k) rollover in a broker-managed account. He's almost doubled the account in just more than two years. However, he invested only half of the account in equities. Out of 10 stocks he has picked to date, four have been losers and 50 percent of the value of the account is in three stocks. This account has grown from $218,000 (in October 1997) to $395,000 today.

I'm pleased by the growth, but the failure of the manager to take profits and diversify the portfolio worries me. I'm 49. My wife is 53. I worked for the same company for 21 years and left due to a merger last August. I'm doing consulting for the acquiring company (in Tampa) while I figure out what to do next. This $800,000 is my retirement fund. What is your opinion of my situation? I know you like the couch potato approach, but I would prefer to be more aggressive. A.R., Dallas

Answer: The argument that routinely comes from the sell side of money management is a macho, "What do you care about a 2 percent annual fee if you're getting top returns with top managers?"

It's a question that inexperienced investors have trouble answering, particularly since they'll be afraid of sounding cheap. The problem is that most people, including those who sell investment services, don't like to think in terms of probabilities. I personally would be happy to pay management fees of 5 percent if I was certain it would net me superior long-term results.

Unfortunately, I have seen no evidence suggesting that high fees will buy superior performance. But I have seen a great deal of evidence indicating that high fees hinder performance. Worse, the longer the period of investment, the higher the odds that high fees will take your performance down materially perhaps from the top 25 percent to the bottom 25 percent of comparable investments.

So let me suggest an alternative. First, manage the bulk of your money through mutual funds and do it in low-cost, passive vehicles. Pick an asset allocation the proportion of stocks, bonds and cash you want to hold. Then hold it. Second, keep a portion of your money in a portfolio of individual stocks. Unlike your current individual stocks, have it be no less than five but no more than 15. Then track your brokers' selections and measure the performance of that portfolio against a universe of comparable mutual funds.

Suppose, for instance, that you wanted to take more risk. You could do this by adding a $100,000 technology portfolio of 10 stocks to your more conservative portfolio of index funds. Think of it as an aggressive couch potato.

Q: I am 50 years old and earn about $60,000 a year. Here are my assets: real estate, $136,000 (including my own home, no mortgage); an investment fund of $500,000 with my former employer; $12,000 in savings bonds; $134,622 in mutual funds; $52,000 in an IRA account; $100,000 in a money market account; and $7,000 in checking.

I also have rental income of $12,000 a year. I am considering investing $50,000 in four different stocks. Looking at my current situation, do you think this is a good idea? Or should I invest more money in mutual funds? R.M., San Antonio

A: I think you're a little ahead of yourself, on the way to creating great confusion and uncertainty. With $800,000 in financial assets you need to start thinking about an overall plan for how the money is invested rather than thinking about $50,000 in four stocks.

What counts is what all the money does over the course of several years. How, for instance, is the $500,000 with your former employer invested? Stocks? Bonds? Cash? Ditto the $134,622 in mutual funds and the $52,000 in the IRA account. Where is it invested?

You can start figuring this out with a single sheet of paper that lists each of your accounts and identifies how much is invested in each category. When you have completed a list like this, you total the amounts in each column and find the percentage of your financial assets in equities, bonds and cash. Then you will be ready to think about changes in your investments.

Q: I am 27 years old. My income is $25,000 a year. When I was younger I was foolish with credit cards and incurred a lot of debts. I have consolidated all my debts, including car payments. I also put away $200 a month in a savings account. What I want to know is whether that's a sufficient amount since I am trying to save for a house. S.M., by e-mail

A: Your timetable for buying a house will be determined by several things beyond having a down payment. It is possible to have a down payment but not qualify for the mortgage that you need. That's why you see those house signs that read, "Contract pending" a buyer has agreed to buy a house but has not secured financing.

So let's take a close look at what you'll need to buy a house: First, you'll need to find a house priced so that you can afford the mortgage that will be necessary after your down payment. Mortgage lenders usually limit the monthly cost of the mortgage, taxes and insurance to 28 percent of your gross monthly income.

Second, you'll need to qualify on your "back-end ratio" the total of your front-end (housing) expenses plus your other obligations. That's usually limited to 36 percent of your monthly income. In other words, if your consumer and auto loan payments are more than 8 percent of monthly income, the difference will be subtracted from the 28 percent limit on housing.

Many people learn that the amount of their mortgage is limited by the amount of consumer debt they have. On $25,000 a year, for instance, your "back-end" debt would be limited to $167 a month. That's a lot less than most car payments. Add a few credit cards and a possible student loan, and suddenly you can't get a mortgage large enough to buy the house you want.

Third, your credit record can put you into a higher-risk loan group. You'll still be able to borrow money, but you'll have to pay more for it. The higher the interest rate you have to pay, the higher your mortgage payment. As a consequence, the amount of house you can buy goes down.

Put those three factors together and the first-time homebuyer can be closed out of the market pretty easily.

Jane Bryant Quinn is on vacation. Scott Burns is a columnist for The Dallas Morning News.

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