(FORTUNE Magazine) – YOU HATED the quiche, and the Hermes tie was too expensive anyway. But the 18% average annual return from stocks, the 13% from bonds, the CDs with double- digit yields . . . ah, the Eighties, they weren't so bad after all. Sorry, investors, they aren't coming back. From now to the year 2000, money managers say, the magic number to shoot for is an earthly 10%. Ten, as in the ten fingers on your two hands. Hold them out, and tell yourself one other thing as you tick off the digits: 10% per year won't come easily. Buying Treasuries alone won't do it for you. Blue-chip stocks offer no guarantees, and cash -- well, you've been to the bank, so you know what that's worth. No, to get 10% now you'll have to pick your investments carefully. The perfect portfolio will have to be global in scope, diversified in risk, and eclectic in content. That means looking to the world of small stocks, junk bonds, convertibles, real estate investment trusts, and municipal bonds. It means venturing overseas for crackerjack capital gains in countries where growth is exploding. Do all that, and you may emerge from the Nineties Hermes- less but looking pretty spiffy all the same. All this sweat for 10%, you ask? Aye, mate -- if you're lucky. Historically speaking, the Eighties were such an aberration that the Nineties may have to pay for it. Since 1927, stocks have returned an average of 10% a year and long bonds half that, according to Ibbotson Associates in Chicago. Says Ronald Clarke, who runs $3 billion in domestic equities for Aetna Life & Casualty's investment portfolios: ''I'm nervous. We've just finished a decade when stocks returned almost twice their historical average. How do we get back to the trend line? I think the 1990s will be below average for several years; 1991 was a great start, but we'll take some of that back.'' Ah yes, 1991. If today's flat stock market and miserly yields sting, think of 1991 as the setup. Last year Standard & Poor's 500-stock index kicked out a 30% return, and 30-year Treasuries punched home 19%. Every spinning top has a final spurt. This one came as interest rates were plunging. The recent 6.3% yield on ten-year Treasuries is the lowest in 20 years, the 2.9% yield on money funds the lowest ever. Why do low interest rates matter? As any retiree can tell you, they hurt the income stream, half of the total return equation. But even more important, as interest rates approach zero, the potential for impressive capital gains, the other variable, shrinks. In the bond market, where prices go up as interest rates fall, the relationship is easy to see. Notes Robert Beckwitt, portfolio manager of the Fidelity Asset Manager Fund: ''It is mathematically impossible for ten-year Treasuries to achieve 10% average annual returns in the next ten years. The coupon would have to fall almost to zero to generate enough capital gains on top of the 6.3% yield. People don't realize it, but there isn't much juice left.'' IN THE STOCK MARKET, the relationship between interest rates and prices isn't always so direct. But there's invariably a tradeoff: When interest rates fall, people are willing to pay more for the growth potential of stocks. That means the average price/earnings multiple of the market can expand regardless of earnings expectations. Last year, in fact, the P/E ratio of the S&P 500 rose even more than the drop in earnings would account for -- from 15 to 26. Now the stock market will have to depend heavily on accelerating earnings to eke out gains, since there just isn't room for rates to drop significantly. In a slow-growth decade, that could be hard. Stocks recently sold at 24 times earnings on average, and 30-year Treasuries were yielding 7.4%. According to one commonly used formula, earnings would have to grow more than 15% annually over the next three to five years to push the stock market higher. Wall Street strategists look for 8% average annual gains in corporate earnings between now and 1997, according to the Institutional Brokers Estimate System, which tracks analysts' forecasts. Hmmm. Has anyone considered the possibility of capital losses? Low yields, limited capital gains potential: That's the recipe for tough total returns. How to sweeten the batter? Higher-yielding investments with above-average growth potential are out there, in many fields. But before you analyze your portfolio stock by bond by stock, step back. Ask yourself: How much of my assets should be in stocks and bonds, period? The answers depend in part upon your age, your needs, and your risk tolerance. Choosing the percentages of your portfolio to invest in stocks, bonds, and cash -- the process called asset allocation -- is more critical to investing success than most folks realize. According to Callan Associates, a San , Francisco-based investment consulting firm, asset allocation determines 