If you find yourself with $100,000 to invest your first job is to decide what you need from this money - income or growth. You will also need to determine your risk tolerance, time horizon, and the level of involvement you want to have with your investment.
If you want long-term growth with little to no involvement, then index funds or mutual funds might be your speed.
If you are looking for income then you might consider bonds or real estate, depending on how much involvement you want to have.
But no matter what you decide, make sure that your financial house is in order before you start and ensure that you are well diversified as you invest.
Before You Start Investing
If you’ve received a $100,000 windfall you’ll want to make sure your financial house is in order before you begin investing it. First, ensure that you have an emergency fund in place. The last thing you want is to invest this money and then need to sell an investment because you have an emergency. Next, you’ll want to consider paying off any debts you have.
Having an emergency fund is an important part of a solid financial plan. It can provide a safety net during difficult times and help you stay on track to achieve your long-term financial goals. If you don’t already, you’ll want to have six months of living expenses saved up. Having to dip into your investments unexpectedly can disrupt your plans to save for the future and may result in penalties, taxes, or just poor investment timing.
You’ll want this money in a safe and easy-to-access place. A high interest savings account is likely your best option.
Here are our favorite high yield savings accounts.
Pay off debt
Before you start investing consider paying off your debts. The interest rates on most consumer debts, such as credit cards and personal loans, are typically higher than the returns you can expect to earn from most investments. By paying off high-interest debt first, you are effectively earning a guaranteed return on your money equal to the interest rate on the debt.
Paying off debt also reduces risk and frees up cash flow, which can put you in a better position to invest for the long term, as it makes it less likely you will need to access your investments for emergencies.
Determine Your Investment Needs and Risk Tolerance
The best way for you to invest $100k will be different than how someone else should invest $100k. What you want to use the money for, how soon you’ll need it, and your risk tolerance are all factors in determining the best way to invest.
What are Your Investment Goals
You’ll first want to determine your investment goals. Ask yourself what you want to achieve with your investments. For example, do you want to save for retirement, build a college fund for your children, or save for a down payment on a house?
Each of these goals would require different investment vehicles. Also, keep in mind that you don’t need to use all the money for one thing. You can work towards several goals at once.
If your goal is to use the money to provide income, you would consider different investments than you would if your goal was to grow the balance of the account.
What is Your Risk Tolerance?
How much risk you are willing to take? This really means - how comfortable are you with the potential for losing money.
In general, the more risk you are willing to take the more potential growth there is. For example, if you have a very high risk tolerance you could consider investing in emerging markets. If your tolerance for risk is low, you’ll want to consider more stable investments such as bonds or real estate.
The longer your time horizon the more risk you can take since you will have longer for the markets to recover before you need the money. This is why you’ll want to have a robust emergency fund - so you don’t need to access the funds before it’s time.
When Will You Need the Money?
Consider the time frame you have to achieve your financial goals. Are they short-term goals that you want to achieve within the next few years, or are they long-term goals that you want to achieve over the next several decades?
If you are investing for the long term (over 5 years) then depending on your risk tolerance you can afford to be more aggressive, consider a portfolio of well-diversified stocks and bonds. If you are saving for retirement you’ll want to consider a tax-advantaged account such as an IRA.
If you are saving for a short-term goal (less than 5 years) such as a down payment on a house, you’ll want something with less risk and easier access, such as a CD.
How to Invest $100k
If you have $100,000 to invest, stocks will likely be a part of your portfolio. You have several options on how to buy stocks.
If you are new to investing in stocks, or just don’t have a lot of time to research and manage a portfolio, then index funds, mutual funds, and ETFs are great options. These investments are mostly hands-off, yet allow you to get access to a diversified portfolio.
Index funds aim to match a particular index that tracks the market. For example, you could invest in a fund that tracks the S&P500 or the Dow. You could even buy a fund that tracks the stock market as a whole.
The benefits of index funds are that it’s easy to get a lot of diversification and they often have very low fees as they require very minimal human research and management.
The drawbacks of index funds are that they aim to match the returns of the index they track, so you will never outperform the index - however, they also aren’t likely to underperform.
Also, with index funds you can become over-invested in a particular sector without realizing it as there can be an overlap of companies across different indices.
Mutual funds are similar to index funds in that they pool together funds from multiple investors to buy a collection of stocks. The difference is that they are run by professional managers who follow the investment objectives of the fund, rather than following a specific index.
The benefits of mutual funds are good diversification and professional management. Unlike index funds, mutual funds are not limited to a set selection of investments. As long as the investments follow the stated objectives of the fund the manager is allowed to invest as she thinks best based on her knowledge of the markets and investment experience.
The drawbacks of mutual funds are fees and the possibility of underperformance. Since mutual funds are managed by a real person they have higher expenses than index funds, which are managed by a computer. This will reduce your returns.
