Where to invest now.(Mutual Funds 2003)

Grief over your stock-market losses has followed a familiar pattern. First there was denial: The markets were sure to come back. Then there was anger: Those *@!#@*% dot-con artists and sneaky CFOs! Next came bargaining: A new hot tip was sure to make it all work out. Then the inevitable depression: Early retirement might not be so early, after all.

Now it's time to accept your losses and move on.

That's not easy to do. The current investment climate is formidable. The stock market could be volatile for at least a year, Wall Street experts say, and the trend line won't necessarily trend upward. By contrast, interest rates have nowhere to go but up, making bonds a risky bet.

Even so, financial planners say little has changed from boom times in terms of the strategies investors should use. "The challenge is the same as it has always been: investing appropriately for your needs and circumstances," says Deena Katz, president of Evensky, Brown & Katz, financial planners in Coral Gables, Fla.

You can, however, invest with assurance if you follow our three-step plan. First, revisit the olden-but-still-golden rule of diversification; we'll help you adapt it to your current holdings. Then eliminate your portfolio's stinkers. Finally, look for worthy replacements.

With the help of Morningstar, the Chicago fund- and stock-rating company company, we've identified 40 promising equity funds, many of which are past CR picks that have succeeded in both bull and bear markets. To round out your portfolio, we've selected 20 bond funds with the same stringent criteria. All, except one, in the socially conscious group, are no-load funds that have edged out their peers over at least three years, with the essentials to provide value over the long term.

For the first time, we've added predictions, provided by Financial Engines (www.financialengines.com), a Palo Alto, Calif., company that provides investment-advisory services for individuals, financial institutions, and corporations. In our Ratings, the forecast gives a range of likely estimates of a fund's performance over the next 10 years based on its current holdings, prior manager behavior, and analysis of thousands of potential economic scenarios, among other criteria.