80% of a portfolio's return. The basic drill is familiar. Because stocks offer long-term growth while bonds give you income, the younger you are the more you should invest in stocks -- up to 80% or so of your assets. In retirement, a 60% bond holding may be more prudent. But don't get too conservative too early. Most investors should own more stocks than they do, just to keep ahead of inflation. Says Harry Miller, 58, portfolio manager of the USAA Income Stock Fund: ''I'm a firm believer that stocks belong in everyone's portfolio. Bonds that paid 13% a decade ago are coming due and can be reinvested at only 6% to 7%. Retired people have had their investment income cut in half, but their expenses have doubled.'' The smartest asset-allocation decision you can make may well be to transfer out of cash. Regardless of your age, most experts say you should keep no more cash on hand than the equivalent of six months' expenses, exclusive of any big upcoming bills, like tuition. Most Americans have far too much in the bank. According to Federal Reserve data, cash recently accounted for $3.4 trillion of individual assets, vs. $2.6 trillion in stocks and $2.4 trillion in bonds. One immediate cure is to own more stocks. The 1990s, after all, may not be nearly as bad as the 1970s, when stocks returned a miserly 6% per year on average. But even so, 10% returns won't be a shoo-in. Today the dividend yield on the S&P 500 is a paltry 3%, leaving 7% for capital gains to make up. Two obvious choices: Buy a stock with an above-average yield and a history of increasing both dividends and earnings, or buy the stock of a company with superior growth potential. Miller of USAA knows the first strategy well. His prospectus commits him to provide a yield that exceeds the market by two percentage points. He invests 20% of his assets in utility stocks with high yields but also potential for growth. Houston Industries, recently yielding 6.8%, and Texas Utilities, at 7.3%, fit the bill. The shares of both companies currently sell at a discount to their peer group, which is yielding 6.2% on average. However, both companies are just beginning to get revenues from recently completed plants, which has increased their cash flow. As the spigot opens, dividends and stock prices should increase. Houston Industries should flow first; it just raised its dividend for the first time since 1988. In addition, 5% of its revenues come from cable television, a venture expected to add to cash flow in 1994 and to profits in 1995. USAA utility analyst Lon West expects Houston to increase its dividend 10 cents, to $3.10, and yield 6.2%, about average for the industry, within the next two years. That would boost the stock price to $50 from the recent $44, assuming no change in the market multiple. Average annual return: 13%. AT THE OTHER END of the spectrum are aggressively expanding young niche companies. They have small market capitalizations and volatile stock prices. Since 1927 their average annual return has been 12%, vs. 10% for the big stocks in the S&P 500. In the slow-growth, low-inflation economy that many foresee for the 1990s, small companies with clear niches can jam. Beth Cotner, an equity fund manager at Kemper Financial Services, thinks health care companies that focus on cost containment and companies in the gambling business are two groups where earnings can expand rapidly. For example, she cites Foundation Health, a California HMO that should see earnings increase more than 20% per year through 1997. The stock, recently $35 a share, trades at 14 times 1993 earnings, a 19% discount to the market. It should reach the market multiple within a year, says Cotner, for a 23% gain. Foundation has an edge: The company has a government contract to serve 860,000 military retirees, a large customer base that gives it muscle to negotiate cheaper rates for hospital care and doctors' services. Sometimes small stocks are undervalued simply because they are underfollowed by analysts. An example: Gtech, a newly public company that operates lotteries worldwide. Cotner looks for earnings to double this year, rise more than 40% in 1993, and thereafter expand at a 30% annual rate. Gtech has dozens of long- term contracts with states and countries and is using that clout to add new business rapidly. It just signed on to run the Texas state lottery, which should become the largest in the country at $3 billion a year. Gtech gets a 4% cut. It is also expanding overseas, most recently to Czechoslovakia. At $26, the stock recently sold for 18 times 1993 earnings, but given its growth rate, Cotner says, it should command a multiple of at least 25. Her target price for the stock in the next 12 months: $35, for a 35% return. In the center of your stock basket, between the go-go small stocks and the steady income producers, will undoubtedly sit a handful