How to Invest 100K with a Diverse Strategy
It may seem unlikely that you suddenly have $100,000 in your bank account but windfalls could happen. You may sell your larger home in order to downsize, sell your small business, or get an inheritance. You may have also built up some wealth after years of hard work and now want to put those savings to good use.
Steps to Take In Order to Invest 100k
If you want to learn how to invest 100K, you should be in good financial standing and know how to handle money.
Before You Invest
You don’t have to have any high-interest credit card debt, but you should have enough of an emergency fund to cover expenses and be able to cover your monthly expenses with money set aside for near term expenses, such as family vacations, tuition, and home improvements.
Take Care of Your Debt
It’s always good to pay down high-interest debt before you put anything in the market. High-interest debt includes payday loans or credit card debt. The average credit card interest rate is 16%, which is going to be much higher than the average stock market return. This means that getting rid of your higher-interest debt is going to be a better use of this money than investing in the stock market, even if it’s a great market.
If you have a lot of credit card debt on multiple cards then you may want to use a balance transfer. This will allow you to consolidate your debt so it’s easier to tackle it all at once. You may even be able to get an introductory 0% APR, which will allow you to focus on just paying down the debt without high-interest charges.
Create an Emergency Fund
Once you have paid down your debt you can then work on an emergency fund. If you suddenly lost your job or had another expense come up, do you have enough money to handle this? If you have an emergency fund already set up then you just want to look it over to make sure it is actually well funded. A well-funded emergency fund will usually cover six months’ worth of your expenses.
How much you have in the emergency fund is going to depend on your risk tolerance. The safe route is going to be to have six months in a deposit account so there isn’t a risk of losing any money. Others may just choose to keep three months and keep some of the money invested. No matter what approach you use, you definitely want some liquid money in order to last you a few months before you start investing.
Decide What Type of Investor You Are
When you are want to learn how to invest 100K, know that it is a ton of money and deciding the best way to invest it can be overwhelming, as well as exciting. You don’t have to navigate this alone. When learning how to be better with money, it can help to have someone on your side. However, finding the right help is going to depend on what type of advice you want, how much guidance you need, and how hands-off or hands-on you want to be with your investment.
- Do It All Yourself
If you are the hands-on type then it can be easier and cheaper to research, create, and manage your own portfolio. Before you start this approach, figure out which trading style is best for you, whether it’s day trading, passive investing, or active trading. When you have opened an account with any of the online brokerages then you can start to take your pick from a variety of assets. You want to include bonds, stocks, mutual funds, and other options.
- Consider Robo-Investing
If you want to automate the process and are looking for a low-cost and low-hassle solution then robo-advisors can be a solid option. These companies have automated portfolio management for much less than you pay a human for doing the same thing. Many providers do still have a human touch where you can get access to financial advisors who are able to help you customize your portfolio and answer your investing questions.
- Work with an Online Financial Advisor
If you are seeking full guidance and want someone to make investment recommendations for you, address other financial planning strategies, and manage your earnings then you need the next step up from a robo-advisor and should work with an online financial advisor. Online financial advisors will be less expensive than traditional advisors but will still give you almost the same level of service.
Work on Your Nest Egg
With this kind of money, you may think you can pay cash for your kid’s education or take on some other expenses. However, you want to pay yourself first. Children can get loans or scholarships while similar opportunities aren’t available to retirees. If you invest just $70,000 of your windfall and earn a 6% annual return then this means that in 25 years you will have an extra $300,000. This kind of padding is invaluable in retirement and makes it less likely that you will have to move in with your kids or even downsize.
Max Out Retirement
While you are working to max out your retirement, know there are also legal ways to dodge the IRS. If you want to avoid the IRS, you can stuff as much of your money as possible into a tax-favored retirement savings account. Retirement plans that are employer-sponsored, such as a 401k, and individual retirement accounts, such as traditional IRAs, can help shield a lot of money from your taxes. With this much money, you can afford to max out both if you are eligible.
Handle Taxes Now to Save as Much Money as Possible
Even though it’s important to focus on investing your money, you also want to know how taxes are going to make an impact so that you can retain as much of this money as possible. If you are worried about taxes, speak with a financial advisor.
Pay Attention to Fees
Just as you don’t want the IRS to take all your money, you also want to make sure that you aren’t losing a lot of it to fees. As you are considering new investments, you also need to be wary of fees since there is a lot of money at stake. Fees are dollars that you won’t recoup and one less dollar you have to invest. Money that isn’t invested doesn't get a chance to grow. Even just small extra fees can take a lot out of your investment returns.
Consider Peer-to-Peer (P2P) Lending
P2P lending is loaning your own money to someone else who needs it for any number of reasons. There are different reasons to use this type of investing instead of going a traditional route, such as real estate or stocks. Depending on where you invest your money, you can usually get a return of 5% to 10%. People need money to borrow and people have money to lend. This will allow you to have lower risk and higher returns since you are lending money directly to someone who is going to tell you how they are using the money.
With many platforms for this type of lending, you are investing money by loaning it and then getting quarterly or monthly deposits. This can create a stream of possible income, as well as create some more diversification for you. Another benefit is that it helps others. It can seem scary at first but there is always some risk involved in investing to begin with and you can decide what kind of risk you are comfortable taking on.
