We received a recent inquiry from a poet wondering how to invest a small inheritance she received on the death of her father and stepmother in a car accident last winter. The sum was more than $100,000 but less than twice that sum. She says she would be inclined to put half of it in a money market fund under ordinary circumstances. But at the moment, cash in a money market account is "dead money" drawing no interest. What should she do?
Our resident expert, a big fan of the great Bill Evans (left) says you should always have enough money in a federally insured savings account to sustain you for six months or through a crisis of emergency. Savings accounts pay less than one per cent interest at the moment -- something like 0.8 % -- but that's better than nothing and $50,000 put away will let you sleep better at night.
An equal sum put into a short-term bond fund -- such as Vanguard Short-Term Investment Grade Bond Fund (VFSTX) -- makes excellent sense because (1) you get close to a 3% return, (2) Vanguard charges you less than any other firm and is noted for probity in an industry where you can't take that for granted. Bond prices vary inversely with interest rates, so whenever the latter go up -- as they will eventually -- the value of the bond fund will decline. But this particular fund has an outstanding record, and when the rates do go up, you can transfer the balance to the Vanguard Prime Money Market Fund.
That leaves a certain amount of money that can be used for long-term investments if you face no major expenditure (down payment on a house, kid's education) in the near future. The market has not recovered from the devastation of 200, which means you can pick up some blue chips at bargain prices. You might look at dividend-paying shares of companies with good reputations, such as IBM, GE, Pepsi, Proctor and Gamble, Exxon Mobil, Intel. The cardinal rules are (1) Diversify. (2) Pick companies you know whoise products or services you understand. (3) Do not trust any broker. (4) Do not buy a stock because someone recommended it in the locker room. You can open a brokerage account with Fidelity, which provides excellent service. If individual stock-picking freaks you out, a solid alternative is Vanguard Wellington Fund (for very conservative investors) or T. Rowe Price's Equity Income Fund (for moderate risk).