• • • • • • • • AND... MONEY's best places to retire

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NEW YORK (MONEY Magazine) - Whether or not success in life is about just showing up, as Woody Allen claimed, success in retirement investing is about proper asset allocation. Divide your retirement savings to strike the right balance between maximizing return and minimizing risk, and you're well on your way to reaching your goals.

For most people, the best way to implement a smart retirement investing strategy is with low-cost index or actively managed mutual funds.

But I believe that if you've got the time and the inclination, you can do even better by devoting some of your portfolio to big blue-chip stocks. They're the safest and the simplest to research, and if you hold them for long periods, you can gain cost, control and performance advantages over mutual funds.

Let me explain the case for stocks and offer some guidance on how to look for specific issues. See the table below for a list of 14 timely choices.

If you hold a stock portfolio long enough, the commissions you pay to buy and sell are less than the annual fees and expenses of a mutual fund portfolio.

In fact, if you use a brokerage at which commissions to buy and sell are under $20 a trade and you hold your stocks for at least five years, your costs will be as low as or lower than those of most index funds. A total of $40 to buy and sell 100 shares of a $40 stock works out to 1 percent. Spread over five years, that's the equivalent of a mutual fund with a fifth of a percentage point in annual expenses.

The comparison is far more favorable in specialized sectors such as stocks with high dividend yields, where it's hard to find a suitable index fund. In those cases you'll have to choose an actively managed fund with fees of 1 percent a year or more.

Relying on mutual funds is convenient, but it greatly diminishes your control. You can decide when to sell your fund, but you can't pick and choose among its holdings, selling all the stocks in which the fund has a loss, for instance.

Moreover, with a fund, you may get a capital gains distribution in a given year that causes you to pay extra income tax, and then get nothing in another year when you easily would have been able to offset the gain with a loss.

Owning individual stocks, by contrast, gives you far more discretion about when and what to sell. That will allow you to delay, and sometimes reduce, your tax liabilities.

Selecting individual stocks can improve your returns in two ways. You can fine tune your portfolio mix more precisely than you can with index funds, and you can take advantage of value opportunities that arise from time to time.

Traditional retirement investing advice assumes that you become more conservative as you age, chiefly by adjusting your mix between stocks and bonds. Finer adjustments to your portfolio can improve your profits without compromising safety.

For example, a stock that provides most of its return in the form of dividend income, rather than in price gains based on its earnings growth, will behave a lot like a bond -- and still be likely to offer better returns.

Thus you can make a portfolio more conservative by moving money from growth stocks to shares with dividend yields above 2 percent. You can also use stocks with yields above 3.5 percent, such as electric utilities, in place of part of your bond allocation. You'll get much of the diversification that bonds give you, but the stocks also offer at least a little long-term growth. That can give you a higher return than you could get from a portfolio split simply between bonds and the S&P 500.

In addition, high-yield stocks have a tax advantage over bonds. While dividends are generally taxed at a rate no higher than 15 percent, bond interest counts as ordinary income. Think in terms of the objectives of your portfolio mix rather than being wedded to specific allocations, and you'll likely earn slightly higher returns and pay slightly lower taxes.

Basically, you need to focus on stocks you can buy and hold for at least five years. Blue chips tend to be the most consistent performers.

In addition, you can go to leading Web sites, such as this one, and find information on big, high-quality stocks -- including analyst estimates, ratings and important news. Best of all, much of this info is available for free.

You might think there are hundreds of stocks you need to track. But if you screen the universe of companies with revenue and market capitalization of at least $5 billion and look for solid finances and track records at least as good as that of the S&P 500, you get down to about 160 stocks. For statistics on 70 of those that appear most promising, click here for the Sivy 70.

When it comes to selecting specific companies from this list of superior blue chips, there are two things to keep in mind.

First, you should look for stocks that are down of late. When a stock has been shooting higher and higher, you can never really know whether it is close to a peak. But you can identify shares that Wall Street seems to have beaten down unfairly -- based on historical price/earnings ratios, historical yield levels, estimates of breakup value and similar benchmarks.

Second, companies with moderately above average return prospects actually offer the best shot at long-term growth -- chiefly because they are less apt to take a big hit than superstars are. It's easier for a company to deliver 8 to 12 percent earnings growth and a 2 percent dividend yield year after a year than it is for one to grow 25 to 30 percent a year indefinitely.

With a long enough time horizon, you don't need to worry about when a depressed stock will rebound. Buy well, and sooner or later you'll get your reward.

You shouldn't, however, become a total bottom fisher. Buying into a company with lousy prospects in a flat or declining industry, no matter how cheap the stock is, offers at most a one-time score. Even if you're right and the share price rebounds, you'll have to sell the stock and buy something else once the price/earnings ratio reaches normal levels, because earnings growth probably won't be enough to keep the price moving up strongly.

That runs up costs and may prompt you to sell when, for tax reasons, you don't want to. And cost and control were two big reasons to buy stocks in the first place.