(FORTUNE Magazine) – SOPHIE TUCKER, that grand old vaudevillian, once observed: ''I've been rich, and I've been poor. Believe me, rich is better.'' For investors today, not only is rich better -- it's almost a necessity. True, we wrestled inflation to the ground during the 1980s. But there is no guarantee it won't come surging back in the Nineties. Besides, despite a tamed CPI, many folks still seem to be losing ground. The cost of life's main events, for example, have run well beyond the broad price indexes, and even outpaced most investments. The average tab for a normal hospital delivery jumped a spanking 14.4% annually over the past ten years, to $4,640. By comparison, the Standard & Poor's 500 stocks fell short, returning 13.9% a year on average over the same period. Feeling enriched by the 54% average appreciation in prices of homes over the past decade? Don't. The cost of a cemetery plot in Richmond, Virginia, rose faster -- 64% -- over the same period, increasing the total price of dying to over $5,000.

The fight to stay ahead of rising costs will be tougher in the Nineties, even if inflation stays calm. Says Gary Brinson, president of Brinson Partners, a Chicago investment advisory firm: ''We're not going to have the kind of investment returns that we had in the 1980s.'' The markets in stocks and bonds have cooled, and economies around the world are growing more slowly. But even if you cannot count on ever-rising markets to lift all your boats, you now have more investment vessels than ever to choose from. Take mutual funds: In 1980, Lipper Analytical Services, the Summit, New Jersey, financial research outfit, tracked 643 funds. Today Lipper follows over 3,000 of virtually every type and size. In fact you can now invest in many ways that used to be open only to the pros. You can buy funds that invest in stocks just about anywhere in the world, or in a single sector of the economy -- health care, say, or biotechnology. Some bond funds invest in the debt of countries all around the world; others confine themselves to municipals in a single state. Brokers and investment bankers now package and market nearly every kind of financial asset. You can buy a piece of your neighbor's mortgage or a contract that guarantees a future price for an ounce of gold or a quart of orange juice. The task is to find your way through this financial marketplace. More than ever, investors need to devise a strategy that matches specific goals with the investments most likely to meet those goals. The challenge goes beyond choosing specific stocks, bonds, or mutual funds. You also need to combine your purchases so that you get the greatest return for your money at the least risk to your principal -- and peace of mind. Some investment verities remain. Says Theresa Havell, director of fixed income at Neuberger & Berman, a New York City money management firm: ''There is no more important decision than asset allocation. It is the one constant in investing.'' Its significance was reaffirmed last summer when Brinson and two co-authors published a study of the performance of 82 large pension funds in the Financial Analysts Journal. The new research confirmed the finding of a similar study they did five years ago: Asset allocation -- how you deploy your dollars among stocks, bonds, cash, and so forth -- determines more than 90% of the return. The individual stocks and other securities that the pension funds picked had only a negligible effect on how well they did. You don't need an MBA to do your allocating. Nor will you need an oracle who can forecast the direction of interest rates. But following a little ancient advice is essential: Know thyself. That education begins with defining your financial goals. Seems easy. With money, as with love, the point is to make lots of it, right? Not exactly, says Thomas Bailard, head of Bailard Biehl & Kaiser, a money management firm in San Mateo, California. You've got to specify what you will spend the money on. Says he: ''Making 15% a year on your money isn't a goal. A goal is financing your son's college education in 2002 or taking a six-month sabbatical in Tanzania in 1995.'' Identifying the uses your investments will be put to allows you to determine your time horizon -- the number of days, months, or years that you can allow to pass before you need to use the money. Your time horizon, in turn, helps you assess the level of risk you can tolerate in your portfolio. Risk here means the variability of financial returns. The more an asset fluctuates, obviously, the greater the hazard that the price will be in the pits when you cash out. It may take years to realize the gains from riskier investments. But over time, the often wild swings in returns from financial assets tend to average out in line with historical norms. Since the end of