Invest your lump sum wisely.
If you receive a lump sum payment as a result of an inheritance or an early retirement buyout package, you need to handle that money properly. Failing to take care of that money the right way could leave you without the funds you need to live on. The best way to invest that lump sum payment depends on a number of factors, including how you plan to use the money and what your immediate and long-term needs are.
Long-Term vs. Short-Term
Chances are, you have both long-term and short-term needs for the lump sum payment you just received. You might want to use some of that money to pay down your mortgage or pay off your credit card bills, while reserving the rest to add to your retirement savings. The first thing you should do when receiving the lump sum payment is separate it into short-term and long-term money. The short-term money should be invested safely, in things like certificates of deposit and savings accounts, while the longer-term money can be invested in growth mutual funds and other investments with a potentially higher return.
Low Costs
Keeping your costs low is an important consideration no matter how you invest your money. When evaluating mutual funds and other potential investments for your lump sum payment, you need to check the fees and expenses carefully. If you shop around, you can find mutual funds with expense ratios as low as 0.18 percent, compared to more than 1 percent for the average mutual fund.
Dollar Cost Averaging
When you receive a lump sum payment, it does not always make sense to invest all the money at once. A better strategy can be to invest one-twelfth of the money each month until it is all invested in the stock market fund of your choice. This approach is known as dollar cost averaging, and it serves to reduce the risks associated with the stock market. When you dollar cost average into a stock fund with your lump sum, you automatically buy fewer shares when the stock market is at all-time highs, and more when it takes a temporary tumble.
Index Funds
An index fund can be a good choice for the long-term portion of your lump sum money. Index funds do not attempt to beat the stock market averages by picking and choosing stocks. Instead, an index fund simply buys and holds all of the stocks in a given index, like the Wilshire 5000 or the Standard and Poor's 500. The only time the fund buys and sells stocks is when the makeup of the underlying index changes. This helps to keep costs low, and it eliminates the risk of under-performance as well. A number of studies, including one published at CNN Money, have found that most managed mutual funds fail to outperform their benchmark indexes.
Tags: lump payment, mutual funds, stock market, your lump, that money, funds other
