First, let’s examine the changes in the interest rate environment. Interest rates have been steadily declining since the early 1980’s. A client recently told me how he bought a home with an interest rate of almost 18%--and was glad to get it! Now, homebuyers are borrowing money at less than 6%. When I started in the industry back in 1987, I remember offering 30-year government agency bonds paying 12%. Now a 30-year Treasury bond yields 5%.

The long-term decline in interest rates over the last 20 years has resulted in rates that are at 40 year lows. The next trend is going to be for interest rates to rise. I don’t expect them to jump up overnight, but to rise slowly over the next several years.

As interest rates decline, the value of an investment in bonds increases. Those investing in bonds and bond mutual funds over the last 20 years have been handsomely rewarded. But the opposite will occur over the next 10 years. Those who continue to invest in bonds and bond mutual funds are going to find their return significantly lower than what they are used to.

Once considered a safe and stable investment, bond investors will be at increased risk of falling behind. It is likely that those investing in bonds could have an annual return of 3-4% or less. You should reduce the percentage of your portfolio that is currently allocated to bonds. I am currently recommending only 20% of my conservative clients portfolios be allocated to bonds.

I am recommending that my clients turn to real estate based investments for that portion of their portfolio designed to provide stability and income. Real estate does not react to changes in interest rates the same way that bonds do. In particular, I am recommending that my clients allocate 20% of their portfolios to a combination of public and private Real Estate Investment Trusts (REITs). These should provide an income stream of 6%-8% per year plus some additional capital appreciation.

It is important that caution be exercised when investing in REITs. There are many different areas of the real estate market in which you can invest including retail shopping centers, malls, office buildings, warehouses, condos or apartments. Each comes with its own set of risks, but properly managed REITs should be an important part of any portfolio.

Now, let’s take a closer look at changes in the stock market. Stock investors have just been through 3 terrible years of losses from 2000 through 2002. This has caused many investors to flee stocks for the relative safety of bonds. But the economy has now turned the corner; businesses are recovering, and the markets should continue to do well over the next few years. I am recommending that my clients increase the percentage of their portfolios allocated to the stock market in 2004 to 50%.

Investing in the stock market can be volatile, so it is vital that you take steps to protect yourself. My firm has developed a portfolio management and protection system so revolutionary that we are patenting several aspects of it. I will share more about it in a future article, but those investing in the stock market need to learn from the past. The times of buying a stock or mutual fund, throwing it in the drawer and forgetting about it are over.

I recommend my clients keep the remaining 10% of their portfolios available as an emergency reserve and as money that will be available to take advantage of unique opportunities as they arise.

Remember, the individual investments you choose are vital to your overall success. Unless you have a trusted advisor actively watching your portfolio, don’t just throw it in the drawer and forget about it.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at http://www.guardingyourwealth.com