World War II, the yearly return on small-capitalization stocks has averaged nearly 16%, on the S&P 500 ; about 12%, on 20-year U.S. government bonds about 5%, and on T-bills about 4%. But there can be long slumps and hot streaks. During the 1980s, for instance, small stocks averaged more than six percentage points below their postwar norm. While you are waiting for normal times to return, resist the urge to tinker too much with your portfolio. Many investors pull out of stocks when they fear the market is headed south and jump back in when they think the Dow is rising again. But according to a 1986 study by professors Richard Woodward and Jess Chua of the University of Calgary, you are better off simply buying and holding your stocks. What you make in the bull markets far outweighs what you lose to the bears. When markets move up, they tend to do so in sudden, short spurts. In order to improve your return by timing the market, the academics found, you would have to call the peaks and troughs correctly at least 70% of the time. Year after year inflation squeezes your dollar smaller and smaller. That was easy to forget during the 1980s, when nearly every major financial asset class beat inflation. It's not always so. The 20th century has seen five periods of rapid inflation, when the average annual rise in the consumer price index was 8.3%. During those periods the average annual rate of return for long-term corporate bonds was a meager 3.1%, while Treasury bills and commercial paper earned an average of 4.7% a year. But the S&P 500 outgalloped inflation by a wide margin, paying investors 12.1% annually, on average. Small-company stocks can offer even richer returns than their larger brethren on the S&P 500. Stock prices generally reflect earnings growth, and because small companies start from a lower base, they can grow faster than bigger companies. Some small companies provide a tempting double dip. Not only is their sales base small, but they may also be in a new industry that has great growth potential. One favorite among small-company mutual fund managers is Ionics Inc. in Watertown, Massachusetts, with $128 million in sales last year. Ionics sells bottled water; it supplied over ten million gallons to the thirsty, dusty troops of Desert Storm. But it also manufactures water-purification equipment. It just broke ground on a big new desalination plant in Santa Barbara, California. Problems with supplying clean, good-tasting water are expected to increase in the coming decade, particularly in California. The growth prospects for Ionics thus look doubly bright. ; Be prepared for potholes on the road with small stocks. A case in point: Investors in small stocks lost 50% in 1931, earned 143% in 1933, and lost 58% in 1937. For the second half of the 1980s, little companies averaged an annual return under 1%. But lately they have been surging. From January to August of this year, little stocks -- the equities of the smallest 20% of publicly traded companies, as measured by market capitalization -- have returned 36% to investors, compared with 23% for the S&P. Says Laurence Siegel, a managing director at Ibbotson Associates, a Chicago investment adviser: ''Small stocks represent one of the best growth opportunities in the market right now.'' CROSSING borders works magic with stock portfolios. Investing in international equities returns more while lowering risk. A study by Phillips & Drew, a securities unit of Union Bank of Switzerland, shows that in the 1980s the average annual rate of return was 16.8% for a basket of stocks distributed over the world's markets according to the size of the underlying economies, compared with the S&P's 13.9%. And the U.S. equities were 10% more volatile. Americans have been slow to invest outside their country. That was more understandable -- and less of a disadvantage -- say, ten years ago, when U.S. securities made up about half the world's market capitalization. Today they account for only about a third of it. Japan makes up roughly another third, the rest of the world the remainder. Like first dates, Americans' efforts to invest abroad have been tentative. Says Rolf Hedinger, head of international portfolio management at Union Bank of Switzerland: ''U.S. investors who go overseas usually allot just 10% to invest internationally. The number comes right out of the air.'' It makes more sense to allocate your assets according to the size of the markets around the world, Hedinger says. By that logic, about two-thirds of your stock portfolio should be invested abroad. One reason for the American reluctance to go overseas is worry about the dollar. But currency fears are easily blown out of proportion. Of the 17.3% average annual return that non-U.S. stocks earned from the end of 1974 to last March, only 1.1 percentage points