Dr. Don, I work in a corporate library, make around $40,000 annually and put 10% of that into a 401(k). I live with my fiancee, and we plan to get married within a year. We are both 28. The only children planned will be of the barking four-legged variety, but you never know what will happen. We currently rent but are looking to buy a house sometime between two to four years from now. The only debt I have is a few thousand dollars of a car payment, and she has about $15,000 in combined student loans and car payments. Together we make about $70,000 a year. While trying to save for a house, I would like to still put at least $1,000 a year into my Roth IRA in order to have that comfortable retirement everyone talks about, which I don't think will be a problem. This year's collapse of Lucent ( LU) and AT&T -- now that's been a problem. A relative gave me 10 shares of AT&T before the breakup in 1984, and at the time a dividend reinvestment plan (DRIP) seemed the best idea since I was 12 and didn't really need the dividends. We expect our new home to cost around $200,000 and want to put 25%-30% down, or about $50,000. We'd like to buy in the next five years, but the sooner the better. What suggestions do you have for my portfolio? LI

LI,

It sounds like your first financial goal is to find a home for you and your future bride. Putting 20% down on a home will allow you to avoid paying private mortgage insurance (PMI). But in a market where housing prices are rising faster than your after-tax cost of mortgage debt, you would be better off buying sooner rather than later. You might also want to consider a strategy that will allow you to avoid PMI while only putting 5%-10% down. To do this, you close on a second mortgage at the same time that you close on the first mortgage. You borrow 80% with the primary mortgage, and your down payment plus the proceeds from the second mortgage funds the balance. Since the primary lender has an 80% loan-to-value, they won't require PMI. The money you save on PMI should offset the higher interest cost on the second mortgage. You get to buy a home sooner, which should save money on the purchase price. With 10% down, this is called an 80-10-10 mortgage. The tables below show the two different scenarios.

Housing markets vary substantially in how home prices appreciate over time. I don't know your credit history and what mortgage rates you would be able to obtain, but it might make sense to purchase a home with less of a down payment than you originally planned. A mortgage lender in your area could put a finer point on this approach to purchasing your first home. The thing to remember with this approach is that it may not be cheaper to do an 80-10-10 mortgage. A conventional mortgage with 10% down can be cheaper if the PMI expense is less than the difference in mortgage interest expense on an after-tax basis. When in doubt, make your lender work up the numbers and then review the work.

You should consider converting your IRA account into a Roth IRA account. You'll have to pay income taxes when you convert. With some 30 years until retirement, it makes sense to convert now so you can have tax-free withdrawals from the account in retirement. Use cash to pay the taxes, not IRA proceeds, to avoid a tax penalty on an early distribution and to allow more money to keep working for you in the Roth IRA account. This also gives you a good excuse to lighten up your position in Lucent Technologies.

In your 401(k), I don't think you need a balanced fund because, at your age, I don't think you need the bond exposure. Move the money to the

S&P 500 Index

fund. I don't know what investment choices you have in your 401(k) plan, but if you can't find better choices for your international fund and your small-cap fund, I'd have you consider putting that money in the index fund, too, and then start lobbying your plan administrator for more choices.

Why do you have over one-third of your financial assets invested in one company's stock? Admittedly,

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was the star of your portfolio last year, but it's not a good idea to concentrate your investments in an individual stock. If you like the financial stocks, there's a lot of different ways to invest in that sector. A fund like

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Fidelity Select Financial Service will give you exposure to the sector without taking on the higher risk associated with investing in an individual stock. I'm not suggesting that you get out of the stock -- just reduce your holdings in it.

I also think that you should lighten up on your telecom exposure. Yes, the sector has been beaten down and the perception is that there's not much downside risk left, but you can keep some exposure without having almost 30% of your financial assets invested in this sector.

It makes more sense to save for the down payment outside your 401(k). Borrowing the down payment from your 401(k) plan is an expensive alternative. By investing in a taxable account, you'll pay taxes annually on the realized gains and interest income, but you can manage the tax obligations.

A first-time homebuyer can take distributions from an IRA or Roth IRA without penalty up to $10,000. The amount of income taxes due depends on the type and age of the account. Check with your tax adviser if you are considering withdrawing money for a down payment from your IRA or Roth IRA.

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Dr. Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at

portfoliorx@thestreet.com.