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Investing a lump sum
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October 29, 2001: 11:21 a.m. ET
I'm expecting a $75,000 windfall. Any suggestions for a novice investor?
MONEY columnist Walter Updegrave
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NEW YORK (CNNmoney) - I expect to net $75,000 or more from exercising some stock options I was given at work. I'm under 40 and would like to turn this into a nice nest egg, but since this will be the largest amount of money I've ever invested, I'm more than a little nervous about putting it in the wrong place. Any suggestions for a novice investor?
With so many people seeing the value of their options go down the tubes these days, I can't blame you for wanting to get the most you can out of this nice windfall. Here's what I recommend.
The basics
First, make sure you've got about six months' worth of living expenses stashed away in a safe place like a money market fund. This will provide an emergency cushion you can fall back on without tapping your other investments if, god forbid, you happen to get laid off from your job or you experience unexpected expenses.
Second, do a gut check. The idea is to get an idea of how much risk you're comfortable taking with your investments. At your age, you should be thinking long-term, at least 30 or 40 years. That argues for putting most of your money in stocks or stock funds. But you've also got to live through the short-term. Would you panic and sell if you saw the value of your portfolio drop 20 percent or more over the course of a few months? Or would you recognize that you've got plenty of time for it to bounce back?
Spread the money around
Next, create an asset mix that's right for you. Given your age, the bulk of your portfolio -- 70 percent or more -- should be in stocks or stock funds. History shows that equities have the best potential to make your nest egg grow over the long term and, even more important, keep its purchasing power growing faster than inflation. But you also need some bonds as a hedge in case stock returns in the future aren't as spectacular as they've been in the past -- and to prevent your portfolio from completely melting down during stock market setbacks. For suggestions on the asset mix that makes sense for you, I suggest you check out CNNmoney.com's Asset Allocation Wizard.
Okay, now you can start thinking about specific investments -- individual stocks and bonds or, more likely, stock and bond funds. Whatever you do, don't go looking for the investments that made some Top Performers list because of their returns over the past few months. Rather, you want investments with consistent long-term above-average performance -- and you want to put together a group of such reliable performers so they work together as a whole, not unlike a conductor choosing musicians for an orchestra. I'm partial to index funds myself -- that is, low-cost funds that seek to match the performance of the market rather than beat it -- but there are plenty of good investments out there that will fit the bill. The Asset Allocation Wizard can help out there as well, or, if you prefer screening for reliable performers, check out CNNmoney's Advanced Fund Screener.
There are no guarantees in the investment world, of course. But if you follow this plan, I think the chances are good that your 75 grand should grow into a tidy little high six- or even seven-figure nest egg by the time you're ready to call it a career. 
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