(MONEY Magazine) – If you've been investing for a decade or so, you should be well on your way to accumulating your first $50,000. In fact, you may already have passed that milestone; an investor who put $200 in stocks each month for the past 10 years and matched the gains of Standard & Poor's 500-stock index would have amassed some $60,000 by now. Once you have such a sizable portfolio, you can boost your profits by buying individual stocks and bonds. By avoiding mutual funds' high management costs, you can increase your annual return by more than a percentage point, the equivalent of an extra $500 to $1,000 a year on a $50,000 to $100,000 portfolio. Choosing your own securities carries risk, of course. But by diversifying and avoiding overvalued stocks, you can limit it. With $25,000, you can make good-size investments in seven or eight different stocks, the smallest number needed for effective diversification. Although < smaller trades could subject you to high commission levels, sales charges for buying and selling $3,000 worth of stock are typically less than 5%. Hold the stocks for four years, and your costs will amount to less than the management expenses over the same period with the average fund. You can realize even greater savings on fixed-income investments, beating bond mutual funds' annual cost in as little as a year. That's especially noteworthy since long-term bonds are likely to be among your portfolio's top performers if interest rates fall over the next nine months as many economists expect. The right portfolio mix depends on your appetite for risk. The safest approach calls for splitting your money equally among moderately priced blue chips, high-yield stocks, and long-term Treasury bonds. Not only will such a mix provide income of around 6% a year, but if interest rates fall half a percentage point, you also could earn an additional 5% to 10% in capital gains. If you are willing to take moderate risks to get a whack at 10% annual gains over a five- to 10-year period, raise the portion of your portfolio in blue- chip stocks to 50%. Finally, investors who are comfortable with a high level of risk may want to include some small growth stocks in place of blue chips and mortgage-backed securities rather than Treasury bonds. And, whatever the risk level of your portfolio, if you are in the top tax brackets, consider municipals, which are likely to give you a higher after-tax return than most other income investments. If you do decide to include riskier investments, you may be better off putting that part of your portfolio in funds, despite the higher long-term costs. That way you'll get the benefits of extremely broad diversification and professional stock analysis. You should also consider funds as an alternative to conservative securities if you think that you might have to sell in a year or two or if you frequently switch your money from one investment to another. Either eventuality could wipe out the cost advantage that individual stocks and bonds enjoy. John Waters, 44, and his wife Monique, 43, of Fort Smith, Ark. have found a comfortable balance between individual issues and funds. After putting $25,000 in bank CDs and zero-coupon bonds to help finance college for their three children, they have invested $77,000 in the stock market. Their holdings include about $46,000 in stocks, mostly blue chips such as telephone companies that pay above-average yields. To pump up long-term returns, though, the Waters have also put about $31,000 in funds such as Twentieth Century's Select and Ultra, which buy the shares of fast-growing firms, and Mutual Shares, whose holdings include the securities of bankrupt companies. ''I don't have time to check on my stocks every day,'' says John, ''so for volatile investments I go with funds.'' After deciding how to structure your portfolio, you'll need to give attention to the building blocks you'll use. Here is a rundown of the best opportunities now in each asset category: BLUE-CHIP STOCKS The shares of large, well-established firms are a traditional haven for conservative investors. Recently, however, stock analysts say many may have become overvalued. For example, Walt Disney, which has gone from $104 to $130 since January, is now trading at a price/earnings multiple of 23, compared with an average P/E of 16.5 for the S&P 500. Seek lower multiples. The top choices are stocks with P/Es in the mid-teens and annual earnings growth of 14% or better. Among them: General Electric (recently traded on the New York Stock Exchange at $70.25), with annual revenues of $41 billion; McDonald's (NYSE, $35.25), with annual revenues of $6.1 billion; and $21.4 billion Procter & Gamble (NYSE, $87.50). Two no-load mutual funds that buy such shares are Gabelli Growth (800-422-3554), with a three-year total return of 78.3% to July 1, vs. 30.5% for the S&P 500 over the same period; and