I suggest simplicity, patience in investing

Q. Would you comment in a column on your present suggestions for a Couch Potato portfolio for retirees? -- C.D., by e-mail

A. The Couch Potato portfolios aren't about change. They are about simplicity and low costs. Whether it is a two-fund Couch Potato portfolio or a 10-fund Couch Potato portfolio, the proportion of each fund in the portfolio is the same percentage -- 100 percent divided by the number of funds in the portfolio. Performance figures over various time periods are updated and posted monthly on my Web site.

Are the funds used in Couch Potato portfolios perfect? Not at all. Because they are based on inexpensive index funds, however, each fund has a high probability of doing better than 70 percent to 80 percent of its more expensive professionally managed competitors.

Are the relative proportions of each asset class perfect? Not at all. The Couch Potato portfolios range from a 50/50 mix of equities and fixed income to an 80/20 mix -- basically from conservative to aggressive balanced portfolios. The greater the number of asset classes in your portfolio, the better the odds one asset class will perform well enough to compensate for the asset class that is performing poorly. It's not a guarantee; it's only a probability. That's the best any of us can do: play the odds.

Are there things to worry about? You bet. Here are a few:

• TIPS (Treasury Inflation-Protected Securities) have enjoyed substantial appreciation and now offer only a small premium over the inflation rate. So they could be overpriced. Then again, with the CPI rising faster than 4 percent a year, you don't need much of a premium over inflation to do better than conventional coupon bonds and CDs.

• Foreign bonds have also enjoyed a good run. Today so many investors are expecting a continuing fall of the dollar that you have to wonder if the decline is ending.

• REITs have fallen miserably in the last 12 months, as their usual sources of financing have fallen into disarray. Then again, yields are now attractive. Many yield 5 percent and more.

• It's much the same with energy. With oil over $100 a barrel, surely we're due for a price decline and weaker energy stocks. Well, maybe. But oil is the new gold. The industrial world runs on the heat content of oil, and the developing nations are building the same energy-intensive infrastructures that industrial nations built more than a century ago.

It's quite possible that any one of these Couch Potato portfolio fund categories could be a disaster in the next 12 months. Or not. All we know for certain is that most bets on market direction are wrong, regardless of source. So the best course of action is to pick an asset allocation you like and stick with it.

Like playing golf, investing remains one of the fastest routes to humility renewal.

Q. Many financial experts are recommending municipal bonds -- in particular, closed-end funds -- because of the high yields and discounts. Do you agree, and if you do, which ones, especially closed-end funds, would you recommend?

The closed-ends recommended by Wall Street Journal columnists actually have high expense ratios. Plus, it's possible that interest rates will eventually be higher since they are already low. -- F.R., by e-mail

A. The tax-free bond market is attracting a lot of interest for two primary reasons. First, interest rates on secure (taxable) government securities have declined to such low levels that alternatives such as municipals pay a good deal more. Recently, 10-year Treasury obligations were priced to yield 3.44 percent. At the same time Bloomberg.com was showing that 10-year, triple-A-rated municipal securities were priced to yield 4.03 percent. In other words, they were yielding more than Treasurys -- and the yield was entirely tax-free.

Second, the disarray in financial markets has reduced the liquidity of municipal bonds. It has been aggravated by the failure of many municipal reset notes -- short-term securities that are auctioned each week to a new interest rate -- to find buyers as worry has mounted about the financial health of municipal bond insurers, etc.

Put the two together and there are some real bargains out there, particularly in closed-end funds selling at a discount to net asset value.

As a practical matter, however, fixed-income investments aren't a good way to look for higher returns. You're better off investing in short-term, highly liquid, taxable fixed-income securities to reduce portfolio risk. Then, take your risk in equities, where the potential returns are far higher.

© 2008, Universal Press Syndicate