Recently a friend asked me what to do with $25,000. He didn’t tell me if he wanted to invest it for growth or make the money last as long as possible. There are a number of ways to work with an unexpected windfall. Here is one possible scenario.

Funds Can Make Sense

I would recommend using three different low cost funds. This is regardless of whether you trying to accumulate—-you are adding to the balance each month—or using it as an income stream. In the case of the latter, let’s say you need $200 a month. Set up the three funds, then instruct the fund company—and I am going to recommend Vanguard Funds because they are low-cost funds and have always seemed to be run in the best interests of the investors, not the fund company—to send you a check for $600 each quarter. There are other good low cost fund families. Here I recommend Vanguard because it is a fund family with which I am most acquainted (Disclosure: I have no connection with Vanguard. However, I have written about its funds, as well as the funds of various families, over the course of a busy life).

My idea is that this is a way of reducing the risk of accessing funds at the wrong time. By contrast, let’s say instead you take out all $25 thousand at one point. What if it is just before the market takes off into a bull period? Then you’ve missed all the gains. Let’s say you wait a few years to take out all $25 thousand in the middle of a bear market. Then you have locked in the losses. Either outcome is bad.

Go Slow to Reduce Risk

Getting in and out of the market slowly is, in my opinion, the best way to reduce the riskiness of markets along with diversifying a portfolio. I will address the latter in a while. My wife and I have several hundred thousand in our funds and a lot more in our retirement accounts. The latter aren’t taxed until age 70.5—in the case of Roth IRAs they are never taxed and you can add to them for the rest of your life if you work, which is a great bargain that you should use if you can—but regular, non-retirement funds are taxed every year.

How do we avoid market volatility?

We are slowly withdrawing money from our mutual funds—non-retirement funds. We leave the retirement funds alone for as long as possible and take maximum advantage of their tax breaks. Implicit in this strategy is that idea that we don’t know if the market is making highs or lows and we don’t want to guess or bet your life savings in difficult to predict short-term market events. The good slow approach will allow one to stay in the market in some capacity for a long time and try to gain some of the historic trends of markets.

Historically, markets tend to go up two out of three years. But the maddening part is not every two out of three years. Instead of jumping on and off the market train—and you have to pay a fare every time you get on or off the market train, which means uncertain investors spend a hell of a lot of money in commissions and other outlandish costs—it is better to get on a good train and just ride it for the long term.

Reduce Risk

The other factor that can reduce volatility is through diversification. Don’t have all your money in stocks, or one type of stock. Don’t have all your money just in bonds. Have some of your money in stocks and some in bonds. How much? Depends on how aggressive an investor you are and how long you expect to be in the market. The longer your investment period, the more you can invest in stocks. The shorter, the greater bond component you should have. But I would recommend some stocks and some bonds in almost every portfolio.

Here is an illustration. In 2008, my wife and I lost about 25 percent of our portfolio in the market crash. In one sense, we were idiots for not dodging the crash. In another, we weren’t as stupid as we seemed. The market as a whole lost about 35 to 40 percent. We lost less. Although we were bleeding, we lived to invest another day because we had some diversification. By the way, showing you the unpredictability of markets, 2009 turned out to be one of the greatest years in stock market history. Those people who jumped out of the market at the end of 2008 were very sorry the next year. This is also a good reason to ignore short term numbers. Often the best performing fund one year is the dog of the fund industry the next year as well as the reverse. (Lipper, a fund adviser, used to say “the worst shall be first.”).

Here are some of my fund recommendations:

1) Vanguard Index S&P500
2) Vanguard Total Bond Index
3) Vanguard Small Cap

Do you want a one stop fund to get diversification in one fund? Then consider a balanced fund. This a mix of stocks and bonds in one fund—about 60 percent stocks and 40 percent bonds. You can get the latter in this fund:

4) Vanguard Star Fund

The Vanguard funds can be reached online. They can send you a prospectus. Also ask for the latest annual report and the statement of additional information. The latter will list the costs that fund investors have to pay to get these funds. These are called expense ratios. However, I think if you compare Vanguard funds average operating costs to the rest of the industry, you will see they are considerably lower, which gives the investors better performance. By the way, fund industry averages can be found at But as a general standard, Vanguard stock funds expense ratios are usually about 0.1 or 0.2. The industry average for a stock fund is usually about 1.3 percent. That’s about 1.2 percent the average Vanguard investor is considerably paying less each year than industry norms. How do they do it?

Vanguard isn’t picking stocks—which requires buying and selling stocks each year—it is merely following indexes. In other words, while many fund companies are trying to hit home runs—-and sometimes hitting them but often striking out—Vanguard is choking up on the bat and trying to consistently hit singles and double. They don’t strike out much, but they don’t hit homeruns.

For most investors, going for singles and doubles in the most long term is the most effective strategy, although there will be periods when it will seem foolish. Ignore that. Adopt a long-term strategy and, as long as you can believe that it will come out well in the end, stick to it.


Gregory Bresiger
Gregory Bresiger

Gregory Bresiger is an independent financial journalist from Queens, New York. His articles have appeared in publications such as Financial Planner Magazine and The New York Post.