Stocks are in a bear market that is now officially the worst since the Great Depression and still ongoing. So people are often selling stocks and piling the money into U.S. Treasury bonds, raising the bond prices and lowering their yields to only about 4.0% (benchmark 10-year duration).

Many are keeping unusually large amounts of their assets, intended to meet long-term goals, in money market funds paying just 1-2%, waiting until they are sure the stock market has reached a bottom.

Financial advisors, computerized retirement calculators, and pension fund managers are often predicting average annual portfolio returns of 9 or even 10% and basing personal finance and corporate profitability decisions on these projections. Even if the projection is only 8% but does not take into account the variability that can occur in returns and expenses from year to year, the outcome can be very different than was suggested.

So, with billions or even trillions at stake, are investors generally on the right track or might there be something suspect in most or all of the above behaviors and attitudes?

Home builders, like Lennar Corp., Pulte, and Beazer Homes, among several others, competing with one another, are going like gangbusters to each "build it," trusting that "they will come." In most any supply and demand situation, though, sooner or later, the former exceeds the latter.

And if the economy rocks along at a much less robust level than in the roaring nineties, there may not be the healing salves of either inflation or full employment to keep house prices rocketing.

Indeed, some think that a greater worry now than inflation is mild deflation. If folks think that by waiting a month or two they may get a lower house (or car or toy, etc.) price than by buying now, there is little incentive to turn over their hard-earned dollars today. Then, as with our real estate broker neighbor's house, already on the market awhile, there may be a number of telltale signs appearing across the nation saying "reduced."

With mortgage and other debt quite elevated, often well above folks' net worth, falling house prices could cause severe heartburn.

Yet U. S. Treasuries pay a coupon that averages only about the same as the historical rate of inflation. And their principal will decline sharply once interest rates begin to go up again. It was different in 1981, when Treasury Bonds offered 15% or greater yields. Barring a doomsday scenario, most bonds may not be the best place to put one's bucks today, and those pulling money out of stocks and putting it into bonds may be shifting funds in precisely the wrong direction, if their intention is to grow or even preserve assets.

Although it is easier for professionals or company officers to just suggest to clients, employees with pension benefits, or stockholders, risk-adjusted portfolio mixes that historically have provided average yearly returns of a certain percentage or other, i.e. 8, 9, or 10%, etc., the usefulness and accuracy of such simplified projections may be somewhat in doubt. Not only is the future not so well known. Even the perfect replication of past performance entails different outcomes, depending on a host of variables. (Please see the table below.)

Since we are dealing, as in particle physics, more in probabilities here than absolutes, it might be better to say, for instance, that if one has 25% of one's portfolio in ten-year U.S. Treasury Bonds and 75% in a low-fee Wilshire 5000 index fund, rebalances each year, and takes out no more for expenses than 5.5% of the prior end-of-year net portfolio assets, the chances of never running out of principal over a 30-year retirement period are 96%.

Such calculations may be adjusted for each individual's situation and needs. For example, a person with a 15-year actuarial life expectancy might safely take out 7.5% a year (or whatever the figure turns out to be), so long as he or she understands there is still a small chance, perhaps 5% or less, that something will happen to exhaust all the funds too early.

Unfortunately, the fine print in portfolio projections should say that there does not even have to be a catastrophe to wipe out most of one's nest egg, while still having good average returns.

Hmm. This reminds me of the easiest way to wind up with a million bucks: Live high on the hog for a decade, and start with $10,000,000.

Dramatic as the result in our example was, the losing years in the illustration were far less severe than the bear market in which we now find ourselves, and the period that followed it was more consistently favorable than one would likely ever find in the real world. For my money, this outcome shows it is essential to stay within a modest budget compared with the liquid nest egg.

Instead, it supports a balanced approach to investing, without crediting unrealistic projections of how much money one will have in "x" number of years.

Keep real estate spending to about 1/4 to 1/3 (or less) of one's total income. If, in the liquid portfolio, one is most comfortable with 5-10% in reserves, 10-20% in bond assets, and 70-85% in stocks and stock mutual funds (or whatever is your preferred allocation), then simply assure the chosen ratios are maintained, with at least annual rebalancing, through up and down markets, and live within a conservatively calculated budget, one that takes into account scenarios such as in our example (for which we thank "Investment Advisor," October, 2002, "The Truth About Monte Carlo," by David B. Loeper, pp. 70-72).

The main point is that equities should be a definite majority of one's liquid asset holdings. If uncomfortable jumping in with both feet at this point, consider a dollar-cost-average approach, for instance increasing one's exposure to stocks by 5% a month until the equity-intensive preferred level is achieved.

"Forbes," in their October 28, 2002, issue, suggests several companies whose shares now appear to be at bargain levels, including:

Finally, keep good control of debt. Whether for credit cards, vehicles, stocks, options, a small business, gambling, real estate mortgages, medical costs, etc., debt can become an insidious expense, contributing little or nothing to the bottom line, often taking away funds that could be much better employed, and requiring many years to at last reduce and eliminate.

Avoiding inaccurate investment assumptions is really just common sense. Stick with what works. Don't try to get something for nothing. Only buy good value. Live within your means. And, in money matters, never believe you can predict the future.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)