If you’ve got $100,000 in spare cash lying around, you should be invested. Investments are the only way to generate real wealth over time, through the power of both higher returns and compound interest. The problem is, according to a GOBankingRates survey, over 47% of Americans aren’t investing their money, and fewer than 20% are investing in a 401(k) or an individual retirement account. With these low participation rates, it seems that the main question investors have is not how to invest $100,000, but if they should.
For some, fear is what keeps them from investing; for others, it’s a concern that they don’t make enough money to invest. The good news is it’s never too late to start. With $100,000 available for investment, you can build a diversified portfolio to meet your investment needs, from generating current income to growing your money for retirement. Although the best way to invest $100,000 is different for everyone, if you’re looking to find out how to invest $100,000 to make $1 million over time, here are some options you might want to consider.
This guide to the best ways to invest $100,000 will give you ideas on where to put your money and tell you what you need to know before you invest:
- What To Do Before You Invest
- At a Glance: Best Ways To Invest $100,000
- Retirement Savings
- Index Funds, Mutual Funds, Individual Stocks and ETFs
- Real Estate
- Peer-to-Peer Lending
- Diversify Your Funds
Investing is important for your long term financial security, but you need to build a base before you put your assets at risk. Ideally, you should be tying up your investment funds for the long term, so you’ll need to shore up your finances with a solid base for the near term.
Create an Emergency Fund
One of the most important steps you can take before you begin investing is to build up your emergency fund. If you have a surprise medical bill or auto repair, you can’t go dipping into your long-term investments to satisfy those needs. Most experts suggest you should set aside between three and six months of your income to cover unexpected expenses, job loss and the like.
Pay Off Debt
Debt is crippling when it comes to financial security. With interest rates averaging in the double digits on credit cards, it’s a near certainty that you’d be paying more in interest on your debt than you could earn on your investments. Before you set aside long term investment money, clear out all of your high-interest debt.
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With your debt paid off and an emergency fund in place, it’s time to get serious about investing. Here are the best ways to take $100,000 in available funds and make it grow:
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Your first step when it comes to long-term investing is to set up your retirement accounts. Maxing out your retirement accounts is critical for a number of reasons. For starters, you get tax advantages by putting your money in a retirement account. In the case of an employer-sponsored retirement plan, your employer might match at least a portion of your contributions. This is the easiest form of free money you’ll ever get in the investment world.
The two main types of retirement accounts are 401(k)s and IRAs. If you work for a nonprofit organization, you might be offered a 403(b) instead of a 401(k). Bear in mind that retirement plans are merely account structures. The individual investments you can place within a retirement account are described below. Here’s a look at the limits of these types of retirement plans for 2019.
For 2019, you can contribute up to $19,000 to a traditional or safe harbor 401(k) plan, or up to $25,000 if you’re at least 50 years old. You can only contribute up to the amount of your earned income. Your combined employee contribution and employer match cannot exceed $56,000, or $62,000 including catch-up contributions for those ages 50 and above. Money grows tax-deferred until it is withdrawn.
Rules for 403(b) plans are somewhat similar to 401(k) plans in that you can contribute up to $19,000 for 2019, with catch-up contributions of up to $6,000 allowed for those who are at least 50 years old. Some plans might also allow contributions of up to $3,000 for up to five years for those who have been in the plan for 15 years. As with 401(k) plans, money grows tax deferred until it is withdrawn.
Individual retirement accounts, or IRAs, are personal plans rather than employer-sponsored ones. Contributions are limited to $6,000 for 2019, with an additional $1,000 in catch-up contributions for those 50 or older.
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Each of these options is a way that investors can get exposure to the stock and bond markets. Here’s a quick overview of why each of these types of investments can be appropriate for someone looking to invest $100,000.
Index funds are currently all the rage because they make investing so easy. An index fund can be a good investment for your $100,000 because you’ll know exactly what you’re getting — index funds simply track the returns of a particular index. For example, if you want to “own the market,” you can just buy an S&P 500 index fund, which will provide you with a return that matches that index as closely as possible. That type of investing has proven profitable over time, with the Vanguard 500 Index Fund Investor Shares, one of the leaders in the industry, returning over 11% per year since its inception in 1976.
With $100,000 to invest, you can diversify your portfolio across a number of different index funds that match your investment objectives. For example, if you believe that the large-cap U.S. market, the foreign small-cap market and emerging market bonds are the areas that will appreciate in the coming months, you can disperse your $100,000 across those investment sectors using index funds. Even with $100,000, it’s hard to get this type of global stock market exposure purchasing individual stocks, so index funds can save you all of the legwork.
