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What to do with bonds depends on your goals

Q. I am an 81-year-old widow with children and grandchildren. I receive retirement benefits and Social Security, which I live on. I reinvest the interest I get on my CDs. I own 270 savings bonds dating to 1964. I have been cashing in $5,000 a year, being careful not to push my income above the 15 percent tax bracket. What do you suggest as my best investment with these bonds?

A. The best investment depends on your objectives, your other assets and your tolerance for risk. Since you do not need income, the question is whether you want to keep this money as a safe stash for emergencies or whether you want it to grow as an investment for your grandchildren.

If this is an emergency fund, keep most or all of it in CDs or in a money market mutual fund, which would give you liquidity as well as yield. Check the money market funds chart in today's Money & Business section for current yields.

If this is a long-term growth investment, I suggest gradually investing your bond proceeds in a stock mutual fund with a track record of producing above-average returns while taking below-average risks. There are many funds that fit that description and you should be able to find one that you like with a bit of research. One tool for mutual fund selection is Morningstar Mutual Funds, which is available in print and electronic versions in some public libraries.

You also can get information and screen funds through the company's Web site (http://www.morningstar.net) if you have access to the Internet. I asked the Web site to show me U.S. stock funds with five-star ratings and received an impressive list of possibilities, including names such as Fidelity Growth and Income, American Century Equity Growth, T. Rowe Price Value, Oakmark and Vanguard Windsor II.

Even though the stock market is at high levels now, if you redeem your bonds and buy shares gradually, you will be engaging in "dollar cost averaging," a strategy for reducing risk.

Keep in mind that savings bonds issued after November 1965 stop paying interest after 30 years and should be redeemed promptly.

Q. What would you advise a 67-year-old who has a $10,000 annuity and $40,000 in a bank money market fund to do? Would it be wise to invest in mutual funds? A friend suggested a variable annuity. The banks offer such low interest rates and CDs must be long-term to get even 6 percent.

A. If $50,000 is all the money you have and you might need it for an emergency, you shouldn't be taking much risk with it. Low yields are the price you pay for low-risk investing. You could increase your return by buying CDs with staggered maturities (1-year, 2-year, 3-year, etc.) and as each one comes due, buying a new long-maturity CD.

You could put part of your money _ say $10,000 _ in a stock mutual fund if you feel fairly certain you will not need the money for at least five years. What you don't want to do is have to pull the money out of the stock market when stocks are down, as they are bound to be in the future.

I see no reason for you to buy an annuity.

Q. Is it to my advantage to reinvest stock dividends on my own rather than through the broker? I own four stocks.

A. As you know, many companies offer dividend reinvestment/direct purchase programs. The main advantage of direct participation is that you have the ability to purchase additional shares for little or no commission. As an alternative, some brokerage firms offer free dividend reinvestment (Charles Schwab and Waterhouse Securities are two examples). The advantage to doing it that way is simplified record keeping since everything comes on one statement.

Online money map

Whether you are an investor, a job hunter or just curious, a visit to Hoover's Online (http://www.hoovers.com) pays off with a treasure trove of information about public companies. Among the data available: company description, names of executives, financial statements, stock performance data, recent news items and links to Securities and Exchange Commission filings.

_ 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 questions we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to huntleysptimes.com by electronic mail.

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