I recently received a fairly large windfall from a relative's estate, and I would like to add this new money to the portfolio I have built up over the years. This would normally be divided between a few different equity funds and several bond funds. However, the historically low interest rates now in the market I think present a very serious risk that rates will rise when the Fed begins to reduce its quantitative easing policy, and that means bond prices will fall.
So I am in a quandary as to how to invest this new money and still maintain a reasonable asset allocation. I see several possibililities:
1) invest a small portion of the money on a monthly basis, cost averaging my way into the market, and divide each month's investment among asset classes as usual -- in other words, make no accommodation at all for the historically unusual interest rate environment, but invest slowly and hope this provides some protection from rising rates;
2) cost average as above, but simply hold the monthly bond investment aside in cash, waiting for a time of less price risk;
3) cost average as above, but invest the monthly bond portion in some equity-like bond substitutes, such as dividend stocks, emerging-market bonds, reits, mlp's, etc. Then when interest rates have come down, switch into a conventional bond allocation.
Any thoughts you might have on the these or other strategies would be much appreciated. Thank you!