If you are in line for an inheritance, how you invest that money can make all the difference in the world. Getting a large inheritance is likely to be a once-in- a-lifetime opportunity, so you need to make the most of it. That means determining what you need to get out of the money, both for the short term and the long term. Once you have answered those questions, you can work on a strategy that will help the money last for a lifetime.
Determine whether you need to use some of the money for living expenses, or if you can afford to leave the money invested for the long term. Money you need within the next five years should not be put at risk, so take that money off the table and place it in safe investments.
Divide the inheritance into long-term and short-term piles. Invest the short-term money, the money you will need within the next five years, in safe investments that are guaranteed not to go down in value. Examples of these investments include certificates of deposit, savings accounts and money market accounts. Since these investments are guaranteed by the FDIC, you will not have to worry about losing any of the money.
Contact several mutual fund companies and request a prospectus for their index funds. Index funds hold all of the stocks in a given index, and over the long term those unmanaged funds have outperformed their managed counterparts. Most actively managed mutual funds have failed to perform as well as the relevant indexes over the long term.
Decide when you are likely to need the long-term money from your inheritance. As that date approaches, you can begin to pull some of the money out of the stock index fund and move it to fixed income investments like money market funds and savings accounts. Use periods of stock market strength to trim your index fund holdings. Watch the market closely and sell into periods when the market is at all time highs.
- Keep copies of all your statements, including purchases and redemptions from your inheritance account. Even if the inheritance itself is not subject to taxation, the return you make on your investments might be.