Mutual funds also have the potential to underperform the market. While index funds aim to track a sector of the market they typically won’t under or overperform. Mutual funds have a lot more flexibility, so while they may overperform some years, they also risk underperforming as well.
Exchange-Traded Funds, are a type of investment vehicle that allows investors to buy and sell a diversified portfolio of stocks or bonds in a single transaction, similar to an index fund. However, ETFs are traded on stock exchanges like individual stocks, and their prices fluctuate throughout the day as investors buy and sell shares.
ETFs are designed to track the performance of a specific index or benchmark, such as the S&P 500, and their holdings are usually disclosed on a daily basis. This allows investors to gain exposure to a broad market or sector with a single investment.
The benefits of ETFs are low expenses and diversification. Because they are managed by computers, like index funds, they tend to have very low expense ratios. They also allow you access to a broad range of investments.
The drawbacks of exchange traded funds are trading costs and the potential for underperformance. ETFs have the potential to be actively traded - if you partake in this activity you will likely have fees when you buy and sell shares. Also, if you actively trade shares you have the potential to underperform (or overperform if you are luck) the market.
Rather than buy collections of stocks via a mutual fund or ETF you could invest in individual stocks, if you have the time, knowledge, and inclination to do so.
Investing in individual stocks has more risks due to the fact that it’s difficult to build a diversified portfolio. Plus, you are also limited by your own knowledge and research abilities.
However, some people love to research stocks and investing strategies. If that’s you, and your risk tolerance is high enough you may find a lot of satisfaction in choosing your own investments. You could potentially beat the market - although you could also underperform the market as well.
Even if this appeals to you, I recommend investing in individual stocks with only a small percentage of your portfolio, while the bulk of your money remains in index funds or mutual funds.
Here are our favorite stock trading apps.
If income is your goal you may want to consider dividend stocks. These are stocks that pay out a portion of their earnings to shareholders in the form of dividends. Dividends are typically paid out quarterly, and the amount of the dividend can vary depending on the company’s earnings and dividend policy.
Dividend stocks are typically issued by established, mature companies that have a history of stable earnings and strong cash flow. These companies may not offer high growth potential, but they are often viewed as more stable and less volatile than growth stocks.
The benefits are that they can provide investors with a regular stream of income and lower volatility than growth stocks.
The drawbacks are they have limited growth potential and can make dividend cuts at any time.
If you are looking to invest $100k you’ve probably thought of real estate. You have a lot of options when it comes to owning property. You could buy an individual property to rent or you could be more hands off with REITs or crowdfunding.
Buying Rental Property
Buying individual rental properties can be an attractive investment option for individuals seeking to generate passive income and build long-term wealth through real estate.
The benefits of real estate is passive income and appreciation potential. When you have a rental property you get rent each month from your tenants and the value of the property will likely go up over time. If the rent is high enough to cover all your expenses you could have a fairly passive income stream.
The drawbacks of real estate are that there are high upfront costs as well as ongoing costs. There is also market risk and tenant risk.
Plus, real estate is illiquid. If you want to sell it will take weeks, even in a strong market. If the market is weak at the time of the sale it could potentially take years to find a buyer and make a sale.
REIT stands for Real Estate Investment Trust, which is a company that owns or operates income-producing real estate properties, such as apartments, shopping centers, office buildings, hotels, and warehouses.
REITs allow individual investors to invest in real estate without having to purchase, manage, or finance the properties themselves. Instead, investors can buy shares of a REIT, which represent ownership in the underlying real estate portfolio.
This eliminates many of the drawbacks of individual real estate. You can participate in the rental income and price appreciation of a property without having to deal with tenants or broken hot water heaters.
They are also more liquid than individual properties. Shares of Real Estate Investment Trusts are traded like stocks, so if you want to sell a portion of your holdings you can easily do so.
REITs are the only way to get in and out of real estate quickly.
Real Estate Crowdfunding
Real estate crowdfunding is a relatively new form of investment that allows multiple real estate investors to pool their money together to invest in real estate projects. Crowdfunding platforms provide a digital marketplace where investors can browse and select from a range of real estate investment opportunities, typically offered by developers, sponsors, or real estate companies.
Crowdfunding is like a cross between buying an individual property and REITs. Like REITs, it allows you to invest in real estate for a lower entry amount and avoid having to be a landlord.
However, unlike REITs (and more like owning an individual property) your money is invested in a particular property, rather than in a fund that has multiple properties. The rent you receive and property appreciation is linked to your specific property.
Also, crowdfunding is typically not very liquid. Crowdfunding platforms usually have a set amount of time, often five years or more, before you are allowed to draw your funds out of the investment.
Bonds are a type of fixed-income security that represents a loan made by an investor to a government, corporation, or other entity. In essence, an investor who buys a bond is lending money to the bond issuer in exchange for regular interest payments and the promise of a the return of their principal investment at the bond’s maturity date.
If your goal is to generate income, then bonds are worth considering. They can provide a regular stream of income in the form of interest payments, which can be particularly attractive for investors who are looking for steady, predictable income.
