Are principal protection funds worth it?

- Alan Lavine and Gail Liberman

Aha! You can invest in stocks and get your money back.

Are you going to drop everything, call a broker, pay them a fat commission and invest?

Don't do it. There is no free lunch. Roy Weitz, publisher of FundAlarm.com, says that these funds only invest a small percentage of your money in stocks. The rest is invested in bonds and cash. The reason: The funds have to invest in bonds and cash to make sure they can pay back at least your principal.

In addition, the funds charge sales commissions of about 4.5 percent. So your entire principal is invested.

Weitz says the average stock fund gained 12 percent in 2003 and 33 percent in 2004. By contrast principal protection funds gained just 2 percent and 5 percent, in those respective years.

Weitz says that principal protection funds are a big rip-off. They were designed so brokers could sell a stock investment to squeamish investors.

So what is the safest way to invest in stocks? Understand that you always face risks with stocks. Bad news about a company can send a stock's price south. And if the stock market declines, a mutual fund that invests in stocks is likely to drop.

The best way to reduce your risk:

• Also invest in bonds, money funds, U.S. Treasury bills, real estate, precious metals and money market funds. These investments will cushion your stock market losses.

• Invest for the long term. A 50 percent stock-50 percent bond mix has never lost any money over holdings periods greater than 10 years, according to Ibbotson's Associates, Chicago.

• Invest in an asset-allocation mutual fund that diversifies your investment for you.

#

Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).