of well-known winners with staying power. They'll share several characteristics in tune with the 1990s -- primarily a lean balance sheet, solid management, and exposure to expanding markets overseas. John Snyder, portfolio manager of the John Hancock Sovereign Investors Fund, thinks PepsiCo, Sara Lee, Johnson & Johnson, and American International Group are prime examples of fat-free enterprises with a commanding global presence. Snyder thinks all four can increase both dividends and earnings at least 12% to 15% a year throughout the 1990s. But heck, if Sara Lee is going to beef up revenues by selling bagels in Brisbane, why shouldn't you dabble abroad as well? Instead of staring at a pricey stock market and a sluggish economy, why not take a trip where stock markets are cheap and economies vigorous? Says Fidelity's Beckwitt: ''The most tremendous opportunities investors can find are overseas. Mexico, for example, has completely turned around, and the stock market sells at a reasonable P/E ratio of 11. They've got Harvard and Yale Ph.D.s running the country like a company. Telefonos de Mexico and Grupo Financiero Bancomer look like Philip Morris and Fannie Mae five years ago. You can easily earn 15% returns per year.'' INVESTING internationally now is the perfect way to try buying low and selling high. Morgan Stanley Capital International's Europe, Australia, and Far East index (EAFE) has performed miserably since 1988, losing an average of 5% per year, vs. a 23% average annual return for the S&P 500. Oh, sure, you say. But what if we've hit bottom? From 1983 through 1988, when EAFE stocks consistently beat their U.S. brethren, international investors lapped up a 33% average annual return, twice that of the S&P 500. These EAFE index returns are denominated in U.S. dollars. Investing internationally always adds an extra element of risk: The foreign currency can depreciate against the dollar. In Canada, and now also in Mexico, the risk is moderated because the local currency fluctuates pretty much as the U.S. dollar does. In Europe, however, the risk is more pronounced. Many money managers expect the deutsche mark to fall as much as 15% against the dollar in the next year, so they have hedged their portfolios by selling currency futures contracts. The easiest way to invest in foreign stocks is through a mutual fund. Many mutual fund managers hedge their portfolios to reduce the currency risk. You can also buy American Depositary Receipts, or ADRs, which are shares of foreign companies that trade on an American exchange. (For more, see ''Go Abroad for Bigger Returns.'')

Don't limit your overseas investments to stocks. Foreign bonds are mighty tempting too. As soon as Germany wrestles inflation lower, managers expect European interest rates to tumble, generating double-digit capital gains. Even allowing for the cost of a currency hedge, 10% to 12% returns are likely (see box, ''Bitte, Sprechen Sie Deutsch?''). Says Theresa Havell, director of fixed-income investments at Neuberger & Berman: ''The biggest change investors will face in the 1990s is the rising importance of looking globally. Global bonds offer moderate risk, somewhere between domestic stocks and bonds. They have very attractive real rates of return.'' There's an emerging markets play too: Mexican treasury bills, for example, pay 19%. Investing in any one of the roughly 50 international bond funds offers the easiest entry to the market. An alternative: funds that maintain a constant percentage of assets in foreign bonds. Paul Suckow, Oppenheimer Management's director of fixed income, divides the $1.7 billion Oppenheimer Strategic Income fund evenly among U.S. government bonds, junk, and foreign bonds. Last year investors took home 16%. In America, the only straight bonds with any hope of 10% returns are riskier junk bonds. But there's good news from this war-torn front: The junk market is pretty healthy. Low interest rates and a rash of new equity offerings have allowed many companies to clean up their balance sheets. Defaults are fewer. In both 1990 and 1991, they ranged between $17 billion and $18 billion; analysts predict that junk defaults will not exceed $10 billion this year. Supply has increased just in time for a yield-hungry market. Through August, $32 billion of new junk issues came to market, putting 1992 ahead of the $30 billion record set in 1986. After experiencing near death in 1990, junk bonds have had a tremendous rally -- up 59% in total return on average in 1991 and about 16% so far this year. Falling interest rates and a recovering economy have added a stocklike kick to the securities because the bonds are so dependent upon cash flow. ''In junk, all the company needs is enough cash flow to make the interest payments,'' explains Kingman Penniman, head of junk-bond coverage at Duff & Phelps//MCM Investment Research in