Founders Blue Chip (800-525-2440), with a three-year total return of 31.6%. HIGH-YIELD EQUITIES Stocks with payouts above the S&P 500's recent yield of 3.4% would be prime beneficiaries of lower interest rates. Because high-yield stocks behave a lot like bonds, their prices typically rise when interest rates fall. James Burnett, editor of the Value Income Investor ($295 for 17 issues a year; 407-629-6102), favors the companies with strong finances that have steadily raised their dividends. For example, $247 million A.T. Cross (American Stock Exchange, $30.25), 4% yield, a pen manufacturer and luxury retailer, has no debt and increased its payout at a 13% annual rate over the past five years. Burnett also recommends Southwest Water (recently sold over the counter for $16), 5.5% yield, a small water utility (1989 revenues: $39 million) that serves Southern California and New Mexico. Richard Evans, director of research for Dow Theory Forecasts ($212 for 52 ) issues a year; 219-931-6480), recommends two natural gas distributors that will benefit from rising demand for cleaner fuel: Indiana Energy (NYSE, $20), 6.4% yield, and South Jersey Industries (NYSE, $17.75), 8.1% yield. Among funds that invest in shares with high payouts, Don Phillips, editor of Mutual Fund Values ($375 for 26 reports a year; 312-427-1985), likes two no-loads, Founder's Equity Income (800-525-2440), which yields 4.6% and has earned a total return of 23.5% over three years, and Lindner Dividend (314-727-5305), with a 9.9% yield and a three-year return of 27.2%. NEGLECTED GROWTH STOCKS Many small and mid-size companies offer unusual opportunities to pursue big gains at only moderate risk. Institutional investors have focused heavily on blue-chip issues, ignoring smaller firms with annual earnings growth of 15% or better. Shop with care, though. ''Many emerging small firms have never been tested by a recession,'' warns Peter Schliemann, manager of Babson Enterprise (800-422-2766), a top-performing fund with a three-year return of 26.7% that holds small stocks. Schliemann's favorites include Athey Products (OTC, $8.75), with a P/E of 9, the second largest manufacturer of street sweepers with annual sales of $41 million; $186 million W.H. Brady (OTC, $31), 12 P/E, the leading manufacturer of nameplates and identification markers for industrial and electronic equipment; and $200 million Tennant Cos. (OTC, $41), 13 P/E, a maker of floor-cleaning machinery. TREASURY SECURITIES Among fixed-income investments, notes and bonds issued by the Treasury are virtually free of credit risk and currently yield 8.2% to 8.4%. Intermediate-term issues that mature in 10 years or less are the most conservative choices. As long as you're willing to tolerate greater price fluctuations, though, long-term bonds could be a smarter bet. If interest rates decline, you will reap larger capital gains than you would get on short- term issues. Treasuries can be bought commission-free from any Federal Reserve bank or branch; those with maturities of four years or more are sold in denominations as small as $1,000. MORTGAGE-BACKED SECURITIES Payments of interest and total principal on these issues, which are fully backed by pools of mortgages, are guaranteed by agencies such as the Government National Mortgage Association (GNMA) that have the backing of the federal government. Such securities pay yields as much as a percentage point above those of Treasuries, but they generally require minimum investments of $25,000, and their terms are complex. With less than $25,000, consider a no-load mutual fund such as Benham GNMA Income Fund (800-321-8321), which currently yields 8.9%. TAX-EXEMPT BONDS Municipals recently offered investors in the 28% federal tax bracket or higher (taxable income of $32,450 or more for couples filing jointly; $19,450 or more for singles) yields as much as a percentage point above after-tax yields on corporate bonds of similar maturity and credit risk. If you're in the 33% bracket, for example, a 6.5% tax-free yield is equivalent to a taxable yield of 9.7%. In addition, interest on bonds issued in the state where you reside is typically exempt from state and local taxes, which can add the equivalent of a half a point to your yield in a high-tax state. Some municipal issuers are undergoing financial strain, but you can avoid that risk by purchasing pre-refunded munis, which are backed by escrow accounts of Treasury securities. Christine Carter Lynch, editor of the Lynch Municipal Bond Advisory ($250 for 12 issues a year; 212-249-9595), recommends Southern California Public Power Authority 11.25%, pre-refunded to be redeemed in 1995 at 103, which recently yielded 6.5%; Ocean County, N.J. 8.7%, pre- refunded to be redeemed in 1996 at 102 and yielding 6.6%; and New York City General Obligation 8.75%, pre-refunded to be redeemed in 1997 at 101.5, yielding 6.6%.