Insider Jeff Fleming

The Best Laid Plans

Any investing decision should be based on both your risk tolerance and your future plans. Why? Find out from our Money Doc. Plus, advice on estate planning.

Dear Jeff:
I would like a suggestion or two concerning how to invest a lump sum of money I will receive upon the sale of my mobile home. After paying off my very small mortgage and a medium-sized car loan, I hope to have approximately $10,000 to invest. My future plans include building a home. I have additional money saved in a Certificate of Deposit earning about 6.5 percent, that will mature soon. How could I change my tactics with that money that could earn a larger return? Thank you for your time and efforts. Any suggestions will be appreciated.

Mindy

Jeff Says:
It's tough to give you a specific answer about investments without knowing much more about your financial situation, including the time frame you have in mind for the purchase of your new home. But, let me try to point you in the right general direction.

In regard to investing $10,000 without reference to a timeline or plan, my advice would be first to determine how aggressive or how conservative you want to be with your investments. Will you lose sleep at night if the stock market drops significantly? Take our Brain Booster to determine your risk tolerance.

Your risk tolerance level will guide you in choosing the type of portfolio to establish. For example, an aggressive investor might have 90 percent of her portfolio invested in stocks and 10 percent in fixed securities. The latter category includes such assets as money-market accounts or certificates of deposit. As you would expect, a conservative investor could have 80 or 90 percent of her portfolio in fixed securities and the remaining portion in equities. Once you determine the makeup of your portfolio, the next step is to find the specific securities to fit each asset class. My recommendation for beginners is to use mutual funds.

My hesitancy with this approach for your scenario is that it is geared to the long-term investor. You said you intend to buy a new home. If you plan to buy that home within the next three to five years, you may need to be careful about investing too much of the $10,000 in securities. Although you lose potential investment return by keeping the money out of the market, you also avoid potential loss or decline in principal value at the very time you need it for the purchase of your new home. Of course, if you wait to buy for a number of years, then determining your appropriate asset allocation, followed by purchasing mutual funds to fit the chosen categories could be the ideal way to get started.

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