Ask Dr. Don
By Don Taylor, Ph.D., CFA • Bankrate.com
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.
Chance
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.
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.
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
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final decisions or implementing any financial or investment strategy.
-- Posted: Nov. 22, 1999
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