Ask These Five Questions Before Putting Your Money to Work

This market's not giving a lot of options on where to put your dough.
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Stocks? Bonds? Marilyn Monroe memorabilia?

Investors are always trying to figure out what to buy now. But today, more than ever, it's tough to tell. Treasury bonds have been on a roll for more than three years. Stocks suffered during most of that time, but they've recently rallied hard. The same goes for corporate and junk bonds.

Basically, everything's up. And not much looks like a screaming bargain.

But if you have money you need to put to work, you still have to decide what to do with it. These five questions should help point you in the right direction.

How Old Are You? How Soon Do You Need the Money?

Your age and your needs are the most important considerations when deciding where to invest. If you've got cash sitting on the sidelines that you know you'll need in a year or two, that's where it should stay -- in cash.

Money that's going to go toward a down payment on a home or a college-tuition payment in a matter of months should be kept in the safest place possible. And even though interest rates are at rock-bottom levels, a money market fund is still the most secure place to invest. You can just try to find a money market fund or account with the best possible rate.

What Do You Already Own? What Have You Been Buying?

The main goal when you're putting together an investment portfolio is to make money, right? But another key consideration is creating balance -- assembling a collection of assets that won't move in the same direction at the same time.

If you have a long time to invest, you can keep the majority of your money in stocks, maybe 80% of your portfolio. But that allocation should be spread across large-company stocks, small-company stocks and international. And the remaining 20% can be in bonds and cash.

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The extra cushion you get by keeping some of your money out of stocks will reduce the swings in your portfolio. In a March 2003 article looking at returns from 1970 through 2002, Charles Schwab found that a portfolio with 80% in stocks and 20% in bonds and cash fell 19.37% in its worst year. Meanwhile, one with 95% in stocks and 5% in cash was down 24.1%.

So, one key question to ask yourself is, does my portfolio have the right mix? A lot of that depends on what you've been buying over the past month or year. If you've spent the past year loading up on Treasuries, you might want to look at undervalued stocks instead. If you still have all of your money in stocks, then short-term bonds might not be a bad idea.

You've probably read about how high-yield or junk bonds have done well this year. The average high-yield bond fund is up 11.3% in 2003. And this could still be a decent place to put your money, if you have a few years to invest. Also, junk is an asset class that's lacking in a lot of people's portfolios.

But -- and this is a big but -- you don't want too much of your money in high-yield bonds. A 10% or 15% allocation is all you need. If you have that and then some, you don't need to put more money in junk bonds. And given the recent run-up, you might want to trim that position.

What Areas Are Attractive?

As I said above, given the rally in Treasuries, corporate bonds, high yield and even stocks, not one investment category is screaming "buy" right now. But some stocks, compared with Treasuries, do look cheaper. The yield on the 10-year Treasury is the lowest it's been in about 45 years. Another way to look at that: The 10-year Treasury is the most expensive it's been in about 45 years.

If you think financial Armageddon is coming and rates are going to 2%, then there's money still to be made in Treasuries. The

Federal Reserve

has cut rates to the bone. A tax cut is coming down the pike. But earnings look as if they're picking up, so stocks could very well outperform Treasuries.

You just have to make sure you don't overpay for the stocks you buy. Some sectors, like chip and chip-equipment companies, have run up sharply and look expensive. One way to avoid that is by giving your money to a manager who looks for cheap, beaten-down stocks. The


Excelsior Value & Restructuring fund is one place to look. And you need only $500 to invest in the fund, so you don't have to spend all your money at once.

In keeping with TSC's editorial policy, Dagen McDowell doesn't own or short individual stocks, nor does she invest in hedge funds or other private investment partnerships. Dagen welcomes your questions and comments, and invites you to send them to

Dagen McDowell.

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