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Short and long term investing?

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?

Jan 13, 2012 by Catherine from Virginia Beach, VA in  |  Flag
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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!

Comment   |  Flag   |  Jul 27, 2012 from Port Washington, NY

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In my opinion, no answers on this board will prepare you to invest on your own. You will be far better off with professional advice from someone who takes the time to sit down and understand your goals, and can explain the risks and potential rewards of various approaches. It's not that any of the information provided is not correct, it is just applying it to your own unique situation, and then having the confidence to stick with your plan (on your own) when the market falls by 30% - is far more difficult.

A professional advisor can help figure out how to best use this money to better your life now, and over the long run.

My recommendation than is similar to Evan's - find a professional to help. Here are guidelines on how to look:

  1. A fee only advisor is paid based on fees, rather than commissions for selling you product. In my opinion, this is the best approach for unbiased advice.

  2. You can hire an advisor to manage the funds for you - basically he will take care of everything. This usually costs a % of the assets under management (more money usually means lower %). You pay more money this way, but knowing things are being handled by a professional gives a certain comfort level.

  3. You can save money by handling the day to day investment management on your own, but hire an advisor to consult with you on an hourly basis. Not all advisors are willing to work this way, but some are.

  4. Your advisor should be a Certified Financial Planner, to give you confidence that they meet educational, experience, and ethical standards.

You can search for an advisor in your local area using the above criteria on this site, or on the CFP board website.

Comment   |  Flag   |  Feb 12, 2014 from Bridgewater, NJ

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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.

1 Comment   |  Flag   |  Jan 14, 2012 from Staten Island, NY
Catherine

Thank you, this is very helpful!

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Flag |  Jan 14, 2012 near Virginia Beach, VA

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Hello Catherine, 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. Good Luck!

Comment   |  Flag   |  Sep 12, 2012 from Miami Beach, FL

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Fulton J. Wood Level 5

Catherine, with some money markets you have check writing abilities, but that defeats the purpose of trying to save. Both CD's and money markets have pitiful interest rates and probably will for some time. In your picture you appear young and should be more willing to take on some risk in a portfolio, while keeping 6 months of cash on hand in a savings vehicle for emergencies.

Comment   |  Flag   |  Jan 13, 2015

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Catherine,

Let me start off by first saying, good job in coming here to get some general guidance. I am sure you will get a variety of answers that should help you get pointed in the right direction.

There are several ways to answer your questions. You really have to ask yourself what STABLE means? Does stable mean accepting a 10% loss or does stable mean accepting a 30% loss in any give year? You really need to make decisions on your risk tolerance and what your willing to lose in a bad or sideways market. I think this is best starting point for how you want to invest your money. You have your time horizons nailed down, the next step is deciding what your appetite for risk is.

As for the short term money, is the 5 year plan something like buying a house? College for a child? Or just a general time horizon? The reason why I ask is, it can help determine what's the best investment option for this money based on the two that you listed. As for money market vs CD. Think liquidity vs slightly higher return with restrictions. If you know for a fact that it's 5 years from a certain date and having that extra 1-2% means the difference in the world then the CD would be a good option. You also have to keep it on the calendar as some CD's have automatic rollover features unless you tell the bank otherwise. So if the security and certainty of NOT losing money is the difference maker as well as that 1-2% for 5 years then yes the CD can make sense.

If the time horizon is maybe 4.5 years or even 3 years then paying the penalty for liquidating the CD early is not worth it, you are better off keeping it in money market. Money market won't get you that slightly higher return but it will be liquid and ready for withdrawal if that day comes sooner than 5 years. Does that make sense?

Now Annuities vs Mutual Funds? That question has been known the cause all out wars between Advisors!! It really depends on who you are asking and what their investment philosophy is. As for me, I would tell you that indexed low fee mutual funds would be the best case for this money you have ear marked for 30+ years. Annuities have their place, as they are tax advantageous, and can provide some life insurance benefits to your heirs (depending on the annuity and how it's structured) At the same time they can also cause problems with surrender charges, high fee's, and poor investment options within the annuity. So if for some reason you need money, it can cost you not only only a surrender charge but also penalties and taxes due to their LIFO structure.

Now not that mutual funds are the end all be all, but you have something that's much more liquid and yes you will pay taxes every year when owning mutual fund , even when they go down in value. At the same time your investment options are much greater and your fee's can be much lower. Lower fee's often time result in better returns. So needless to say, there are pro's and con's to each investment type. they both serve a purpose so an investor looking for something specific. .

As I stated before you really need to go back to what STABLE means to you, then you should sit down with an Advisor or two and go over all your what if scenario's and decide which investment options suit your needs and more importantly, give you the most PEACE OF MIND. I highly recommend sitting with more than one Advisor if you don't already have one. There's nothing wrong with getting a second opinion and making a decision based on the Advisor that most coincides with how you want your money managed.

I hope this helped and best of luck! Feel free to reach out to me if there are any questions you have!!

jeremy

Comment   |  Flag   |  Jan 13, 2015 from San Diego, CA

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You've read some excellent advice from the other advisors responding to your question, Catherine. My two cents includes the following. If you think you'll need X dollars in the short term, 5 years as you defined above, then consider funding your short term investment with 2X just in case. You've got lots of time to grow your long term investment, 35 years as you mentioned. This may be slightly conservative, but it's proven through experience. Best wishes to you!

Comment   |  Flag   |  Mar 14, 2015 from Cedar Park, TX

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Steve Casull Level 13

Catherine, For the love of all that is Holy do not put any money into an annuity until you call me. I know that sounds 'SHARKISH', but I mean only to give you good information, NOT to get your account. . OH! You will be told by 95% of the so called salespeople posing as FInancial Advisors out there that annuities are great, and then they will surely say the "G" word (guarantee). The guarantee is by the Insurance company NOT the government. Annuities pay HUGE COMMISSIONS. They lock in the client. If you need to take out a big chunk for anything, you get penalized unless you annuitize. There is way too much information to convey. Call me!

Short and Long term investing facts:. Prepare yourself, but I disagree again with probably 95% of the Financial Advisors out there and I will explain right now with an excerpt from an article I just had published. Hear me out, and I will give you obvious proof: I'm sick of remaining quiet, as people are falling for typical advice. The typical advisor will allocate your investments more and more to bonds the older you get. The theory is that the closer you get to retirement, the less time you would have to rebuild your retirement after a market fall. First, the day you retire you don't need the whole amount. The mareket rebounded right after the 2009 fall. Second, the typical advisor charges about 1.36% per year in management fees. Bonds yield about 1.60%, so you do the math. The 1.6% is bad enough, but the actual gain as you can see is barely a dribble. Third, are bonds the safe portion of the allocation they are touted as being? No. Look at ANY bond fund chart, load or no-load from 2006 to present. Notice that HUGE dip in 2008, 2009? Now calculate the miserable returns the holders of those bonds received prior to that downturn.SAFE? Facts are facts, if the Equities markets plummet 20%, they will always bounce back. Always. OK, there is a possibility they won't, but if that happens, bank CDs won't be worth anything either, the banks, if they are standing will hand you a stack of paper. This is not the rambling of some conspiracy theorist. I know what I am talking about. The hard part for you is finding the aforementioned "10%" of us. Seek me out if it rings true to you. I have much more information.

Comment   |  Flag   |  Mar 03, 2015 from South Jordan, UT

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