October 5, 1997

Q. My husband and I were recently left money in the amount of $100,000. We are seven years away from retirement and would like to invest this in mutual funds. We don't mind being a little aggressive. What do you suggest?

C.B., West Roxbury

A. Move very slowly and cautiously, even if this money is relatively unimportant to your financial well-being in retirement. You don't give me much to go on, so I'll outline two approaches -- one in the event you will use the income from this money in retirement, and the other in case this is simply extra money that is unlikely to be called upon for a decade or more.

In the first instance, I suggest bond funds. After all, seven years is in the intermediate-term investment time frame, and closer to short-term than long term.

My suggestion will be a mixture of three bond funds -- putting perhaps 25 percent each in a short-term corporate bond fund and a high-yield (or junk) bond fund. I suggest the other half go into a Ginnie Mae fund.

But remember, while bond funds usually produce excellent results for long-term investors, they can be treacherous in the short term. Nonetheless, if you ride out the bumps, they provide solid income streams, and if you reinvest distributions you should have built a nice pool over seven years -- perhaps realizing growth from that $100,000 to about $155,000 (presuming an average portfolio total return of 6.5 percent). As for fund selection, almost any large fund family can provide funds in these categories. Especially for fixed-income funds, I usually favor the Vanguard Group, based on its low expenses and its plain-vanilla approach to investing.

But if you want to be aggressive, you'll want to get some stocks into the mix, but you'll also want to hedge your bets with a substantial fixed-income position. There are two ways to do this:

One is to begin a dollar-cost averaging program, slowly moving the funds into a solid balanced fund. These funds divide assets between stock and fixed-income holdings, usually holding between 50 percent and 60 percent stocks and the balance in bonds.

You get some of the best of both worlds here, but of course the two ends of the portfolio frequently tend to pull in opposite directions, so the overall result is moderated. Lipper Analytical Services Inc. reports the average results for the 372 funds in the category show a 23.51 percent gain over 52 weeks and an 89.39 percent advance over five years. If you move to one of these funds, I would suggest a three-year dollar-cost averaging program, initially putting $97,000 of your inheritance in a money market fund and beginning with only $3,000 in the balanced fund. Then each month move another $3,000 into the balanced fund; if you achieve average 5 percent returns from the money fund, you will have only a few hundred dollars left to invest in the 37th month.

Another approach would be to create your own balanced portfolio of funds. You might achieve this by putting half of the money in a fixed-income portfolio, and then slowly building a portfolio of all-stock funds. If I were to follow this, I would begin the process that would eventually put $30,000 of the money in a conservative stock fund, $10,000 in a traditional growth fund, and $10,000 in a fairly aggressive small-cap fund. An example of such a portfolio might be $30,000 in Vanguard Index Value, $10,000 in Fidelity Contrafund, and $10,000 in Kaufmann fund. An alternate approach would be to put $40,000 in the conservative end and the final $10,000 into something that represents a lot of risk; what I'm thinking of is the new CGM Focus fund, which is designed to hold a small portfolio, perhaps only 25 stocks, selected by its well-known manager G. Kenneth Heebner for maximum long-term growth.

Heebner, whose long-term record shows spectacular (but erratic) growth in CGM Capital Development fund, and solid, but still bumpy, results with the balanced CGM Mutual fund. Perhaps one of the reasons for more moderate results for Heebner's funds in recent years is their swelling asset bases, with $783 million in the now-closed CGM Capital Development, and $1.32 billion in CGM Mutual. The Focus fund has got off to a roaring start, debuting on Sept. 3 at a $10 net asset value and advancing to $10.99 by the end of the month.

If you decide to build your own balanced portfolio rather than going with balanced funds, invest the fixed-income money immediately, but use dollar-cost averaging to build the stock portfolio.