I just inherited $250,000 that I want to invest, but I'm concerned that stocks may be overvalued and bonds might be hurt by rising interest rates. Should I invest this money gradually to protect myself -- and, if so, how long should I spread it out? -- Mary M., Connecticut

When it comes to investing a windfall -- or any large sum, such as a 401(k) or IRA rollover -- advisers and the financial press often recommend dollar-cost averaging, or investing the new money a little at a time. The rationale is that you're taking on less risk by tiptoeing into the market rather than plunging in all at once.

So the standard advice in your case would be to put the $250,000 in a savings account or money-market fund initially, and then over the course of, say, a year invest $20,833 each month ($250,000 divided by 12) in a portfolio of stocks and bonds.

But like many other supposed nuggets of investing wisdom, this one doesn't stand up to close scrutiny.

In fact, the more sensible strategy is to settle on a mix of stocks and bonds that jibes with your financial goals, and then invest the whole sum based on that mix. So, for example, if you decide based on your risk tolerance and the length of time your money will remain invested, that a portfolio of 70% stocks and 30% bonds is appropriate for you then you should allocate 70%, or $175,000 to stocks and 30%, or $75,000 to bonds.

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To understand why this approach makes more sense, let's take a closer look at what happens if you invest gradually, or dollar-cost average, instead of invest the entire $250,000 in 70% stocks and 30% bonds.

With dollar-cost averaging, you'll start out with an asset allocation that's 100% cash. After three months of shifting money into stocks and bonds, you'll have $43,750 in stocks, $18,750 in bonds and $187,500 still in cash, or a portfolio of 17.5% stocks, 7.5% bond and 75% cash. After six months, your mix will be 35% stocks, 15% bonds and 50% cash. And at the end of nine months, you'll have 52.5% in stocks, 22.5% in bonds and 25% in cash.

Only at the end of the year will you arrive at your target allocation of 70% stocks and 30% bonds. (To keep things simple, I haven't factored in any investment earnings on stocks, bonds or the cash holdings.)

In short, you'll actually go through a series of asset mixes that are more conservative than the mix you've decided is right for you. Or, to put it another way, for an entire year you'll be investing more conservatively (much more conservatively early on) than you should based on your risk tolerance, time horizon and financial goals.

Now, I'm sure that many readers are now saying, "Yes, but if the stock market goes down and bond prices fall due to rising interest rates during that time, I'll take a bigger hit by going immediately to my target allocation than I would by dollar-cost averaging to it over time."

That's true. But it's also true that you won't do as well going in gradually if stocks and bonds perform well.

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The reality is that no one knows what stock or bond prices are going to do, especially in the short-term. Which is why savvy investors divide their assets between stocks and bonds based on their financial goals and appetite for risk in the first place. Asset allocation is a way to get some short-term protection against market setbacks while still allowing you to get the returns you need long term. But by dollar-cost averaging into your target portfolio rather than going to it immediately, you're undermining your investment strategy -- or at least putting off getting to it.

Still convinced dollar-cost averaging is the way to go? Then consider this: Why stop doing it once you've invested your windfall? After all, even when you're fully invested, your portfolio will still be vulnerable to market setbacks. So why not continue to "protect" yourself by converting all your money back to cash and then dollar-cost averaging all over again? And then why not repeat that process again? And again? Obviously, that would be silly. But that's what someone who really believes in dollar-cost averaging should do.

My advice: Don't obsess about how long you should take to get your money invested. Instead, focus on creating a portfolio that's right for you. You can start by completing a risk tolerance questionnaire. Among other things, the answers you give will help you understand how much of a market setback you can stand before you start bailing out of stocks. You'll also come away with a recommended blend of stocks and bonds that's appropriate for you.

You can then concentrate on building your portfolio with specific stock and bond funds. You don't have to do anything complicated or load up on all manner of obscure investments. Indeed, simpler is better. You can create a fully diversified portfolio with just two or three broadly diversified stock or bond funds -- or just a single target-date fund, if you prefer.

Most important is that you stick to low-cost choices like index funds or ETFs, as over the course of a long career saving even a half a percentage point a year in fees can boost the eventual size of your nest egg by 25% or more. Lower fees will also allow you to draw more income from your investments throughout retirement.

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Once you've figured out your stocks-bonds mix and what to invest in, you can plug that information along with other details into a retirement income calculator that will estimate your chances of having a secure retirement. If the probability is uncomfortably low -- say, less than 70% or 80% -- you can make adjustments (save more, invest differently, retire later) to improve your retirement outlook. Whatever blend of stocks and bonds you eventually settle on, stick with it except for occasional rebalancing (although after retiring you may want to shift more assets into bonds to better preserve capital).

If you find that psychologically or emotionally you just can't bring yourself to invest all your dough at once, then at least limit the period over which you gradually invest. Do it over six months instead of 12. Or better yet, three. But remember, the longer you take to get to the mix of stocks and bonds that jibes with your risk tolerance and financial goals, the longer before your money will be invested the way it should be.

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