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Jan 25 2010 12:00AM

Question


If I got a check for $1 million from an inheritance that was half my net worth and wanted to divide it between a diversified portfolio of up to 10 mutual funds and Exchange Traded Funds (ETFs), should I do it in stages, say over one or two years, or just invest it all right now? I'm 57 with nine years to retirement.

Answer


In the absence of knowing your full financial situation, FPA member David C. Haraway, CFP®, of Merrill Lynch Wealth Management said the following, "I would not recommend investing it all at once, unless you have in your possession 'tomorrow's newspaper' and know with certainty what the future will hold. The odds do not favor you being successful placing a big bet all at once."

"For example, in 1987 we had a stock market in the U.S. that was up about 5 percent for the year, Jan 1 through Dec 31," Haraway said. "Unfortunately we had a high of about 2,700 on the Dow in August and a low three months later in October of 1780 or so, and over half that decline came in a single day."

"You don't mention how much experience you have investing, but if one-half of your net worth was in the market on October 20 of that year and you were down 37 percent on your portfolio, and the bad market news was 24/7 on cable, you might be tempted to sell out that morning," said Haraway. "As it turned out that was one of the very best days to buy I have seen in my career. If you were planning to invest your money over a period of two to four years beginning in January 1987, say, over half your money would be available to invest after the crash of 1987, and you'd feel a lot better."

"Therefore I would advise against going all in on a single day," said Haraway. "Try not to be impatient. I'd try to make monthly or quarterly investments over the next several years."

Learn more about dollar-cost averaging.

Other financial planners, meanwhile, offered this guidance:

FPA member Michael Snowdon, CFP®, of WealthRidge, said, "The short answer is, if you don't need the money for nine years, make your investments when the market dips. For example, if the market is down today, invest some of the money. We are likely to have ample opportunity to work with days where the various markets are down.

"Many market gurus and economists expect that we will have a market pull-back sometime this year — perhaps around 10 percent or so," said Snowdon. "However, trying to time that pull-back is nearly impossible. So, if you have nine years or more, get your money invested and working for you. You might divide your funds into four or five investment objectives, and as the market provides opportunity, invest each one."
 
FPA member Kim Jones, CFP®, of Jones Strategic Financial Planning, offered this take: "The answer to your question involves being able to predict the future of the stock and bond markets. If we knew with certainty that the market would not be falling in the short-term, then it would be advisable to invest the total lump sum all at once."
 
"But, since we cannot be certain that the markets will not fall short-term, financial advisers will sometimes recommend that clients invest lump sums in several stages," said Jones. "For example, they might recommend investing one third of the lump sum now, with an additional lump sum in six to 12 months, and the remaining lump sum in 12 to 18 months."

"We do know that the long-term trend of the market is up and sometimes the ease of investing the lump sum all at once gets the decision off the table," said Jones. "Whichever strategy you pick, it is important that you remain disciplined to the strategy and not make whimsical decisions based on short-term market moves." 

"Also, it is important that you make intelligent choices when you select your mix of mutual funds and ETFs and that the resulting portfolio is well diversified," said Jones. "Although you have nine years to retirement now, make certain that you have adequate holdings of cash and short-term bonds as you approach the five year mark before retirement. You don't want to be selling potentially volatile equity funds in the first few years of retirement should the equity markets be declining during those years."

Learn more about what to do when you receive an inheritance.

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