Dear Mr. Berko:

I cashed out of the market in mid-2001, taking some large losses, and put $520,000 in a money market fund and a few brokerage certificates of deposit. Now I have a young broker who seems to know his stuff. He manages my wife’s small account, which returned nearly 12 percent last year.

As you know, the Dow broke 11,000 in January. If it breaks through the old high of 11,750 and then goes on and upward, I don’t want to miss out. But I’m afraid to lose money as I did five and six years ago.

My broker insists that this market is going to run through the 14,000 level this year and has advised me to invest my $520,000 in 20 stocks that his firm has researched for maximum growth over the next two years. What do you advise?

D.E., Charlotte, N.C.

Dear D.E.:

The Dow Jones industrial average reached an all-time high of 11,750 during January 2000, then fell like a tear from a tall camel’s eye to 7,500 in October 2002. That’s a drop of 4,250 points in 33 harrowing, unnerving, terrifying and horrible months. I know, because I was there!

The Dow finally broke through the 11,000 level in early January, but seems to have temporarily retreated below that number. My associate Roy Akers and I have been giving this recent move above and below 11,000 a lot of thought. Roy called many of the analysts with whom we consult at some of the Big Board firms, as well as those who manage some popular mutual funds. Here’s the consensus.

This year (perhaps by late March or early May), the Dow industrials might reach the old 11,750 high, and some fence-sitters who have spent a long time warming their buns may employ their sizable cash hoards and jump into the market, fearful they might lose out on a new record Dow.

As the Dow moves through the 12,000 level (the consensus is late May) the remainder of the fence-sitters may become so fearful of missing a strong bull market – remember, 2006 is an election year — that they may cash in their CDs, their money market funds, their Treasury notes, etc., hoping and praying that they’re making the right move.

Neither Roy nor I can say with any degree of certainty that this scenario will play out. But judging from the few hundred letters I get each week, an increasingly larger number of readers are fearful of losing an opportunity if this market takes off again. (I recently told an audience in Phoenix that I believe the Dow can easily exceed the 20,000 level in 10 years). You might miss an opportunity if you continue to glue your derriere to the bench.

Roy came up with a sterling and even capital idea for you. He suggests that you keep $260,000 of that $520,000 in short-term, risk-free, liquid investments. Roy suggests that you then invest $130,000 in 21 dividend-paying growth stocks. The yield on this 21-stock portfolio is just a tad under 4 percent, but if the market has the zoom room you believe it does, then those 21 issues should also provide you with some attractive capital gains.

Roy suggests that you invest the remaining $130,000 in the Equitable Variable Annuity, which has a 6 percent income guarantee plus an income stream you can’t outlive. If the Dow does explode, the Equitable Variable Annuity will explode in value, too.

Before continuing, I am required to tell you that some of our clients and I have sizable investments in the Equitable Variable Annuity.

Roy’s idea makes good sense. Your only market risk is the $130,000 you invested in the 21 dividend growth issues. If the Dow turns tail and heads south, those issues could crash like a boulder from a high alp, never to return to prominence again. But with the Equitable Variable Annuity, you are guaranteed $7,000 (6 percent of $130,000) every year for the rest of your life or even longer. That’s the worst-case scenario in a crashing market.

Frankly, most variable annuities are adequate for this “split decision.” However, Roy has analyzed and compared 14 variable annuities, and the Equitable continues to remain the best choice. It has better features, it’s more user-friendly, it’s attractively flexible, its costs are reasonable and its record is probably the best we have seen.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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