Attention New Investors: Invest That Cashhttp://www.fool.com/investing/general/2012/06/12/attention-new-investors-invest-that-cash.aspx Dan Newman
June 12, 2012
You win the lottery; your great-uncle bequeathed you his fortune made during Prohibition; or, more likely, you worked slavishly while saving pennies to amass a pile of cash. No matter the way in which the cash appeared in your account, inflation is slowly eating away at its value unless you do something about it.
For example, if you have $1,000,000 in cash sitting in your account, even at today's inflation rate of 2.3%, it will lose 20% of its purchasing power over 10 years, and after 30 years, it will only be able to buy half as much as it can today. And with today's low interest rates, it's unlikely the cash sitting in your bank is earning very much. To beat inflation, invest that cash.
How should you invest it? Here are plans for two different hypothetical investors: one for an investor not interested in researching and following companies, and one for an investor who finds such research fascinating.
For the investor with other passions
If you fit this description, you can use a portfolio of low-cost funds that track major indexes. Make sure to rebalance it every so often, and it is likely that you will outperform a majority of actively managed mutual funds. How is that possible? Well, about 84% of those mutual funds underperformed their benchmark indexes last year.
Many such example portfolios with specific fund selections are available through the Motley Fool's Rule Your Retirement community. Here's a general example of such a portfolio that's aimed at those who are getting closer to retirement:
Source: Rule Your Retirement.
While this takes away the anxiety from investing in specific companies, you might still worry about investing at a market top. To solve this, take smaller chunks of your cash and invest them over a longer time period (called dollar-cost averaging).
For the investor with passion