How to Invest $100,000

You’ve managed to rack up $100,000. Congratulations! That’s no easy task and you should be proud of yourself.

Having $100,000 is a massive milestone in your personal finance journey. You might not be wealthy yet, but you’re well on your way. Moving forward, the investment strategy you implement is critical.

Investing $100,000: An Overview

Before investing any of your hard-earned money, you’ll want to consider everything outlined below. Here is how I typically build my investment strategy.

1. Outline your goals

The first thing you’ll want to do when investing $100,000 is to outline your financial plan.

Chances are you are a multi-faceted person with many individual life goals. For example, you may want to get married and start a family, buy a house, put your kids through college, and retire. Or you may want to take a mini-retirement and spend some time traveling while you plot your next career move.

All of these initiatives require careful planning and execution.

Make a list of priorities so that you can determine the types of accounts to fund. For example, your five-year outlook may include putting a down payment on a house or traveling to Spain. Or you may wish to sacrifice travel to put more money away now and retire earlier in life.

Regardless, keep in mind that you probably don’t want to invest any money that you’ll need within the next few years. If you plan to use the money for a down payment in three years and the market crashes, you’re out of luck. If you have a longer-term outlook, your money would have a chance to rebound from that crash and grow.

2. Max out your retirement accounts

Regardless of your long-term financial goals, it’s important to put money aside in a retirement plan so that it can grow on a tax-free or tax-deferred basis.

Chances are you already have an employer-sponsored retirement plan, such as a 401(k) set up. Or you might have a traditional IRA or Roth IRA. If you don’t, you should absolutely look into that.

Each one of your retirement accounts has an annual contribution limit. For example, the maximum 401(k) contribution for the 2020 tax year is $19,500 while IRAs have a combined contribution limit of $6,000 between Roth and traditional accounts.

Consider maxing out your 401(k) if you are in a position to do so, especially if your employer offers a match. After that, max out your IRAs, putting a total of $25,500 into tax-friendly retirement vehicles. Assuming you started investing with $100,000 and didn’t have to set any money aside for emergency savings, this leaves you with $74,500 left over to put into other areas.

Keep in mind that if you’re 30, you should try to have the equivalent of your annual income saved. By the time you’re 35, you should try to have twice that. So, if you’re behind in your retirement savings, you may want to put even more aside.

3. Invest your remaining funds

The next step is to take your remaining funds and invest them so that the money grows over time.

How much you put into the stock market — and where you put the money — is unique to your individual situation. Only you can determine how to invest.

You might want to load up on some Vanguard ETFs and index funds to spread risk around. They make a great foundation to any portfolio. Or you may want to add individual stocks into the mix. For the best results, build a diversified portfolio that covers a lot of ground.

Determine your risk tolerance

To determine where to stash your money, you need to figure out what type of investor you are.

For example, if you are a young investor with decades of prime working years ahead of you, you’ll probably want to take a more aggressive approach than someone who is approaching retirement age. This means investing heavier in high-risk equities that may have more volatility but could lead to stronger returns.

If you’re older, then you should talk to a financial advisor about structuring your account to protect yourself from downturns. Your advisor will tell you if you are in a position to maximize growth or take a more conservative approach.

Diversify your portfolio

The next step is to move forward with diversification.

The amount you allocate into each category is going to be determined by the state of your existing portfolio. For example, you may have $10,000 in stocks or bonds and are considering adding other types of investments to achieve greater balance.

If you don’t have anything in your investment portfolio and you’re just starting out, here are some ways you can spread out your funds:

  • Individual stocks, index funds, exchange-traded funds (ETFs), and mutual funds (25-75%)
  • Bonds (5-20%)
  • Real estate investment property or REITs (5-15%)
  • Alternative investments (5-15%)
  • Cash or cash equivalents (10-20%)

To take a more aggressive approach, go heavier on individual stocks and funds than on bonds or cash equivalents.

Tips for Investing $100,000

Use expert advice

It can be overwhelming trying to determine the types of stocks you should buy. There are thousands of publicly traded companies to choose from, making it difficult to narrow down the best-performing companies.

