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Maybe the


disaster has finally convinced you to move some of your money out of your company's stock. But now you face the tough task of finding a few decent funds among your 401(k) plan options, which might look something like a bowl of badly bruised fruit.

Today 401(k) plans have an average of over 10 investment options, up from three in 1990. Unfortunately, quantity doesn't always mean quality. And in some instances, employees don't get either.

Reader Chris Morris knows this all too well. "I understand the reasons you would want to diversify your holdings and not invest in tons of company stock. My question is, what if there is not a really good alternative? My company has only five very dismal mutual fund choices to invest in," Morris writes. "I would love to not be in any company stock, but I don't see anything in my choices that has the potential to perform better than my company's stock. That stinks."

Yes, it does. But unless you can force your employer to change your plan, you have to figure out how to use what you've got and cut your concentration in company stock. You should focus on finding one solid, broadly diversified stock fund and one good bond fund and forget about everything else.

Do Your Homework

An index fund -- even if it isn't run by a firm like



T. Rowe Price



-- is always a good first choice for your stock allocation. You can track its performance by simply following the market's moves in the paper every day. You don't have to research the manager and the style of the fund. And according to a survey of about 400 companies done last year by consultant Hewitt Associates, 70% of the plans in the study offered an equity index fund, up from 59% in 1997.

A fund that tracks the

S&P 500

index might be the easiest to find in your plan. This index tracks the largest stocks in the U.S. but still covers about 75% of the total value of the U.S. stock market. It's diversified across various industries, from financials and energy to health care and technology. And over long periods of time, the average actively managed diversified stock fund cannot consistently beat this index.

TheStreet Recommends

Now, if you're lucky, your plan will offer an index fund that tracks the Wilshire 5000 index (which could be called a Total Stock Market fund). This Wilshire index represents the entire U.S. market and will give you exposure to small-, mid-cap and large-cap stocks. It will deliver maximum diversification.

If you can't find an index fund in your plan, you should try to find a large-cap stock fund that's actively managed but still broadly diversified. A fund's prospectus will generally tell you if a fund is diversified. But you also can look for a fund that holds more than 50 stocks and provides exposure to a variety of industries. You can compare a fund's sector allocations to those of the Wilshire 5000 index. You also don't want any one stock position in a portfolio to be greater than 5%.

To see how this fund's performance compares to others like it, you can use Morningstar's

Web site. Looking at a fund's total returns, you ultimately want to see a fund that's been able to beat the S&P 500 over the past one, three and five years and also ranks in top third of its category over those periods. In Morningstar's world of scoring, the lower the number the better the rank. What you don't want: a fund that has consistently landed in the


third of its category, which would translate into a percentile ranking of roughly 66% or higher.

After you've found your stock fund, you'll want to add a bond fund that will hold anywhere from 10% to 30% of your assets. This should cut the volatility in your portfolio. A short-term or diversified bond fund will be your best bet. And if you're lucky, the bond funds in your 401(k) will be from Pimco, the masters of fixed-income investing.

If you want to keep it really simple, you could just put your money into a balanced fund or a so-called lifestyle fund. Both will automatically give you exposure to stocks and bonds and can be great all-in-one investment options. (The asset allocation in a lifestyle fund is usually tailored to meet a general risk tolerance or future retirement date.) And according to the Hewitt Associates study, 89% of the plans surveyed included a balanced or lifestyle fund.

U.S.A. All the Way

And if simplicity is your goal, you shouldn't worry about investing in a small-cap or foreign-stock fund. "You don't need to bother," insists Ron Roge, a financial adviser in Bohemia, N.Y.

The bigger a small-cap fund, the harder it is for the manager to produce exceptional returns. Because small companies offer a limited number of shares to the trading public, a manager of a small-cap fund that has too much money in it can't put enough money in any one stock to make a significant difference in its performance.

As a result, a small-cap fund that's being offered to thousands of investors through a 401(k) might deliver lackluster returns. "A good small-cap manager wouldn't want to be in a 401(k) plan anyway," Roge adds. "It would be very difficult to put that money to work."

And your plan might have only one foreign fund option. In many cases, you can just ignore it. Why? Well, the average foreign stock fund has produced mediocre returns over the past five years. Another reason: Since an increasing number of U.S. companies are developing multi-national business models, most domestic mutual funds probably have some international exposure. But if your plan offers a great foreign fund, like the

(TBGVX) - Get Tweedy Browne International Value Report

Tweedy Browne Global Value, funnel some of your money into it. This fund, after all, has outperformed the S&P 500 over the past one, three and five years.

With these suggestions, you're on your way to a less risky retirement portfolio.

In keeping with TSC's editorial policy, Dagen McDowell doesn't own or short individual stocks, nor does she invest in hedge funds or other private investment partnerships. Dagen welcomes your questions and comments, and invites you to send them to

Dagen McDowell.