Bill Gross, managing director of Pimco Funds, suggests that on a number of traditional valuation measures stock indexes remain overvalued and could fall about another fifty percent before reaching fair levels, given companies' true profitability.

Corporate earnings have been inflated by not expensing the ballooning stock options. Some argue net profitability, after considering the costs of management and employee stock options, might average only half to two-thirds of reported earnings.

Similarly, if companies were to show realistic rather than wishful levels of pension fund returns, their overall profitability would, on average, be much lower.

At today's prices, Gross suggests stocks might return only two to three percent over inflation, virtually the same amount now available on long-term, essentially risk-free Treasury Inflation Protected Securities (TIPS) or on low cost mutual funds specializing in this type bond asset.

He also points out that stocks have historically been priced to yield over 4% a year, but that such dividends now average only about 2%.

For all these reasons, he suggests TIPS held to maturity may be a better bet for investors now than stocks. If one can get the same return with bonds, and risk-free, why invest in equities, which certainly are not without the potential for both short-term and long-term loss?

Yet, Jeremy Siegel, author of Stocks for the Long Run, notes that up till now, in any twenty year period, if one reinvested dividends and capital gains, stocks, on average, have always beaten the total return of bonds. He still believes, even with today's equity deficiencies, investors will come out ahead over time.

Perhaps a combination of stocks and bonds is the best way to approach the dilemma. It is interesting to note that, assuming one began with one-third in long-term TIPS assets and two-thirds in equities, and if inflation were to be about average (or 4% a year) over the next dozen years, and all dividends and capital gains were reinvested, then, even in a fairly worst case equities scenario and were stocks to fall so much more sharply that they remained fifty percent below today's levels, one might in twelve years at least have recouped one's initial investment.

Thus, in spite of a likely intervening war with Iraq, possible excessive spending levels by Congress and the White House, and another severe terrorist attack or two, one's portfolio would then be unlikely in the long-term to show a substantial loss below current levels.

If, in addition, one were to make new investments on a dollar-cost-average basis, through both the market dips and rises, one might well come out significantly ahead.

*My brother, Frank, a financial consultant and Raymond James Branch Manager, has suggested that reliable insurance company annuities, offering a guaranteed 6% minimum annual return (with the possibility of more if the equity markets perform well), may also be a safe alternative to direct investment in stocks and stock mutual funds for part of one's portfolio. This possibility is shown in the table as well. I do not know if such annuities are available in amounts as low as $5000 but, for purposes of the illustration, it is assumed that they are. To achieve the average 6% return on the left side of the table, an investor could also invest in high grade corporate bonds, paying coupons at a 6% or greater rate, and hold them to maturity.

The investor who also rebalances his/her portfolio annually, to the original 1/3 in relatively stable assets vs. 2/3 in equities, will likely maintain good returns with lower than average levels of risk. And, if the detractors are wrong and stocks turn out in the next dozen years to be much better performers than expected, this overall approach will not leave the investor out of that market.

Moreover, the investor who becomes adept at careful stock selection can improve his/her odds of attaining even better long-term saving and investing results than shown in the illustration.

I am greatly indebted to my mom, Julia, for some of the ideas used in the current article.

(One caveat concerning the use of TIPS or TIPS mutual funds in one's investment strategy: though they offer excellent, low-risk protection against inflation, Uncle Sam expects to receive his share each year, whenever the holdings are adjusted upward based on changes in the Consumer Price Index. Accordingly, these assets are best for tax-deferred accounts.)

(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.)