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Investment choices

Dear Dr. Don,
I will be receiving a settlement in the near future and will have approximately $70,000 to invest after paying off all my bills including my mortgage. We have about seven years to retirement.

We have a Section 457 plan from my husband's work that we will max at 25 percent. We also have my husband's company retirement and Social Security for both of us. What would be the best type of investment for this settlement money?
Connie Cash

Dear Connie,
Deciding where you should invest this money depends on how the rest of your portfolio is invested. You don't want to look at this money as a separate part of your portfolio. Not only do you have a choice between stocks, bonds and money market securities, you also can invest in real assets like your home.

If you're already heavily invested in the stock market, then buying additional stocks doesn't make much sense, especially this close to retirement. It's not that you don't want stocks as investments; you just don't want to overweight them in your portfolio.

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The ideal is to have a portfolio diversified (spread) across investments to reduce the overall volatility of your investments and for your portfolio to increase in value on an inflation-adjusted basis.

The more risk you take on in your portfolio, the higher the potential return. The problem is that you can't spend potential return -- only realized returns.

Putting it all into money market funds (cash) isn't the answer because, while cash investments are very secure, you'll be hard pressed to stay ahead of inflation by investing in Treasury bills. If you can't stay ahead of inflation, your portfolio is losing purchasing power.

I think it's worth your while to get a financial checkup by having a fee-based financial planner review your portfolio, your financial situation and your retirement goals. If you're reluctant to hire a financial planner to take a look at the big picture, you can get a rough idea of what may be appropriate by using SmartMoney's One Asset Allocation Worksheet.

For more specific recommendations about your investments you could use Financial Engines' subscription service. Depending on the level of service you need, the subscription costs between $160 and $300 a year, but Financial Engines offers a full refund if you cancel the service within the first 30 days.

-- Posted: March 21, 2002

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See Also
Investing's magic formula: Allocation plus annual rebalancing
Where do I stash my emergency cash?
Cashing in a CD can be costly
More Dr. Don stories

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