How to Invest Lump Sum or Small Sums
BOSTON — Q I'll turn 70 in November, 1997. As a consequence I'll have to take a distribution of my 403(b) (contributory retirement plan) and my Individual Retirement Account (IRA) in 1998.
Are my 403(b) and IRA considered qualified retirement plans? And when I take my distribution in 1998, can I take a lump sum distribution using 10-year income averaging based on the 1986 tax rates?
- B.L., Benicia, Calif.
A According to Gary Schatsky, a fee only financial adviser and attorney in New York, if you receive a qualified lump sum distribution from a company retirement plan or Keogh plan and were born before 1936, your distribution would qualify for 10-year averaging based on 1986 tax rates.
Unfortunately, for purposes of 10-year averaging, neither a 403(b) plan nor an IRA qualify.
Q I recently inherited a substantial sum of money. I would like to invest it in the stock market, but I'm concerned, since market indexes are so high. I am also moving to another state shortly. Should I invest all of the inheritance in the market now?
- A.B., San Francisco
A Many stock market experts say no. According to John Markese, president of the American Association of Individual Investors, in Chicago, a person should use income averaging for sudden inheritances. Invest equal amounts of money over time, such as monthly or quarterly, and perhaps over a year or two. That way you end up buying more shares when the market falls, and fewer shares when prices rise. Keep the surplus cash in a money market fund or bank certificate of deposit. The money will be available if you need it during the move.
Q Our granddaughter is under a year old. We are looking for an appropriate stock investment for her. We plan to have her parents be the custodian of the investment. What should we do?
- D.R., Clinton, Mich.
A "The longer time-horizon one has, the more aggressive one should be in terms of investment returns," says David Sterman, assistant director of research for Individual Investor magazine. If you are buying only one or two stocks, they should be companies that will be around 20 to 30 years from now. Mr. Sterman likes Ford and Chrysler. He thinks they may dominate the world auto market in 20 years. The US entertainment sector will also be globally dominant, Sterman says. He likes Time-Warner and Disney. Disney's share price has fallen recently, but this is a case of a company with an "excellent long-term strategy going through short-term hiccups," he says.
He also recommends a mutual fund linked to technology or communications, key industries of the next century. Sterman likes Fidelity Select Electronics (800-544-8888), up about 32 percent this year, and Seligman Communications and Information-A (800-221-2450), up about 28 percent.
Q I am 30 years old, single and have a modest income. Do you have any advice for ways to invest small amounts? I could only afford about $25 to $50 every month. Is there a fund family that will allow me to invest this sum?
- G.A., Lexington, Ky.
A Several fund families have such low minimums. At Franklin-Templeton Group (800-342-5236) the majority of 120 funds require a minimum initial investment of $100, with subsequent payments - whenever you wish - of $25. The group specializes in bond and international funds, but also has several domestic equity funds. T. Rowe Price (800-638-5660) also offers funds with $50 minimums.