Recently, I was left some money through an inheritance; it is currently in a money market account. I am sixty years old, and need to decide where I can invest this money safely and tax-free. This year, I will add interest from the money to my income. I am in a 403b plan through my work, and also contribute to an IRA. I had no savings previous to the inheritance, so I want to be very careful with the money. Where would be the best place to put it -- and how can it be sheltered from tax?

Thank you very much,

Dear M.Y.,

Given your current situation, I think the wisest and safest thing for you to do is to find a Certified Financial Planner in your area who can help you organize and manage your finances. Any fees they may charge are definitely worth the peace of mind [and small compared to the possibility of losing everything you have invested because of lack of experience].  Last week, a reader wrote and asked how to choose a financial planner [see previous edition].  Most banks and brokerages offer such services, and I strongly urge you to ask around and find out other people's experience with the planners in your area - and above all, choose someone who has a stellar reputation and you feel comfortable with. Never forget that they work for you. You should [and have a right] to know exactly what someone is doing with your money and why - and if they can't explain it to you, then they have no business taking care of your finances.

That being said, since you are approaching retirement age, you will probably want to be in fixed income / low risk investments [bonds, corporate bonds, t-bills, money market accounts, etc...] There are a vast array of municipal bonds that are tax free, as well as certain other government paper. You mentioned that you had previously had little savings, so I am assuming that you will use this money to help support you when you do retire. Working with a planner, you should be able to get a conservative and safe, tax-conscious fixed income portfolio created that should yield you ideally, at least 7.0% annually, hopefully more. Your planner could have the interest sent to you in the form of a monthly "check", or if you don't need the money to live on, you could have them reinvest everything every year to keep it growing and compounding value upon itself.

Bravo on contributing to your retirement accounts! You will find that they can make a huge difference on the life you are able to live once you have left the working world. You sound like you are off to a great start, and I wish you the best in the years to come!

Have a wonderful day,

Joshua Kennon

Dear Mr. Kennon,

My name is Dougie and I am a high school student. I am recently involved in stock market research in my economics class and was wondering if you can give me some information.

I am trying to research the differences between stocks and bonds. How do investors know which they should invest during different situations? Is there other reasons why an investors should invest in both of these investments besides the fact that they would want to diversify their portfolio?

Dougie,

Stocks and bonds are two very different machines; stock is ownership in a company. It is literally taking a business and cutting it apart into individual pieces and selling those pieces off at auction. Bonds are loans from people TO the company, in return for which the company agrees to pay interest. You, as a bond holder, are acting as the bank and lending money to the company.

Stocks tend to rise when bonds fall, and visa versa, although this is not always the case. For a young person who plans on holding their investments for over twenty years, bonds are, for the most part, moot. Common sense dictates that if your investment horizon stretches upwards of fifteen or twenty years, putting all of your money in stocks [which have given the best return over the long run] is an easy decision. Since you don't need your money for a very, very long time, you can afford to ride out the ups and downs of the market. Allocation and diversification are for the people who need their money sooner for costs such as purchasing a home, sending themselves [or their children] to college, or paying medical expenses.

Bonds, on the other hand, are used for people whom are nearing retirement, want to quit their job, or require a certain level of safety [either for financial or psychological reasons]. They pay a steady, predictable amount of money to their owners, and thus can replace a person's salary when they move onto the next stage in their lives. They are generally considered safe [as in the event of a bankruptcy, the company's assets first go to the bondholders, while the stockholders have to fight for what's left]. The general rule of thumb is, the safer the bond, the lower the yield the bondholder is paid [you are essentially purchasing safety.] 

At your age, if you can afford to leave your holdings alone for the next few decades, the wisest thing to do is purchase stock in a great blue chip company such as Coca Cola or Gillette, that has great balance sheet and a history of increased earnings, reinvest the dividends, and hold on for the rest of your life. History has shown that those who pick a great company and then ignore the market for decades at a time, generally end up very, very wealthy. 

Joshua Kennon

Hello!  Please answer the following questions for me.  What are some of the advantages of investing in a Money Market Account?  What are the advantages of buying Savings Bonds?

Dear Anna,

Both are generally low-risk investments that pay predictable, and steady interest on the principal invested. Savings Bonds are backed by the U.S. Government against default; meaning the owner of the bond is promised by the United States Government that the money + interest will be paid back. Money market accounts invest in government savings bonds, t-bills, corporate bonds, and other such investments. They maintain a price of $1 per share and pay a higher interest rate [somewhere between 4.8%-5.2% is attainable depending upon where you purchase your money market account. Banks generally will pay interest based upon the amount you have invested]

The advantages of both are that they are relatively safe compared to other investments, and provide steady, relatively predictable income to the owner. This is especially beneficial if you nearing retirement, don't want to risk your money in stocks, will need your money sometime soon, or just want the peace of mind that comes with a very conservative investment.  One notable advantage that a money market account has over savings bonds is that you can write checks out of your money market account and deposit additional funds at will; you aren't forced to buy in set denominations as you are with the savings bonds.  This can mean immediate access to your money, which may be important if you require access to your capital immediately.