Work on Reallocating Your Portfolio
If you already have a portfolio for investing, keep it growing. Just because you are learning how to invest 100k doesn’t mean you should just scrap it altogether in order to accommodate some more money. Changes to the current makeup of your portfolio and your risk tolerance may be unnecessary. With extra money on hand to invest, take some time to review where you are with asset allocation. Look at areas where your portfolio may have become unbalanced and then rebalance it with some of your 100k.
This can reduce your exposure to risk from a lack of diversification. When looking at your portfolio, you also want to pay attention to asset location, which gives you tax diversification. With your IRA and 401k, you have tax deferrals covered but it can also make sense to hold investments that generate taxable income in these accounts. Slow and steady investments also belong in your portfolio, even if they are taxed.
Best Investments for Your 100K
When investing, there are plenty of different options to consider. If you want a diversified profile, you may want to consider a little bit of everything.
Mutual Funds, Index Funds, and ETFs
There are a lot of options when it comes to investing. ETFs (exchange-traded funds) and mutual funds can be a good way to create some diversity in your investments.
Mutual funds are basically baskets of investments. They could be all bonds, all stocks, or a combination. These funds have a manager who is choosing what to include in the fund. Mutual funds can be a nice in-between for those who want to invest in individual funds but don’t quite have the understanding of how it works yet or don’t have the time to continue to research every stock. This way, you can just research a mutual fund. Then you get to leave the investing decisions in the hands of the fund. The trade-off is that these funds can have some high management costs.
ETFs are like mutual funds but they trade like stocks. These can sometimes have lower costs than mutual funds. You are able to invest in certain types of companies, such as big corporations, specific sectors the economy like healthcare, or other types of investments, such as real estate and bonds. There are even ETFs that focus on an idea, such as renewable energy.
Within ETFs and mutual funds, an option can be index funds. Instead of having a manager who actively picks your stocks and makes trades, these funds will look to track the performance of a single market index. This means you can usually cheaply and easily invest in different ranges of companies. This also gives you some protection in case certain sectors or companies struggle. Over the long term, index funds can typically outperform managed funds.
Individual Stocks
Stocks can give you some of the best diversification. Not only do you have exposure to nearly every industry in the world but stocks also have been known to give you the best returns on your investment. The common thought when many people think of investing is that they pick one stock that is going to take off, such as the next Amazon or Apple.
However, trading individual stocks can be risky and time-consuming. You will need to do a lot of research on the companies and you should have some knowledge of equity analysis. There is always the potential for big gains but you need to know there is also an equal potential for big losses. There isn’t anything wrong with using your money and investing this way but ensure you have the right knowledge and time if you want this strategy to actually work.
Real Estate
If you like the idea of investing in real estate but aren’t sure where to start then you should consider investment funds. REITs can be popular and still allow you to invest in real estate without having to buy property. There are also ETFs that can allow you to track the real estate market as a whole. For those who want to purchase property, 100K is enough to make a down payment. However, if you live in an expensive area then you may want to purchase property out of state or outside of the region. Keep in mind that living in one place and having property in another place may complicate your taxes. You shouldn’t let this discourage you but you may want to speak with an expert about the best way to manage your finances if you do decide to go this route.
Other Safer Options
If you aren’t quite sure yet how to invest your money or you already have investments then there are some safe places you can store your money.
The simplest way to store your money is in a savings account. Many big banks will give you a very low-interest rate on your savings account so it’s best to look for a high-interest savings account. Here are some options you may want to consider:
A money market account can be the next option since these rates are usually higher than with a savings account.
If you are looking for another safe place to store your money then you can also look into a CD (certificate of deposit). With a CD, you don’t touch the money until the term has elapsed. With this approach, you get reduced liquidity but higher interest rates. Longer times will usually have higher rates.
You can also get a higher rate with a jumbo CD. Jumbo CDs are designed for balances of more than $100,000. Even though you have to give up your money for a little bit, you get a guaranteed payout. If you choose a bank that is FDIC insured then you can ensure your money is safe.
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Should You Invest All Your Money at One Time?
When you want to learn how to invest 100K, one of your questions may be if you should invest all the money at one time. Even if you have a great plan for the assets, it may not always be a wise idea to invest all the money at once. Instead, you may want to think about spacing out the investments over time and use a strategy, such as dollar-cost averaging. This investing strategy is where you start to invest a fixed amount at regular intervals. For example, if the ultimate goal is to invest $6,000 in one ETF, with this strategy you may invest $1,000 a month over six months instead of doing it all at once.
The advantage of doing this is you face less risk instead of spending all your money on an asset while it could have a high price. Markets do go up over time and crashes and corrections do happen. If you have a turn of bad luck and invest all your money before a downturn then you are going to lose big. If you space out investments, you can help mitigate this risk. This strategy is the most useful for assets that fluctuate more in price and it’s not a necessary strategy if you are putting money in a CD, where there is little to no risk for any loss.
To Conclude,
When learning how to invest 100k, there are a lot of things to consider. You first need to decide what kind of investor you want to be and then look at your portfolio for different options on what makes the most sense for your risk. Investing all your money at once may not be the best strategy if you want to face less risk. Always speak with a financial advisor in order to get the best information about how taxes will play into your investments.