Financial Q&A: Diversification is required for a windfall

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Q: I am due a $1.25 million windfall from the sale of a work of art acquired generations ago. I am an older man, no longer sharp enough to play with money. People I have spoken with about what to do with the money want me to put it in the bank or stocks. One person mentioned tax-free bonds. An online bank tells me they can put $100,000 – their limit – into a euro currency Certificate of Deposit, and it will be FDIC insured. This way I could take advantage of the dollar's decline against the euro and earn about 2 percent on the CD, without worrying about losing my money. I can see no reason that the dollar will not continue to decrease in value against other world currencies in the next year. At that time I could convert to dollars if I chose that option. Are there other banks that also do this foreign currency CD, FDIC insured thing? I would need a dozen CDs.

P.B., via e-mail

A: Betting on the direction of currencies is a treacherous business, warns Lewis Sisich, a partner at Washington Investment Management in Spokane. No one really knows where the euro will head next, he says, and it's usually not wise to invest heavily in a trend that has proven to be successful and assume it will continue. Even if you buy another 10 or 11 euro-denominated CDs you will have made only one type of investment, euro CDs.

Mr. Sisich's recommendation would be to diversify. One way to simplify this process is to use four major options of where you could put your money. The most conservative approach, Sisich says, would consist of the following:

1. Capital protection account. This would include taxable and nontaxable money-market funds, short-term bond funds, and Treasury bills. These investments generate current income, have a low degree of volatility, and a high degree of liquidity.

2. Market-risk account. This would focus on long-term high-quality blue-chip stocks or mutual funds. It would also include income and growth mutual funds or professionally managed portfolios.

3. Capital-appreciation account. Since other parts of the world are growing faster than the United States, mutual funds that specialize in these areas offer good opportunities to add value to your overall portfolio. Funds offer an easy way to invest in stocks and bonds of emerging markets without having to make individual country bets.

4. Opportunistic account. Investments here will have more volatility and risk but much higher rewards. These type of investments would be precious metals such as gold and silver, art, sector-specific mutual funds, or high-yield bond funds.

A serious amount of money is coming your way. Like it or not, it requires a serious amount of time and effort on your part in order to ensure that it's invested wisely and in a manner that benefits you. Keep calling people – professionals, says Sisich. If you have a trusted family member who has knowledge of investing, get him or her involved as well.

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