Q. I recently inherited some money. I would like some advice about investing it. My husband and I are 48 years old. We feel as though our current financial package, which includes a 401k, mutual funds, life insurance, real estate, trust fund, etc. is in order. We would like to invest $100,000 of this inheritance with a different philosophy--- high earnings in the short term. We want to take the earnings out of the account at the end of a year and spend them on travel, home improvements, etc. Can you give me some suggestions?

---S.Z., by e-mail from Dallas


A. What you do depends on the amount of time and effort you are willing to expend putting your 'spending money portfolio' together. Basically, you've got four choices: one stop shopping for a relatively high-income mutual fund or building a portfolio of individual securities that invest in either REITs, high dividend stocks, or master limited partnerships. The last three may provide more income, but at greater risk. Let's examine the simple choice first.

While a typical balanced fund is 60 percent equities and 40 percent fixed income, Morningstar now divides balanced funds into "conservative" and "moderate" allocations. The "moderate" funds represent the traditional mix. "Conservative" allocation balanced funds have a larger commitment to bonds and, therefore, tend to produce more current income.

Franklin Income A shares requires a front-end commission but it has a good track record. It offers a yield of about 6.8 percent. Vanguard Wellesley, a no-load fund with a good track record, has a yield of about 4.3 percent. That, by the way, is a pretty good yield these days. The limitation of both these funds (and the category in general) is that most of the income will be taxed at your regular tax rate because it will come from bonds.

The higher the tax rate on your earned income, the more you will want to consider the second option, building a high dividend portfolio. The strategy has more risk but is likely to yield more spendable income.

While REIT (Real Estate Investment Trust) income doesn't qualify for the 15 percent tax rate, the Morningstar database indicates the average REIT yield is 5.8 percent, with many yielding 6 to 8 percent.

There aren't very many high dividend stocks out there--- about 200 non-REIT domestic stocks yield more than 4 percent--- but you could still put together a portfolio of ten yield stocks and benefit from the low tax rate on dividends.

Finally, you could assemble a portfolio of Master Limited Partnerships. Like REITs, these entities distribute virtually all of their income. Unlike REITs, most of the income distributed is regarded as return of capital. The return of capital portion is not taxed. Most have a distribution yield in the range of 6 percent to 8 percent.

The return of capital reduces your original cost basis. This creates a future tax liability if the shares hold their value or appreciate.   These investments work well for people with capital loss carry forwards.

Needless to say, the last three require a good deal of homework.


Q. If we do the Couch Potato portfolio using the total stock and total bond funds, would you have any qualms about putting essentially all one's savings into two funds? We have an emergency cash reserve elsewhere, but in a minimal amount.

---R.C., by e-mail from Dallas


A. If getting your decisions down to two is what it takes to manage your own money, then it's a good thing to do. You'll get diversification across the two major asset classes, low costs, and significant tax efficiency. With the cost of passive investing about 0.20 percent a year, the average management arrangement offered to small investors will have to come up with an extra 1.80 percent a year just to overcome the weight of its 2-percentage point annual cost. That isn't easy.

One caveat, however. While the Couch Potato is better than most of the alternatives, a somewhat more enterprising investor could reduce risk still further by adding other asset classes such as, inflation protected bonds, foreign stocks, REITs, and gold shares.