I would like to invest an inheritance for both short term (within the next 5 years) and long term use (after retirement, in about 35 years). What are the most stable ways I can invest this money? My knowledge of investments is somewhat limited. What benefits does a money market account have over CDs, if any? How about annuities vs. mutual funds?
Hi Catherine, the answer to your first question depends on a number of factors including your goals for the investment and the amount of risk you are willing to take. The amount of the inheritance in relation to your net worth is also a consideration. These are just some of the many variables taken into consideration when constructing a sound financial plan, and as such, they are good starting points for determining what direction you would ultimately choose for your finances. To address your second question, money market accounts are basically savings accounts which are considered very safe. The result of this safety, however, is a low return on your money. The main advantage to money market accounts though is the liquidity, which means you are free to move money into and out of the account as needed. (Note that there are also money market funds which you may invest in as well, but for purposes of clarity I will address funds separately in this response). As for CDs, there are many different types with varying risks and benefits. In general, CDs allow you to loan money to a financial institution for a fixed or variable percentage return at the end of a predetermined time period. CDs usually pay higher returns than money markets but the returns you earn from CDs may still not keep pace with inflation. Additionally, CDs might require to lock in your money for a certain period of time and may penalize you for withdrawing your money before the maturity date. As for mutual funds, these are pooled investment vehicles which provide diversification, active management, and liquidity (most can be bought or sold within one business day). And finally, annuities are contracts between you and a financial institution that generally consist of two phases: the accumulation phase and the distribution phase. In the accumulation phase, you add money to the account and in the distribution phase, the annuity starts paying you distributions. Annuities come in all shapes and sizes and there are many different kinds available. Compared to mutual funds, however, annuities generally have higher fees and they may require you to lock in your money for long periods of time. There are also surrender charges which penalize you for withdrawing funds before a certain period of time. I hope you find this answer helpful. If you have any additional questions, please feel free to reach out.
Another thing you need to consider when investing is the fees involved. Make sure you understand clearly how you will be charged. Annuities and mutual funds usually carry management fees, and many other fees that can eat away the returns on your investments. CD's on the other hand may be cost effective but the grow is very slow since interest rates are so low now. A well diversified portfolio will be the best option depending on your time horizon and risk tolerance you have. learn about the different asset classes there are available. Invest your time learning about the different options available and finding the right advisor for you, that is another way of securing the right returns and reducing your risk of investment.
I think out of the gate, an initial decision should be considered; Do I want to invest on my own, gathering information from various sources as I go along, but ultimately becoming the steward of my own investments?... or do I want to seek out a wealth advisor that I can partner with and then delegate much of the oversight to? There is no right or wrong to this question... it's just a function of comfort level and philosophy. Alexander's information is only as good as the extent to which it is followed and implemented according to your unique situation. And then monitored and adjusted accordingly as things change. And if you are not comfortable with implementation and staying on course on your own, you should consider outsourcing to an advisor that you like and trust. Good luck!