Bonds can provide diversification in an investment portfolio, as they tend to have a lower correlation with stocks and other assets. This can help to reduce overall portfolio risk and volatility.
However, bond prices and yields are inversely related, meaning that when interest rates rise, bond prices tend to fall. This can result in capital losses for bond investors. Also, bond issuers may default on their payments, which can result in capital losses for investors. You can lessen credit risk by only buying bonds from governments and large stable companies.
Here’s how to invest in bonds.
Certificates of Deposit
Certificates of Deposit similar to a savings account except that your money is locked away for a set period of time in exchange for a higher interest rate. They are good investments when your primary goal is safety of principal but don’t need access to the money for a fixed period of time.
The benefits of CDs are that they are very low risk. Your money is insured and not invested in any market so you have no risk of losing your principal. They also offer CDs offer a fixed rate of return, which is nice if you are looking for a predictable source of income.
However, they also have fairly low returns. Depending on the interest rate environment the returns may not even keep up with inflation - so you may even be actually losing purchasing power over the long term.
Here are the best CD rates.
Investing means dealing with taxes - even investing in a retirement account will have some sort of tax implications.
Capital Gains Tax
If you are investing outside of retirement accounts you will want to consider capital gains taxes. Capital gains occur anytime you sell an investment for more than you paid. If you’ve held the asset for less than a year when you sell, then you will be taxed at your ordinary income tax rate.
However, if you’ve held the asset for more than year you will be taxed at your capital gains rate, which is likely 15% (and likely lower than your ordinary income tax rate).
Capital losses can also occur. If you sell at a loss you can use your losses to offset any other capital gains you had that year. If your losses exceed your gains you can carry them over indefinitely.
If you are receiving income from your investments, for example, rent, dividends, or interest payments you will likely pay your ordinary income tax rate on this income.
An exception is some dividends are tax advantaged. Dividends can be “qualified” or “non-qualified” which will affect their tax status. Here is some information from the TurboTax on this.
Also income from government issued bonds may be tax advantaged as well. Income payments from municipal bonds are exempt from federal taxes and state taxes if the issuing state is also the state where you live.
Income from federal bonds are exempt from state taxes and local taxes.
If you are investing for retirement then using a tax advantaged retirement account is your best bet.
Common accounts are Traditional and Roth IRAs. Both are individual retirement accounts but they are taxed differently.
Traditional IRAs give you a tax break when you contribute to the account but withdrawals in retirement are considered taxable income and you’ll pay taxes as your ordinary income tax rate.
Roth IRAs do not receive a tax break when you contribute but withdrawals in retirement are tax free. Meaning the growth is actually never taxed.
IRAs have annual contribution limits. You can find out more about that here.
As you start investing, keep in mind that you don’t have to invest your money all in one place. If you like the idea of long-term growth but feel nervous about putting it all in the stock market, that’s ok. You can split it up between an index fund and a real estate investment trust.
Maybe you sock most away in a well-diversified index fund but want to keep a little bit set aside to trade in individual stocks and try your hand at individual stocks.
It’s your money and ultimately you get to decide what to do.
Hire a Financial Advisor
If you don’t feel confident enough to invest $100k on your own you can always ask for help from a financial advisor. They typically have expertise in various areas of finance, such as investments, retirement planning, tax planning, and estate planning.
Financial advisors get paid in a few different ways:
- Commission-based: Some earn commissions on the products they sell, such as mutual funds, insurance policies, or annuities. This model can create a conflict of interest, as advisors may be incentivized to recommend products that may not be in the client’s best interest.
- Fee-only: Fee-only advisors charge clients a fee for their services, typically based on a percentage of the assets they manage. This model eliminates the potential conflict of interest associated with commissions, as advisors are not incentivized to recommend specific products.
- Fee-based: Fee-based advisors charge both a fee for their services and may also receive commissions for the products they sell. This model can also create a conflict of interest, as advisors may be incentivized to recommend products that generate higher commissions.
- Hourly or project-based: Some financial advisors charge clients an hourly rate or a flat fee for specific projects or services, such as creating a financial plan or reviewing investment portfolios.
It’s essential to understand how a financial planner is compensated before working with them, as their compensation structure can influence the advice they provide. Fee-only financial advisors are often considered the most transparent and unbiased, as they are not incentivized to recommend specific products.
It’s important to find an investment advisor that you trust. They will be helping you make some of the most important financial decisions of your life.
How to find a financial advisor.
Summary of How to Invest $100k
Investing $100,000 can be an overwhelming task, but with the right approach and mindset, it can be a fruitful one. The first step is to create an emergency fund/ savings account and pay off high-interest debt to ensure financial stability.
Ultimately, the key to successful investing is to develop a diversified portfolio that aligns with your investment goals, risk tolerance, and financial objectives. With the right strategy and mindset, investing $100,000 can be a smart move towards securing a better financial future.