Montpelier, Vermont. By contrast, he says, ''in the equity markets the P/E is high and everyone's asking, Will the earnings come through?'' While the economy muddles along, conservative investors should plan to earn their 10% to 12% coupons from junk bonds through a mutual fund. Individual junk issues can be tough to analyze and buy, and they are often callable within five years. Harry Resis, director of high-yield trading for Kemper Financial Services, is finding plenty of bargains, including the 11.125% bonds of Rogers Cantel Mobile Communications, due in 2002. The B-rated bonds recently yielded just over 10% to their 1999 call date. The company, a subsidiary of Rogers Communications, is the only coast-to-coast cellular operator in Canada, with 46% of the market. It has already completed most of its capital expenditure programs, and it's growing rapidly. Resis says, ''In four to five years, the senior debt of this company could become an investment-grade credit. That would add substantial price appreciation, so returns could be better than 15% per year.'' JUNK BONDS are but one of a batch of securities that share a dual nature: They have the appreciation potential of equities but are yield-oriented like bonds. Convertible preferred stocks, convertible bonds, and real estate investment trusts all offer the potent combination of high yields and potential for capital gains, which makes them ideal scouting grounds for 10% returns. Convertibles have proved their worth in the past 12 months. The average convertible fund returned 12.3%, vs. 5.6% for the average stock fund and 11.9% for bond funds. Convertibles come in two varieties -- preferred stocks and bonds, both of which convert into common shares. Both yield slightly less than straight bonds and move with the common shares. The conversion becomes profitable only after the common stock has appreciated a set amount. On average, converts recently paid 6.5%, more than twice the stock market's yield (see box, ''Aladdin's Convertible Lamp''). Real estate investment trusts, or REITs, also trade as stocks and pay bondlike yields. REITs typically own or operate real estate -- apartments, shopping centers, warehouses -- and pass along the rental income to investors. REITs are required to pay out 95% of their operating income as a cash distribution. Because REIT managers avoided buying new properties and office real estate, they are stuck with few non-income-producing turkeys -- unlike a lot of insurance companies and pension funds. REIT managers are practically the only healthy buyers of real estate around. They are paying bargain basement prices at a time when the cost of money is very low. On average, REITs recently paid out 7.8% in yield (for more on REITs, see ''Don't Be Afraid of Real Estate''). STOCKS, BONDS, real estate . . . Sounds good, you say, rolling up your sleeves. But taxes already can eat up much of your gains, and Bill Clinton has said he will raise them if elected. President Bush says he won't, but then press secretary Marlin Fitzwater says that's not a pledge. Many states desperate for revenues are increasing taxes too. In California, the top income tax rate is 11%, up from 9.3% a year ago. Well-off investors there, and in New York City, which has a local income tax, can fork over 40% or more of their taxable take. The answer, of course, is to own some municipal bonds. Long-term munis today pay out an average yield of 6.3%, or 85% of the yield on long-term Treasuries. For investors in the top federal tax bracket of 31%, that's a taxable equivalent yield of 9%. Throw in some state taxes, and you've easily reached the 10% goal. Mutual funds like Dreyfus's General Municipal Bond fund, which has returned an average of 11% a year to investors since 1989, offer the easiest way of investing in munis. Investors with at least $50,000 to put into municipals can set up their own portfolios. Richard Ciccarone, director of tax-exempt fixed- income research at Kemper Securities, recently recommended that investors put as much as 20% of their muni portfolio into the bonds of large suburban hospitals. In the health care crisis, Ciccarone observes, the strong are getting stronger at the expense of the weak. Hospitals with a dominant market share should maintain operating margins, so Ciccarone says their bonds will outyield other municipal alternatives. Currently, A-rated 30-year hospitals pay an average of 6.6%. The higher- rated AA bonds of Kaiser Permanente due in 2021 pay 6.3%; they are a Ciccarone favorite. The hospital chain, the dominant care provider in Oakland, operates as an HMO and has relatively little debt. A healthy hospital for a healthy portfolio? In the 1990s that's a 10% prescription too good to pass up.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: IBBOTSON ASSOCIATES, MSCI EAFE INDEX CAPTION: MAKING 10% NOW WILL BE TOUGH