was due to foreign exchange. All the rest reflected improved earnings of the businesses themselves. Says Brinson: ''Do I need to worry about currency? In the short term, yes. In the long term, no.'' Mixed in the right proportion with stocks, fixed-income securities add stability while taking away very little of your return. According to a recent study by Neuberger & Berman, the average annual total return over the past 30 years from a portfolio made up entirely of stocks was 9.8%. But during that time, annual returns varied from a negative 27% in 1974 to a positive 37% a year later. By allocating 30% of that portfolio to one-year Treasury bills, you would have reduced the volatility of the portfolio by more than a quarter. The price of fewer ulcers? Your average annual total return falls less than half a percentage point (see chart, page 46). BOND BUYERS should be wary of building castles based on the recent spectacular performance of fixed-income securities. The chin-high inflation of the late 1970s and early 1980s wreaked havoc in the bond market. When inflation rises, bond prices fall, pushing yields higher. The reaction occurs because investors demand a yield that is comfortably above the inflation rate. When inflation shot up into double digits in the late 1970s and early 1980s, bond prices collapsed. From 1977 to 1981, even before taking inflation into account, investors in 20-year Treasuries lost an average of 1% a year lending money to Washington. ''But over the later part of the 1980s we essentially recouped that underperformance,'' says Eugene Chung, an analyst for Morgan Stanley. As inflation rates fell, the prices of long-term bonds shot up, producing some of the heftiest capital gains in the history of the bond market. Gambling that interest rates will keep falling, some investors are buying 30-year Treasuries, which are most sensitive to any drop. But, Havell asks, why make the bet? Over the past three decades, 30-year Treasuries have tallied an average annual total return of just 5.9%, compared with 7.1% for five-year notes. And long bonds were almost twice as volatile. If you are hunting for capital gains, go after stocks. They pack a much bigger total return punch. After all, the real goal of investing in bonds is to preserve your principal and earn a rate of return that exceeds inflation in order to maintain or even increase your purchasing power. Intermediate bonds do that nicely. Ginnie Maes may do it even better. These securities, sold by the Government National Mortgage Association, are pools of home mortgages that are guaranteed by the government. They trade freely and pay a relatively high rate of interest. Newly issued Ginnie Maes were recently yielding 8.5%, compared with 7.5% for an intermediate Treasury. You can buy similar securities issued by Ginnie Mae's cousins, Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp.). The risk with mortgage securities is that the maturity is uncertain. If interest rates fall sharply, mortgages can be prepaid by homeowners looking to refinance. As a result, you can get stuck with a pile of principal to reinvest at a lower yield. Municipal bonds have a place in the portfolios of the well-heeled. Recently, newly issued ten-year high-quality munis were paying 5.9%. For those in the 33% tax bracket, that meager-sounding yield translates into a more hearty taxable-equivalent yield of about 8.9%, more than a full percentage point above what AAA-rated ten-year corporate bonds are yielding lately. But investors in lower tax brackets should look closely at what they sacrifice to beat the tax man. What matters is the return you take home (see ''Plenty of Life Left in Munis''). Unless the yield on a muni is at least 80% of the yield on an equally creditworthy taxable bond, you may be better off buying the taxable issue and paying Uncle Sam his baksheesh. Consider foreign bonds too. A basket of them weighted according to the size of the local economy returned 12.8% a year on average from 1980 to 1990. During the same period all-American government paper earned 13.2%, only a hair better. But the global portfolio was 6% less volatile. Real estate can also help stabilize a portfolio. Mother Earth holds up well, especially in times of high inflation. The rates of return for real estate fall about halfway between those of stocks and bonds, but real estate is only slightly more volatile than Treasury bills over the long term. From World War II to the end of 1990, annual rates of return averaged 7.7% for residential housing and 7.5% for commercial properties, according to Morgan Stanley. Current conditions in commercial real estate dictate extreme caution. Over the 1980s, the amount of office space in the U.S. more than doubled. Prices consequently collapsed, and it will take years for the market to