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Ask Dr. Don

Ask Dr. Don

Lump-sum investing

Dear Dr. Don,
I received a large settlement from a workers' compensation case. I need to figure out what to do with this money to ensure that it will earn enough to help with the children going to college, retirement, buying a home and paying off the credit card debt that's accrued from me being unable to work.

I'm 37 years old and have a few hundred thousand to deal with. I'm pretty sure you will suggest that I find a financial Adviser to help me and that's fine, but I also want to know what types of investing should I expect that person to suggest if they know what they are doing? I don't want to be one of those people who get large settlements and end up losing it for whatever reason.

Dear Chance,
You've done well in defining the issues on your own. You've identified what financial goals you want this money to accomplish. Now you need to figure out how to invest the money so that you are able to get a sufficient return to pay for these goals.

Although it sounds like you want to avoid spending principal, it makes sense to pay off the credit cards, and may make sense to prepay the children's college tuition. Most state plans allow you to lock in today's tuition rates.

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You want your investments to increase your purchasing power. To do that, they have to earn a return greater than rate of inflation on what you'll be purchasing in the future. College tuition costs have been increasing faster than the general rate of inflation, so it might make sense to lock in their costs today. For more on the programs offered in all 50 states you can refer to U.S. News Online.

Your investments should be in a combination of stocks, bonds and cash. By cash investments, I mean money market investments such as Treasury bills, money market mutual funds and short-term CDs. (The money market describes the market for short-term debt with a maturity of less than one year.) Your personal residence can be the real estate component of your investment portfolio.

Yes, I'm going to recommend that you use a financial planner, and I'd prefer to see you hire a fee-based one. A fee-based planner will charge you for the time spent putting together your financial plan vs. a commission-based planner who will earn a sales commission based on the products you buy from him. Look for an individual with a professional designation such as Certified Financial Planner. You should be fine with an initial consult and periodic reviews of your portfolio. Write checks for these consults and stay away from paying someone an annual fee based on the amount of assets you let them manage for you.

Interview a few planners. From your brief description of your situation and the size of your nest egg, you would be better off in mutual funds. Someone that promises the moon should be shown the door. For the stock portion of your portfolio an index approach to investing matches your long-term horizon better than trying to time the market by picking sectors or stocks. Make sure your planner, your attorney and your accountant are on the same page. I wouldn't use your insurance agent or your stockbroker to put together your financial plan.


Investing after retirement

Dear Dr. Don,
My father-in-law has asked my husband and me to help him invest his retirement money because his current mutual fund isn't doing very well. He's given us $2,000 to get him started. What investment would be good for an 83-year-old man? What advice can you give about changing the bulk of his money from the current mutual fund?
Interested In-law

Dear Interested,
Investment returns come from either current income or price appreciation. People who need current income choose investments that provide dividend or interest payments. Growth-oriented investors are looking for investments that will appreciate in price.

Both stock and bond mutual funds have the potential for price appreciation, while money market investments have no potential for price appreciation.

For example, the Standard & Poor's 500 has a year-to-date return of approximately 13.5 percent. Less than 2 percent of that return is attributable to dividends paid. The rest is price appreciation on the 500 stocks in the index.

If the retiree is using the retirement money to live on, they have a greater need for income then they do for growth. Because of that, they tend to shy away from investments with a lot of price volatility. Your father-in-law is past the point where he should be trying to hit a home run in his investment portfolio. Income-oriented funds aren't going to have the return potential of growth funds. That does'nt mean that he should switch out an income fund. And that's as far as Dr. Don can go with the limited information you've provided.

Related information:
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Bankrate.com writers base their answers on our editorial content and advice of financial professionals. We make no claims or representations about the accuracy, timeliness or completeness of such content, advice or the answers provided to you. Our content, advice and answers are intended only to assist you with your financial decisions. However, by its nature such information is broad in scope. Your financial situation is unique, and our content, advice and answers may not be appropriate for your situation. Accordingly, we recommend that you get different opinions and seek the advice of your accountant and other financial advisers before making any final decisions or implementing any financial or investment strategy.

-- Posted: Nov. 22, 1999


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