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Buying stocks on margin isn't for everyone

Q. I read that people should have some savings for emergencies, but my husband doesn't agree, with interest rates so low. He follows the stock and bond markets avidly and lets persuasive brokers sell him things on margin. We are in our 70s, and I don't think we should owe money, even though there are stocks to sell if necessary. Don't you think we should save up and then buy the stocks or bonds?

A. I think you are asking two basic questions. One is how your savings should be allocated to stocks, bonds and cash, and the other is whether you should buy stocks on the margin.

A popular rule of thumb is to subtract your age from 100 to get the percentage of your assets (not including your home) that should be in stocks. The rest is supposed to be divided between bonds and cash. In the long run, stocks are the most rewarding investment, but the market goes down as well as up, and the older you are, the less opportunity you have to make up any losses.

However, age is not the only issue. You also need to take into account the amount of money you have, your investment experience and your tolerance for risk. Experienced investors with substantial assets ought to have a higher percentage of their money in stocks than those with small nest eggs who have never before ventured beyond certificates of deposit.

A reasonable allocation for you might be 30 to 40 percent stocks, 15 to 25 percent cash and the rest in bonds. A conservative couple might keep 40 to 60 percent in cash and only 15 to 20 percent in stocks. Cash includes bank accounts, CDs, money market funds, short-term bond funds, Treasury bills and U.S. savings bonds.

Buying stocks on the margin (borrowing money from the brokerage firm) is a way to make more money when stocks go up and lose more money when stocks go down. In my opinion, the increased risk makes margin buying a bad idea for most people, including you and your husband. However, I would make some exceptions. One is that borrowing against the securities in your account sometimes is the best way to get cash to meet a short-term need.

Another exception involves people who trade stocks for enjoyment and who find that taking extra risks such as margin buying makes the game more exciting. In those cases _ and your husband may be one _ I think a little margin buying is acceptable as gambling/entertainment as long as not too much money is at risk.

The two of you really need to sit down and discuss what's going on in your financial lives. One proposal you might make is that you treat your margin debt and interest payments as part of your husband's entertainment budget and allocate an equal amount to you to spend for your enjoyment. Perhaps that will help convince him to take a hard look at your margin debt.

Q. I am a man of modest means, with a monthly income of $928 from Social Security and a pension. I also have $35,000 in an IRA CD yielding 9.11 percent interest, which I withdraw and spend. My problem is that my CD is coming due in October. How can I invest my IRA so I can reasonably expect to get a return approximating what I am getting now?

A. You can't. The sad truth is that no investment offers you any hope of a 9 percent return without requiring you to take a lot more risk. You can buy high-yield mutual funds that pay dividends in that range, but the value of your principal may rise or fall with fluctuations in the market.

I suggest that you immediately start learning about mutual funds and the alternatives you have available so that you will be ready to invest your money when October rolls around. If this is all the money you have in the world, I think you should keep a good chunk of it _ perhaps half _ in CDs in spite of the low rates. The rest you might divide between two mutual funds.

One starting point I frequently recommend is the Investor's Guide to Low-Cost Mutual Funds, available for $5 from the Mutual Fund Education Alliance, 1900 Erie St., Suite 120, Kansas City, MO 64116. Order the July edition for the most up-to-date performance information.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Questions should be sent to Helen Huntley, Times, P.O. Box 1121, St. Petersburg 33731.