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I managed to benefit from an inheritance lump sum payment overseas. After paying off my debts, I will still have majority of that inheritance lump sum. My goal for that money is to preserve its value. Investing them in GIC, bonds, or other cash-like liquid investments would get that fund eaten away fairly quickly through inflation. I was influenced heavily to purchase real estate, but I'm hesitant to do that due to its volatility. I'm leaning towards purchasing lifecycle funds, but I don't know how the risks would calculate out comparing to ROI. What are your thoughts, backed up with resources or calculations?

This is for a person who is close to retirement age located in Canada (the lumpsum is located in Hong Kong).

Thanks in advance!

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    All we know is that you just inherited some money. Need more information to make any kind of suggestions. What country are you in now? How old are you? Married? Risk tolerance? Debt load? Etc.
    – mbhunter
    Feb 8, 2011 at 6:03
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    Go in for an inflation bond to take care of the inflation parameter. Real estate mayn't guarantee returns.
    – DumbCoder
    Feb 8, 2011 at 10:11
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    Real estate won't guarantee returns in the form of cash, but if you buy it and live in it, it can guarantee a place to live. (In some ways this is better than financial returns: you don't have to pay income tax on the amount of money you saved by not renting.)
    – user296
    Feb 9, 2011 at 16:04

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If you simply want to preserve the value of your capital, take a look at buying Treasury Inflation-Protected Securities (TIPS) from the US Treasury:

When a TIPS matures, the investor is paid the inflation-adjusted principal or original principal, whichever is greater. Since a TIPS investor won't receive less than the original principal, the investor's original principal amount is protected against deflation as well.

TIPS pay interest semiannually at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.

So you'll earn (a small amount of) interest, and the principal will be adjusted for inflation.

Edit: As Michael Pryor points out in a comment below, there is liquidity risk -- if you need the money before the bond matures, you could lose principal. In my answer above I'm assuming you want to "lock up" the money for a period of time. If you're anticipating needing cash from the principal, you could set up a bond ladder to provide you with some extra liquidity.

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    Note that if you don't hold the security until maturity you have some price risk as well. I.e. if you buy a TIPS today but need the money next year, you will have to sell it and depending on interest rates and inflation, you could get less than you paid for it.
    – Michael Pryor
    Feb 8, 2011 at 17:37
  • And that is a very real risk in an environment with rising interest rates. And as of late 2010 / early 2011, there's really very little room for interest rates to fall. So.
    – user296
    Feb 9, 2011 at 3:12
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    @fennec - The OP asked about preserving capital especially with respect to inflation, not maximizing returns. The update to the question about "nearing retirement age" makes a well structured ladder of inflation-indexed bonds sound like a good fit for someone with a low tolerance for volatility who is willing to sacrifice the possibility of growth in exchange for stability and predictability.
    – bstpierre
    Feb 9, 2011 at 3:37
  • This is true. Inflation-indexed bonds are indeed a very important component of a balanced retirement portfolio. However, they probably shouldn't be the only part. Retirement can last 20 years or so, and sometimes longer.
    – user296
    Feb 9, 2011 at 15:50
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I'd just apply the principal toward my general savings goals. If I didn't have anything saved yet, I'd either start with a lifecycle / target-date fund for my retirement, or with a portfolio of broad mutual funds and index funds with an asset allocation similar to one you'd get in a lifecycle fund: some stocks and some bonds. There's still a risk to my capital, but I'd also actually earn money off of it.

My secondary consideration would be to buy a house, or at least save up for a down payment on the house (in a less aggressive portfolio) but it's not so much as an investment goal: it's more to just have a house. (There's risk of losing capital, but my housing situation is stable. Also, if I'm in a city with consistently good prospects this is good; if the city turns into Detroit this stability is worthless).

If I felt I'd saved enough and just wanted to start spending it but didn't want it to ever run out, I'd buy a managed-payout fund like these from Vanguard.

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