JANE BRYANT QUINN

Are you still diversifying your investments?

You know the drill: Spread your money over different types of assets big stocks, small stocks, internationals, bonds. Diversification limits your risk and, over the long run, can improve your total returns.

You might see this approach as totally out of date. The American market has felt like an easy layup shot. Never has prudence seemed so pointless, or classic investment advice so wrong.

In recent years, you could double and redouble your money easy, with one-hand even without owning Internet stocks. All you needed were large and prospering U.S. companies, such as Intel, General Electric and Microsoft.

The record shows that, from 1995 through 1998, big U.S. growth stocks did better by far than a typical diversified portfolio (big stocks, small stocks, internationals). Over nearly 30 years 1970 through 1998 growth stocks and the general stock market performed about the same.

So why break your head about how much to put into internationals or smaller stocks? Why not buy growth stocks, plus a mutual fund that follows the market (that is, Standard & Poor’s 500-stock index), and be done with it?

Two reasons. First, history says that the super performance will not last. A stock group that rises this high, this fast, will struggle during the market’s next phase, and the change will not be announced in advance.

Second, the S & P;’s 30 percent returns since 1995 can distort your long-term view. Investors don’t understand how exceptional these recent years have been, says finance professor Richard Marston of the Wharton School in Philadelphia. (The S & P; has risen by nearly triple its historical rate.)

If you go back to 1970 and measure only through 1994, the S & P; loses to the diversified stock portfolio, which also carries less risk.

Different types of stocks outperform at different times. In the 1970s, small stocks burned up the charts. The 1980s belonged to the international stocks. The best academic research was showing that value stocks (stocks with prices that are beaten down) did substantially better than growth stocks.

“Back then, big growth stocks were for absolute dummies, the most conservative people out there,” says John Rekenthaler, research director of Morningstar in Chicago. “Ten years later, what made the most money? Big growth stocks.”

That’s also why you diversify because you have no idea what will happen next.

Marston says it’s easy to give up diversifying today. Americans are getting rich on the most obvious stocks to own. When prices soar on your home country’s best-known stocks, investing looks like a cinch.

But think about it: What if the big European stocks had been rising by 30 percent a year? Would you say, “sell everything else, owning Europe is enough”? No way and the very same principle applies to big growth stocks in this country.

As a practical matter, you haven’t diversified when you own a portfolio of individual stocks. You won’t buy the right number and type to cover all the bases the value stocks, growth stocks, small stocks and proper industry sectors.

To make diversification work, choose mutual funds especially index funds, which track different kinds of markets. At Vanguard in Valley Forge, Pa., you could diversify with just three funds Total Stock Market (for big and small stocks), Total International Stock and Total Bond Market.

A 401(k) is a tougher nut. You do your best with the choices you have.

Diversifiers won’t do as well as the best market in the world (discovered only in hindsight), says Ernest Ankrim, director of portfolio research for the investment-consulting firm, Frank Russell, in Tacoma, Wash. But neither will you lose a big piece of your savings when a market drops.

There’s no “right” investment mix for everyone. A baseline might be 30 percent to 40 percent bonds; 30 percent big U.S. stocks; 20 percent smaller U.S. stocks; and 10 percent to 20 percent internationals, including 5 percent in emerging markets.

If you’re older or more conservative, you’ll hold more bonds. If you’re younger or aggressive, you’ll hold more stocks.

As one test of how much risk you can bear, ask yourself this: If stocks dropped by half, would I still be OK? If the answer is no, you should rethink.

The attraction of annuities

Today, the Boomer generation worries about amassing enough money for retirement. Tomorrow will bring another worry: how to make a limited pool of savings last for life.

That’s where annuities come in the type known as “immediate pay.” These annuities guarantee you a permanent income, no matter how long you live.

They have some drawbacks. But insurers are starting to rethink immediate-pay annuities to make them more saleable especially annuities linked to the performance of stocks.

You buy an immediate-pay annuity with a lump sum of money. The funds might come from regular savings, stock market gains, a retirement plan, even the cash in a life insurance policy.

The insurer will turn that money into a lifetime income. The income could also cover the joint lifetimes of you and your spouse. Neither of you would ever run out of cash, no matter how long you lived.

With immediate-pay annuities, you and other buyers pool your longevity risk. If you die early, the money you didn’t use goes into the pool, to pay benefits to those who outlive their expected life span. You don’t know in advance which group you’ll be in.

Most people hate the thought that they might die soon after purchasing the annuity. So they make a trade-off. They take a lower monthly payment in return for a death benefit.

Sometimes, the annuity comes with a death benefit built in. This benefit guarantees that monthly payments will be made for at least 10 or 15 years to you, while you live, or to a beneficiary if you die early. The beneficiary might also take the money in a lump sum.

You can annuitize your savings in one of two ways:

? Take fixed payments. You get a guaranteed sum each month, but inflation will lower its purchasing power.

? Take variable payments. Your annuity is invested in mutual funds, and your future income depends on how well they do. Variable payments give you a shot at a rising income. But you run the risk that, in some years, your income might decline.

If you want an income guaranteed for life, a variable-pay annuity makes sense, provided that you can manage during years when the annuity payout drops.

But buy it as soon as you retire, says Moshe Arye Milvesky, an assistant professor of finance at York University in Toronto. You need to allow enough time for a stock market strategy to work out.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.