Before investing the inheritance, think about time

Q If a person in the early-60s age group is basically debt-free and inherits some money, say $10,000 to $40,000, how should a person invest it? TIPS? CD or CD ladders? Savings account? Bonds? Stocks?

JB

A Well, those are all good investment choices. But a key question for deciding where to put the money is what's your time frame?

It's always helpful to divide savings into two broad categories. The first is your safe money. It's the money you've set aside for everything from a car breakdown to blood pressure medication to taking a vacation overseas. The critical question is whether the money will be there when you need it. You'll want to place this money in risk-free to relatively risk-free securities. All the main safe options rely on U.S. government backing rather than private sector promises. The trade-off for avoiding risk is a minimal return. It's pretty stunning right now how little we're getting on our safe savings, but it's still a reasonable trade-off to preserve the principal value.

I would stay short-term with CDs and Treasury bills. This way, you'll be able to quickly reinvest the money if interest rates rise on stronger economic growth and rising inflation fears. Treasury Inflation Protected Securities (TIPS) are wonderful, but because of the way they are taxed they're usually best in a tax-sheltered account. However, the federal government's inflation-protected savings bonds are a good option. Your money will compound, tax-sheltered, until you cash them in, and they're a good inflation hedge.  

The other broad-brush category is investments at risk to the mood of the market casino. The potential return is much higher, but so is the risk of a shortfall or a loss. For instance, Wharton School finance Prof. Jeremy Siegel has calculated that since the early 1800s, the stock market has sported an average annual return of 7 percent, after adjusting for inflation.

But consider that the inflation-adjusted Standard & Poor's 500 composite rose by 666 percent during the long bull market of 1982 to 2000, according to calculations on the financial website www.dshort.com. Yet from 1968 to 1982 stocks fell by 63 percent. Similarly, from its high in 2000 to its low in 2009 the S&P plunged by 59 percent. It has since rebounded 41 percent.

Why would someone in their 60s put inherited money at risk in the stock market (or corporate bonds)? There are plenty of scenarios where it could make sense. For instance, you're still young. So if you have a strong financial foundation, putting money in equities could boost your portfolio's overall potential return. It adds some growth to the mix. You could also decide that you won't need to tap the money but you would like to invest it for your grandchildren as part of your estate. In that case, you'd be investing with a time horizon much longer than your life expectancy.  

Of course, depending on how much money you actually inherit you'll probably want to do a mix of safe and risky investments, setting aside some money for fun and emergencies and the rest into higher-yielding securities. And when I say "risky" investments, I'd still stick with blue-chip corporate stocks and high-quality corporate bonds. But I'd steer clear of junk bonds. Forget currency speculation. Commodities are too volatile. Keep it simple and embrace quality.

Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org.

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