Investor's Dilemma; The only way to ensure a safe retirement is to take high risks now.(Roger Hertog on global markets and investment advice)(Interview)(Cover Story)

Byline: Tony Emerson

Roger Hertog says, sure, investors are a bit emotional right now. But they'll be a lot more emotional if they make decisions that ruin their retirement. As vice chairman of Alliance Capital, which manages some $485 billion in investments, Hertog takes the long view. In his 39th-floor Manhattan office, surrounded by classic black-and-white photos of World War II, he shared his views on risk-taking with NEWSWEEK's Tony Emerson. Excerpts:

What's the mood in global markets?

There's a lot of concern, true. But they need to think over the next 10, 20 and 30 years. [Look at] the years 1965 to 2003. This is a long sweep of history--the Vietnam War, high inflation, low inflation, an oil crisis, a constitutional crisis with President Nixon. The S&P 500 was down 10 out of 38 years. The worst 10-year return was 1.7 percent. But over that period, you compounded at 10 percent per year, doubling your money every seven years.

That's very good, but only part of the equation. After taxes and inflation, 10 percent goes to 3.9 percent in real terms. Now look at Treasury bonds. After taxes and after inflation, you've lost about 1 percent a year. The value of your money is eroding. That is the investment dilemma. And that's the kind of thing that doesn't get enough attention because we live in the moment, but we need the money over 30 years.

So do you rethink holding stocks, long term?

No, the reverse. What do you think, there is a free ride, a huge return without a lot of risk after taxes and after inflation? The investment dilemma is that very low risk erodes capital on a real basis over a long period of time. And higher risk creates capital over a long time. That doesn't mean all stocks. There may be an in between, but certainly if it's all low risk your chances of retiring in any serious way, if you're a normal NEWSWEEK reader, is zero.