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With Markets Down, Jumping in Can Be Sound but Scary Plan


Question: I recently transferred money from a former employer's 401(k) into an individual retirement account. The money was invested in a variety of growth-oriented mutual funds, but is now in a money market fund. I would like to move the cash back into mutual funds, but would like to do this over a period of time (up to two years) to take advantage of dollar-cost-averaging. I am 55 years old and do not plan to retire for at least 10 years, and I am willing to take a modest amount of risk. Is this a good plan? Or with the stock market as low as it is, should I move more quickly?

Answer: Historically, people who jumped into the stock market with a big wad of cash and a longtime horizon (that is, with 10 or more years until they needed the funds) typically have done better than those who inched in over time.

That makes sense, when you think about it. In most 10-year periods, the stock market has gone up significantly, so the sooner you get a piece of the action, the better.

The problem is human nature. If the market tanks right after you commit a chunk of your life savings, you probably will feel awful. You might feel so awful that you yank your money out, thus buying high and selling low. That's a bad combination, and one sure to further delay your retirement plans.

So by all means, ease your way into the water, but consider easing a little faster than you'd planned. Many financial planners would say six months is a better period than two years to move your money into the market.

If that seems dizzyingly fast to you, consider compromising at one year.

Before you start, though, make sure your planned portfolio is properly diversified and has a good chunk of bonds and cash as well as stock funds. Anyone who's had fixed-income investments in a portfolio during the last 18 months has seen how important these shock absorbers can be when the stock market swoons.

And put your plans on automatic so those all-too-human emotions--greed and fear--don't divert you from your plan. Most brokerages are happy to set up an automatic weekly transfer of money from one account to another.

Inheritance in Form of Annuity Has Drawbacks

Q. We have a 30-year-old, divorced, spendthrift daughter. When we recently updated our estate-planning documents, we decided to leave part of her inheritance to her in the form of an immediate annuity. She's not in the best of health, so we directed that an annuity with a 15-year "period certain" be purchased, so payments would continue for at least 15 years, whether or not she lives that long (her children will be the beneficiaries if she dies). Is there anything wrong with our plan?

A. Such annuities are a time-honored way of keeping principal out of the hands of brainless heirs. The insurance company sends out a check every month for the rest of the heir's life or, as in your description, for a guaranteed period even if the first beneficiary dies.

The disadvantage is that the checks eventually stop, perhaps before your grandchildren get to benefit. If that concerns you, you have another option--a bypass trust that gives your daughter income from the inheritance while she's alive, with the principal passing to the children at her death.

Such a trust may require more ongoing supervision, because you'll need to appoint a trustee to manage and safeguard the money. Whether that's worthwhile depends on how much money is at stake; the annuity may well be a more cost-effective option.


Liz Pulliam Weston is a personal finance writer for The Times. Questions can be sent to her at or in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.

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