If there's one thing the past three years have taught most investors, it's a new respect for risk.

To the surprise of some, we've found that we can lose real money in the stock market. In other words, risk isn't just theoretical. The current bear market has been a sobering influence.

Among the hardest hit investors have been retired people who rely on their investments to meet their needs. When they experience significant losses, these people usually don't have many options except to reduce their standard of living.

Obviously, the prudent course for retirees is to avoid large losses in the first place. But not everybody is sure how to do that, including Clark in Fort Wayne, Indiana. "How would you position a 65-year-old retiree's portfolio so it would average 7.5 percent over the next 20 to 25 years?" Clark asked via email. "Can I get there if I keep 10 percent in cash?"

Without knowing anything else about Clark, I can say for sure that keeping 10 percent in cash won't stop him from achieving his goal - as long as he does the right things with the other 90 percent of his portfolio.

Clark's expectations also come into play. If he wants to make a minimum of 7.5 percent every year without ever taking a loss, he's going to be frustrated. To achieve a real return on his investment after inflation, he'll have to take some risk. But he can control that risk in a couple of ways.

The most important decision Clark will make about his portfolio is how much to allocate to stock funds and how much to have in fixed-income instruments like bond funds and (because he seems to want a cash stake) money market funds.

At investment workshops, I ask participants which of three possible goals they have.

• Do you want to beat the market?
• Do you want to find the highest return possible within your risk tolerance?
• Or are you looking for the lowest-risk way to get the return you need?

Clark seems to fall into the third group, and he isn't asking for a very high return on his capital.

In the past half century, it hasn't been difficult to achieve a compound return of 7.5 percent. I think Clark has a high likelihood of attaining that return if he invests 20 to 30 percent of his portfolio in a widely diversified group of low-cost equity funds, with the rest in fixed-income funds -- and the fixed-income portion can include 10 percent in money-market funds.

We recommend an equity portfolio of low-cost index funds that include U.S. large-cap stocks, U.S. large-cap value stocks, U.S. small-cap stocks, U.S. small-cap value stocks - and the same asset classes in international stocks, plus an emerging markets fund. We believe short-term bond funds are the best vehicles for the fixed-income part of a retirement portfolio.

Over the past 33 years, from 1970 through 2002, a portfolio with 30 percent in diversified equity funds and 70 percent in short-term bond funds had an annualized return of 10.1 percent. This strategy's worst 12 months was a loss of 6.4 percent, and there was never a three-year period with a return less than 5.4 percent.

By decreasing the equity allocation to 20 percent, an investor over that period could have cut the worst-12-months loss to 2 percent; and the worst three years was a gain of 10 percent. This combination had an annualized return of 9.4 percent, still significantly higher than Clark's stated objective.

Both those strategies made money in 2002, by the way.

Even though an all-bond portfolio would have exceeded Clark's target return over the past 33 years, we think he should own some stock funds, for two reasons.

First, he needs the possibility of growth of assets in case inflation should heat up. Second and more important, bond returns have been boosted heavily by falling interest rates over much of the past 20 years. That effect cannot continue much longer, and interest rates are likely to increase during his retirement, which would adversely affect bond prices.

There's a second dimension of retirement planning that Clark should address, because I think he' probably concerned about another goal: to make sure his retirement money never runs out. One of our most popular reports, "Making Your Retirement Money Last a Lifetime," addresses that very concern.

To make your money last, you must not only earn a proper return and avoid big losses. You must also avoid prematurely spending it.

While investors accumulate money, the rate at which they add to their savings is crucial. After they have retired, their withdrawal rate is crucial.

Based on extensive statistical studies and experience with hundreds of retired clients, I can make two general recommendations to Clark.

First, plan on increasing your withdrawals over time to keep up with inflation. A retirement income of $3,000 a month would have seemed quite comfortable to many people in 1980. But 20 years later, in 2000, that would have purchased only $1,346 worth of goods at 1980 prices.

Second, plan for a conservative withdrawal rate from your portfolio. If you can limit your annual withdrawals to 6 percent of your (presumably growing) portfolio size, you have a good chance of staying solvent for 25 years or more.

Clark has put himself ahead of the game by taking the trouble to figure out what return he thinks he'll need from his investments but the issues may be slightly more complex than he realizes.

I also recommend reading "When Your Portfolio Starts Paying You," which discusses how retirees can stack the odds in their favor and minimize the statistical probabilities of running out of money.

If Clark deals straightforwardly with these issues now, he'll maximize his opportunity to do what he should do during retirement: Finding new ways, and rediscovering old ways, to enjoy life.