But you don’t have to go it on your own. Consider using a service like the Motley Fool’s Stock Advisor, which delivers frequent stock tips that are hand-picked by experts. (Note that The Motley Fool now owns Millennial Money, but I’ve been a fan for years.) You should also compare this data to other investment websites like the Wall Street Journal, Investor’s Business Daily, and other leading financial publications. Armed with information from the experts, you can allocate your funds with more confidence.

Learn how to read stock charts

As an investor, you can never have too much information. One way to figure out whether a company is worth investing in is by reading its stock chart. By understanding metrics like the price-to-earnings ratio (P/E ratio) and dividend yield, you can get a better sense of a company’s recent track record and overall value.

Learning how to read stock charts also helps you cut through the noise and discover whether companies are undervalued or overvalued — reducing the chances of making a bad decision.

Think long-term

It’s sometimes said that the best stocks are the ones you never have to trade. Investors sometimes get into trouble when they rush into the stock market and begin buying and selling stocks quickly based on limited data and insights. It happens too often that new investors get caught up in the hype surrounding a “hot ticker” that people are touting on social media and elsewhere. This is an easy way to lose money.

Instead, focus on identifying companies that are stable and come with great dividends — the ones you anticipate sticking around and remaining competitive for many years.

Simply put, investing with a long-term strategy increases your chances of success in the stock market. It’s also far less stressful to invest this way because you don’t risk losing tons of money with each market fluctuation.

Are You Ready to Invest?

Before you make any sort of investment or decisions about asset allocation, it’s important to do a gut check and make sure you’re in a position to start investing.

Here are some things to consider.

Your debt is paid off

There’s little point in investing if you’re spending more money on high-interest credit card payments and loans than you are gaining in investment returns.

Bad debt is one of the top wealth killers. As such, it’s something to avoid at all costs.

If you have debt, focus on paying it down and getting it to a manageable level. Once you’ve done that, you can shift your focus to investing.

The exception to this rule is if you are paying down a massive amount of student loans. If this is the case, you may want to start investing while paying your loans off so that you don’t lose too much time.

For example, if you are hundreds of thousands of dollars in debt, you could easily lose a decade or more of investing — which hurts when you realize how compounding works.

If this all sounds complicated, that’s because it is. Remember that it’s never a bad idea to speak with a qualified financial planner to figure out if your current debt load allows you to invest.

You have emergency savings

As the pandemic demonstrates, emergencies can arise when you least expect them. You have to be prepared for sudden job loss or missed time from work due to illness.

Unfortunately, when the pandemic hit, many people were financially unprepared. And they paid the price, having to wait for government assistance that took many months to arrive.

The last thing you want to do is wait on the government for a handout or resort to asking friends or family for money. Plan ahead and have money in the bank to pay your rent or mortgage and put food on the table.

The rule of thumb is to have an emergency fund set aside to cover at least six months’ worth of expenses. So, form a budget, determine your monthly spending, and put this money into a secure location. This means if your bare-bones living expenses are about $2,500, you should have at least $15,000 or more set aside in a bank account to float you if needed.

Best practices suggest storing emergency savings in a high-yield savings account (HYSA) where you can’t access it on a daily basis without first transferring funds into a checking account. This can prevent frivolous spending while also enabling you to benefit from considerably higher interest rates than you will find at a traditional bank.

You are mentally prepared

You should also make sure that you’re mentally prepared for the challenge of investing.

It’s one thing to put $100,000 into a brokerage account or retirement account so that it can grow. It’s another thing to manage effectively. And sometimes, investors can be their own worst enemy. What happens if the market tanks and you lose 10% in a week?

Oftentimes, investors make rash moves by trying to time the market. For example, they may sell a stock thinking it’s about to drop in value or rush into an investment thinking that a company is about to skyrocket. Trying to time the market is very dangerous and frequently leads to capital loss.

Before you put your money aside for growth, prepare yourself for the task at hand. Form a strategy so that you can manage your investments effectively — protecting yourself from emotional investing while maximizing long-term gains. A steady temperament is among your most valuable assets as an investor.

