Q: Should I continue investing in the stock market if I can make more than 6 percent in I Savings Bonds and retire in the next five or six...

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Q: Should I continue investing in the stock market if I can make more than 6 percent in I Savings Bonds and retire in the next five or six years?

We have invested in Fidelity Funds since 1996 and have earned a 3 percent total return.

(We invested in Equity Income, Growth and Income, and Tech Sector funds through 2002. Now we are invested in the Total Stock Market index, the Standard & Poor’s 500 index and a bond index fund. The bond index fund is losing money.)

Should we pull out of the market if we have accumulated enough to live comfortably in retirement? Is this situation of no loss but no real gain worth it?

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— E.B., Houston

A: Discouraging, isn’t it? Many people are thinking the same thing.

More important, I Savings Bonds are beating a lot of the alternatives cold.

I Savings Bonds will earn at a 6.73 percent annual rate between now and April. The yield is based on the trailing rate of inflation plus a premium over inflation.

That premium was reduced from 1.2 percent for the May-to-October period to 1 percent for the November-to-April period.

That 6.73 percent yield is 200 basis points (there are 100 basis points in 1 percentage point) higher than the yield on Treasury bonds, well over the 6.24 percent yield on government-guaranteed mortgages, and right in the ballpark with General Motors Acceptance Corp. paper.

So it’s a good deal.

Be aware, however, that the yield will change in May if the trailing inflation rate changes.

The next rate may be lower.

Then again, the yield can decline to an annualized rate of only 4.5 percent and still be competitive with current five-year Treasury notes.

If interest rates continue to rise, I Savings Bonds are likely to be the best fixed-income choice in the near future.

If interest rates continue to rise, the 1 percent real annual return on I Savings Bonds may also beat the return on equities.

Your equity investments, meanwhile, will have five years to deliver a higher return. They may or they may not, but I’ve never liked all-or-none investing, so I’d keep some position in domestic equities.

You should also think about real diversification.

Owning Total Stock Market and S&P 500 funds is like owning two funds with an overlap of about 70 percent because the S&P 500 stocks represent about 70 percent of total U.S. market capitalization.

You can achieve broader diversification in equities by retaining the Total Market fund, selling the S&P 500 index fund and replacing it with a total international stock fund.

Had you done this, year to date (as of Nov. 11) you would be in somewhat better shape.

The iShares EAFE index exchange-traded fund (ticker: EFA) has returned 7.33 percent year to date, while the iShares Total Market Index (ticker: IYY) has returned 3.3 percent and the SPDR 500 ETF (ticker: SPY) 2.4 percent. The Lehman aggregate bond index ETF (ticker: AGG) has lost 2.3 percent.

Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at scott@scottburns.com. Questions of general interest will be answered in future columns.