I'm taking a break this week from analyzing your portfolios to answer several readers' questions about investing. I'll be back next week with another reader's Portfolio Rx.

Hi Dr. Don, If you had $350,000, were 67 years old and still working, but planning to retire at 71, how would you invest that money? I need money to retire on along with Social Security and a small pension. I was heavily invested in technology and now I am heavily invested in cash. Based on what you know today, what would you do with it? Thanks for your input.DL

Dear DL,

I think the most important thing for you to do is put together a retirement budget and figure out what your income needs from the portfolio will be. Use

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retirement calculators to help you with this planning. Remember not to make your portfolio work any harder than it needs to in meeting your need for income. Stock investments should return more, on average, over the years than bond or cash investments, but -- to paraphrase Nobel Laureate Bill Sharpe -- you can't eat average returns. Stocks are considered a hedge against inflation, allowing you to maintain your purchasing power over time, but so is the

Series I Savings Bond, because its return fluctuates with changes in the consumer price index. After all, if you need only 5% pretax to meet your goals, then invest in lower-risk investments to reach that required return.

Dear Dr. Don,Is it true that I have to include capital gains (long-term or short-term) reported to me on a 1099 as income on my personal tax return? While all of my mutual funds' performances have been negative these last two years, I've had very large positive capital gains (granted, this does raise my cost basis). I was curious to know if any mutual fund ever reports a capital loss, which I could then write off.Sincerely,SM

Dear SM,

Mutual funds are required to pass on income and capital gains to investors at least annually. Because the gains are passed through to investors, though, they aren't taxable to the mutual fund. Remember that capital gains/losses aren't recognized unless the fund sells the investment at a gain/loss. Fund managers have the ability to manage the fund's tax liabilities by offsetting capital gains with capital losses. A mutual fund may also realize net capital losses, but it is not permitted to pass these losses through to investors. Instead, the fund carries forward these losses to offset future capital gains. Morningstar provides an estimate of a mutual fund's capital gain (loss) exposure, as well as its tax efficiency over a three- and five-year period.

Last year's debacle was that the mutual funds were losing money on a net asset value (NAV) basis, but still recognizing capital gains. Obviously, paying capital gains taxes on a mutual fund when the fund is losing NAV is a hard pill for investors to swallow. But these capital gains do raise your cost basis; for more on how to calculate the tax cost basis of your mutual fund investments, check out this

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article.

Dr. Don,I have no portfolio at this time. I just inherited $100,000 and after paying my credit card debt off, I will have about $60,000 to invest. I am 58 years old and have low-to-medium risk tolerance. Where should I invest? Funds, money market, what? Thank you, MH

Dear MH,

I never know how to react when I hear of someone coming into an inheritance. As an outsider, I don't know the emotional price paid for that financial gain. I'm sorry for your loss of a family member or friend. That said, it has to feel good to be out from under that mountain of credit card debt.

This $60,000 is just one piece of the puzzle. Don't invest it without considering the rest of your portfolio and your financial goals. You have to look at how it all comes together. If you're investing for retirement, what other income will you have in retirement besides the returns on this investment?

For a quick read of how your overall portfolio should be allocated, I heartily recommend you take Jim Cramer's

Asset Allocation Adventure. It's one of the best first steps you can take in investing.

Dear Dr. Don,How can I find a financial adviser to evaluate my portfolio without selling me all kinds of products?MR

Dear MR,

First, decide what your goal is in hiring a financial adviser. Do you need help putting together a family budget and identifying your financial goals? A financial planner can help you identify and prioritize your financial goals and work with you to establish a budget that will help you reach those goals. In contrast, an investment adviser is more focused on what's in the portfolio and how the portfolio's returns are meeting your needs for growth and income. Estate planning is a different matter and you would benefit from having a tax professional, an attorney and an investment adviser working as a team to help you with your estate planning needs.

Any investment professional who reviews your portfolio is going to have recommendations about changes you should make in how the portfolio is invested. And if they didn't provide you with specific recommendations about how to implement those changes, their advice would be less useful and the complaint would be, "Why am I paying this person when I am not being advised on what to do with my money?"

The problem is that you need to be sure that the financial adviser is recommending what's best for you and not what's best for the adviser. That's why it's so important to understand how, and what, the adviser is getting paid. You're going to pay for financial advice in some manner, so understanding in what manner isn't an inappropriate question to ask when interviewing financial advisers.

The Certified Financial Planner (CFP) Board of Standards maintains a

consumer page that explains in greater detail what a planner can do for you, questions to ask when interviewing planners, and a discussion of compensation issues. Remember that a CFP isn't the only professional certification in town when it comes to choosing a financial planner. A partial list of other certifications include Chartered Financial Analyst (CFA), Chartered Financial Consultant (ChFC), Personal Financial Specialist (PFS) and Registered Financial Consultant (RFC). To find out more about what these certifications mean, check out this

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article. When you interview an adviser, ask about professional certification and how that certification benefits you as a prospective client.

Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at

portfoliorx@thestreet.com.