Frequently Asked Questions

Is real estate investing risky?

Real estate is considered to be one of the most secure types of investments because it deals with a type of tangible security. It can be a great way to increase your net worth, and it can also lead to a steady cash flow and tax advantages.

That said, all investments carry risk — and there are many pitfalls to avoid when investing in real estate. Investors should go in with plenty of cash reserves and a detailed strategy for flipping a house or owning rental property.

Another way to reduce risk is to invest in real estate investment trusts (REITs), which you can trade like stocks. REITs allow you to profit from real estate investments without having to buy any physical property or deal with tenants. It’s much less resource-intensive and comes with less barrier to entry.

Is $100,000 a lot of money?

Yes. $100,000 is a lot of money for everyone — even the richest people. However, it’s important to provide some context as you assess its overall value.

For example, having $100,000 in cash savings is a lot of money — more than the average person needs at any given time. It’s also enough to buy a car or put down a down payment on a solid house in most areas of the country.

From a retirement standpoint, however, it’s not that much money. If you want to retire young, you need to keep earning and growing your money by investing it in the stock market and other assets.

Your best bet is to look at $100,000 as a launchpad that you can use to build a secure future and eventually gain financial independence. This requires careful investing, discipline, and determination.

How much can I make investing $100,000?

For most investors, growing a brokerage account from scratch is a bit of a slog. But once you hit $100,000, everything changes because your money starts producing significant gains.

For example, suppose for the sake of argument you have a portfolio worth exactly $100,000 filled with stocks that pay 5% in annual dividends. You’ll earn a sizable amount of money as an annual return — $5,000 — just for letting your money sit untouched. And that doesn’t take into consideration the market returns you could earn.

Granted, the market is highly volatile. But if you make the right investments — meaning you avoid taking on too much risk and carefully consider where you put your money — in time your $100,000 could double or even triple in value.

Is the stock market right for me?

All investors should consider putting their money into the stock market. The stock market is risky. But the potential gains that you can make over time are too good to pass up.

A better question is to ask whether the stock market is right for you at this time. If your debt is paid off or at a minimal level, and you have at least six months of living expenses tucked away, you should strongly consider entering the stock market.

Don’t worry too much about the economy when you’re putting your money into the stock market for the first time. Remember that the economy and the stock market operate independently of one another and the market will always be volatile. Focus on building a long-term strategy and ignore bullish and bearish trends.

What is a value stock?

A value stock is a share of a company that trades at a lower price than its earnings, sales, or dividends. A value stock is generally favorable to investors — some people think about it as buying a stock that’s on sale. They typically aren’t expected to increase in value as fast as growth stocks, but they tend to be more dependable and less volatile than some high-risk, high-return alternatives.

What is day trading?

Take my word for it: Day trading is one of the most dangerous things you can do as an investor. It involves trying to time the market by buying and selling stocks based on how you think the market is trending.

Day trading is a bit like going to the casino — it’s incredibly risky, and you’re going to lose more often than not most likely. Be very careful about the companies you invest in, and plan for the long term. Leave day trading to professional investors — many of whom are more interested in long-term plays anyway.

Should I use a robo-advisor?

If you are new to investing, using a robo-advisor from a company like Betterment or Wealthfront can be a great idea. It can help you allocate and manage your investments, preventing you from having to do much of the heavy lifting when it comes to researching stocks. This is a hands-off approach to investing, which is appealing to many newcomers.

The Bottom Line

Any way you slice it, you have $100,000, and that’s something to be proud of. Now the trick is to make the most of it. Now that you’ve reached this milestone, don’t squander it!

The truth is that $100,000 can go a lot faster than you might think. If you start buying things like expensive cars and lavish vacations, you may find yourself broke or buried in debt before you know it.

Put your money away so that it can grow and pretty soon you’ll be collecting regular payouts in the form of interest and dividends. Investing gets easier over time as you forge your way toward financial independence. I’m rooting for you every step of the way.

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