stabilize. Says Bailard: ''I asked our real estate expert when the market was going to recover, and he said, 'Not in my lifetime.' And he is 45.'' But there is still plenty of money to be made in real estate, and you don't have to buy a partnership or an entire building to invest. Real estate investment trusts, or REITs, work like mutual funds, except that the fund buys real estate and manages it for its shareholders. Traded on the major exchanges, REITs are easy to buy and sell, unlike real estate itself. American Healthcare Properties and Weingarten Realty Investors are two that security analysts recently recommended. REITs move in mysterious ways. Because they are traded on the stock exchanges, their prices rise and fall with equity prices. But since the Internal Revenue Code requires REITs to pay out 95% of their taxable income to investors, dividends tend to be high. That attracts buyers who want fixed- income returns, and makes REITs look a lot like bonds. At the same time, obviously, REITs act like real estate since ultimately that is what they are. Says Robert Frank, an analyst at Alex. Brown & Sons: ''In the short run, REITs act like stocks. Over six months to maybe three years, they act like bonds. And over the long run, they act like real estate.'' FOR MANY INVESTORS, the best allocation in real estate will be right over their heads. The family home is often the biggest investment you make. If you bought before the inflation-bedeviled 1970s, it may also be the best investment you ever made. If you still own the old homestead, or if you bought recently, think twice before putting more into real estate. It may be true that God isn't making any more of it, but He made a heap of lousy properties before He stopped. Every time a property changes hands, palms are out to collect fees for lawyering, brokering, and the like. Getting rid of an undesirable property is expensive. If you find the dream rental and sign Ward and June Cleaver as tenants, make sure the property brings in more in rent than you pay out for the mortgage, maintenance, and taxes. Though interest rates are the lowest they have been in years, you will still pay around 9% a year for a mortgage. That means that even after seven years you will own only about 16% of the house you buy today, assuming a 10% down payment. True, you have lightened your tax burden over those years because the interest you paid was deductible, but if you sell you will owe a 6% commission to the real estate broker. And if you have had to pay to carry the property too, you may find yourself wishing you had invested in stocks instead. Big capital gains in housing will be rare. Demographic shifts will continue to soften demand. Economists expect prices to rise only modestly as the last of the baby-boomers pass through the house-buying ages. That will occur gradually over the Nineties. Says Joseph Battipaglia, director of research for Gruntal & Co., a New York brokerage house: ''Residential real estate has been a boon for many. I can't say it will pan out 40 years from now.'' No matter what the asset class, diversity is critical. A stock portfolio should contain shares in ten to 20 companies in different industries. You will also want to buy your stocks in round lots to minimize commission costs. That's tough to do unless you have $100,000 or more to invest. A diversified bond portfolio is even more difficult to put together. Unless you have $1 million to invest in bonds, use a mutual fund. Choose no-load stock or bond funds over those that charge fees, or loads, to invest, assuming management quality and track records are comparable. There are even mutual funds that market themselves as ''asset allocation funds.'' But don't look for great returns. Asset allocation funds are basically market timing funds, so they may not be holding stocks at the moment of a big rally. ''And remember, you are buying the manager's allocation, not yours,'' cautions Robert Freedman, chief investment officer for John Hancock's mutual fund operations. Your allocation should reflect your financial needs, which ultimately spring from the disquieting certainties of life: Living will cost more. We will all grow older and more infirm. There will be less time to make nest eggs grow. Even if you're in clover now, this is no time to stop to smell the flowers.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: MORGAN STANLEY CAPTION: HOW THEY DID In the 1980s beating inflation was easy. Global stocks should continue to outpace U.S. equities.

CHART: NOT AVAILABLE CREDIT: LINDA ECKSTEIN FOR FORTUNE/SOURCE: NEUBERGER & BERMAN CAPTION: HOW TO RIDE THE BULL If the volatility of stocks scares you, don't give up. By shifting just a small portion of your assets from stocks to T-bills, you can continue to earn big returns while enjoying a much gentler ride.