Don't let windfall ignite spending

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Author: John Waggoner

Section: Money, Pg. 02b

Mutual fund companies like to tell you that, at your current rate of savings, you'll be reduced to a diet of fresh gravel when you retire. And that's if you manage your money wisely.

What they don't mention is that sometimes fate smiles, and you get a big chunk of money all at once. You could get the money for a sad reason, such as the death of a relative, or for a happy reason -- such as the sale of your condo for $2 million.

People who have handled their affairs well all their lives suddenly feel like rank incompetents when handed a big sum. But there's no need to. Start with these steps:

Open a money market account. Park your money somewhere safe and don't do anything for three to six months. If you've just inherited the money, you're not going to be in the mood to think about investing for a while, anyway. If you just made a ton of money in real estate, you need a few months to stop thinking that you're God.

The average money fund yield is 4.17% now, and it's likely to rise in the next few months as the Federal Reserve raises rates. One suggestion: Vanguard Prime Retail fund currently yields 4.47%. If you want a higher yield, consider a bank CD. You can find the highest CD yields in the nation in this section of the newspaper every Friday. (Today, Savers' scoreboard is on 3B.)

Make a list and prioritize it. Sure, you want a Corvette. And heck, Dad would have wanted you to have one! But you might start to think differently if you rank the list from least to most important.

Paying off any high-interest credit card balances should be high on the list. You may also want to pay off other debt, such as car loans, if they are cramping your cash flow.

If you have a low-interest mortgage, and no problems making the payments, then burning the mortgage should probably be a lower priority than college for the kids or retirement for yourself. The return on paying off the mortgage is about the same as the interest rate on your loan. If you have a 5.5% mortgage, you can probably do as well or better by investing the money.

But it's your money and your list. If you think that you can pay off the mortgage and invest what you'd otherwise pay on your mortgage, give it a shot.

Make a timeline. The more time you have, the more aggressive your investments can be. You'll have time to make up your losses if you invest in stocks on the eve of a major downturn.

If your goals are far off -- say, 15 years or more -- load up on stocks. If your goals come sooner, temper your portfolio with bonds and money market securities, such as CDs and money funds. Those will ease your short-term losses.

The chart shows how different portfolios have performed over time. Thanks to the 2000-2002 bear market, a mix of stocks and bonds would have fared better than an all-stock portfolio. Over 20 years, however, the all-stock portfolio fared best.

Start shopping for investments. If you want a low-cost portfolio, then index funds are for you. These boot the manager and simply follow an index, such as the Standard & Poor's 500-stock index. The Vanguard Group is the king of index funds, but most major fund groups offer them these days. Low costs are one major argument for indexing, so look for the index funds with the lowest expenses. Vanguard Total Stock Market (Ticker: VTSMX) is a good place to start.

If you want an active manager, here are a few suggestions. These large-company stock funds all have good long-term records and experienced managers:

*Selected American Shares (Ticker: SLASX). Managers Chris Davis and Ken Feinberg look for stocks with good growth prospects and reasonable prices, relative to earnings.

*Masters Select Equity (MSEFX). This multimanager fund picks from among the best managers in the business.

*American Century Equity Income (TWEIX) This conservative stock fund looks for undervalued stocks with decent dividend payouts.

*Harbor Bond (HABDX) is a good place to start with bond funds; it's run by Pimco star Bill Gross. If you prefer tax-free municipal bonds, consider USAA Tax-Exempt Intermediate-term Municipal (USATX).

All these funds are just starting points. As you become more comfortable with investing, you'll be able to form your own portfolio with other funds. And bear in mind that there's no shame in hiring an adviser. You can find fee-only advisers, whose advice isn't swayed by commissions, at www.napfa.org. --- John Waggoner's column appears Fridays. E-mail: jwaggoner@usatoday.com.

(c) USA TODAY, 2006