One of the big advantages of using $100,000 to buy mutual funds comes in terms of pricing. For funds that charge a sales load, you can usually get that commission reduced if you buy in bulk. With a large sum like $100,000 to invest, you might also get access to institutional-level funds, although the minimum there is often $1 million or more. With an investment of that size, you can also spread your money out across enough diverse mutual funds to build a long term, sustainable portfolio.
Many investment advisors recommend clients have at least $100,000 to invest before purchasing individual stocks. The reason is that individual stocks carry a relatively high amount of risk, in terms of price fluctuation. With less than $100,000, it can be hard to lessen the risk of investing in individual stocks. But with $100,000 or more, you can purchase a significant amount of different stocks, thereby lessening your risk while still capturing upside potential.
Individual stocks can have widely varying returns. In 2018, for example, the best performing stock in the S&P 500 index, Advanced Micro Devices, returned nearly 80%, while the worst-performing, Coty, lost more than 60% of its value.
Exchange-traded funds combine elements of both mutual funds and individual stocks. With certain ETFs, you can diversify your portfolio like with buying a mutual fund but still have the freedom to buy or sell shares on the stock market whenever you want. They can be a good option for an experienced investor with $100,000 to invest because many ETFs are passively managed. If you have some experience in the market, you can pick and choose the sectors, industries or markets you feel have the best chance for appreciation rather than handing over those decisions to a mutual fund manager.
Real estate is a less liquid way to invest than the stock and bond markets, but it can provide high returns. In fact, a Harvard study found that residential real estate returns just a bit more than equities over time, but with considerably less risk. Here are three ways you can use $100,000 to invest in real estate.
The most traditional way to invest in real estate is to buy investment property. With $100,000, you can buy a home outright in many markets; at the very least, you can put down a significant down payment — or you can diversify your holdings across a number of different investment properties. If you’re knowledgeable in the area, $100,000 can also finance a house flip.
Raw land can be a cheaper option than developed investment property. You can use your raw land as a platform to build structures in any way you want, or you can hold the land as a long-term speculative investment. But raw land is just that: a speculation. It can be a good option if you’re an experienced real estate investor, but it can be hard to generate a return. Unlike bonds and rental property, which pay a regular stream of income, raw land doesn’t pay anything unless you sell it. Since many plots of land don’t offer much appreciation potential, it pays to know what you’re doing before you use your $100,000 to buy raw land.
Crowdfunding is a relatively new way to invest in real estate. Crowdfunding can reduce your risk in real estate investments because you’re combining your funds with other investors’ rather than shouldering the risk of an entire project yourself. Additionally, some sites choose properties on your behalf and spread out your investment across a number of different real estate projects, so you can automatically diversify your risk rather than having to plunk down $100,000 into a single property.
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Peer-to-peer lending is another relatively new investment avenue that can help diversify your overall portfolio while providing additional benefits.
Peer-to-peer lending returns vary, but you can end up earning strong returns if you do your homework. At peer-to-peer lender Prosper, for example, historical returns for investors have averaged 5.3%. Because you get to pick and choose who you’ll lend your money to, you can screen out candidates who seem too risky and only invest in those who seem willing and able to pay you your return. With $100,000, you can reduce your risk even further by diversifying your investment across a number of different borrowers.
A source of passive income of any kind can be a great investment because you don’t have to actively monitor what’s going on. With peer-to-peer lending, once you find candidates with acceptable risk profiles, you can just sit back and watch the income roll in on a monthly or quarterly basis. If you’re investing $100,000, that could amount to significant checks. For example, if you’re earning 10% on your peer-to-peer investments, you’ll pull down over $800 per month.
Ability To Help Others
Not many investments come with the ability to help others in need. Although you can make charitable contributions, you won’t receive a financial return on your donations. With peer-to-peer lending, you can actually make a difference in someone else’s life while still earning an investment return. With $100,000, you can make a huge difference to a number of different people.
One of the true luxuries of having $100,000 to invest is that you can successfully diversify your portfolio across different asset classes, types of investments and varying risk profiles. With a $500 investment in an S&P 500 index fund, if the stock market sells off, your investment will sink right along with it. With $100,000 spread out among different asset classes, you minimize the risk that your entire portfolio will go down at the same time.
John Csiszar worked for 19 years as a financial advisor, both with a major wirehouse and at his own registered investment advisory firm. Along the way, he earned his Series 7, 63, and 65 licenses, in addition to a California insurance license and a certified financial planner designation.
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