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Updated on Friday, July 30, 2021
The best way to invest $100k comes down to figuring out what’s optimal for your unique financial situation. While that may seem like a daunting task, you can start by considering your current financial profile and various investing and savings options.
You might consider investing your $100k in exchange-traded funds (ETFs), mutual funds, stocks, real estate or cash. And, of course, you can always consult a financial professional if you need help. We’ll walk you through how to figure it out, what to know about your investing options and what to keep in mind throughout the process of investing $100k.
- What do to with $100k: 4 steps to figure it out
- Where to invest $100k
- What to keep in mind before investing $100,000
What do to with $100k: 4 steps to figure it out
Step 1: Assess your current financial situation
Before you make any decision about what to do with $100k, you first need to take a step back and look at your current financial situation. Consider if there are any pressing issues you need to take care of, like tackling high-interest debt, such as credit card debt. You may also want to think about other financial priorities, such as ensuring you have some sort of emergency fund.
You may not want to put all the money toward paying down debt or starting an emergency fund, however. Consider taking the time to really think about where the money will have the most impact on your finances.
Also, understand that if you received this money due to the death of a close relative or other significant life event, you may want to wait to make any major decisions until you have worked through the emotions of such an event. A financial advisor may be able to help you work through different scenarios and figure out how to best proceed.
Step 2: Make sure you’re already making the most of your retirement accounts
If you want to determine your best way to invest $100k, first look at your retirement accounts, if you have any. Tax-advantaged retirement accounts can be more efficient in the long run, providing you a chance to grow your money in a way that comes with a tax benefit.
Review the contribution limits of your accounts, and consider the tax deduction phaseouts. With the help of tax-deductible contributions, you can reduce the immediate tax impact of your $100k windfall. For 2020, you can contribute up to $19,500 to a 401(k) and $6,000 to a traditional or Roth IRA. People who are at least 50 years old can make a catch-up contribution of $6,500 to a 401(k) or $1,000 to an IRA. If you’re self-employed, though, you might be able to contribute even more to a SEP IRA.
With a traditional 401(k) or IRA, or a SEP IRA, you contribute with after-tax money. This allows you a tax break today, even though you pay taxes later, when you withdraw the money from the account. Or you may fund a Roth 401(k) or IRA with after-tax dollars. While you won’t see a tax break today, the money you invest grows tax-free and you won’t have to pay taxes later when you take distributions.
Don’t assume that you need to max out your tax-advantaged retirement accounts if you already have a pretty good nest egg, or if you know you’ll want access to your money without worrying about early withdrawal penalties. Consulting with a tax professional can help you figure out your best way to grow your wealth while paying attention to tax consequences.
Step 3: Determine your risk tolerance and time horizon
Your risk tolerance and time horizon can affect what you decide to do with $100k. Basically, your risk tolerance is how much potential loss you might be able to sustain in your portfolio. Your time horizon, or how long you plan to need to be able to hold an investment, is connected to your risk tolerance.
For example, if you are young, and at least a couple of decades away from retirement, you’re likely to have a higher tolerance for risk. Your portfolio will have time to recover from market downturns, so you might be able to devote more of your assets to stocks, which are generally a riskier asset than bonds or other fixed-income investments like certificates of deposit (CDs).
On the other hand, if you’re within a few years of your planned retirement, you might be wary of putting too much into stocks. Instead, you can have more of the so-called safer investments in your portfolio, and fewer risk-on assets. The older you are, the less time you will have to recover from stock market downturns, so less risky assets can create a degree of stability in your portfolio.
Step 4: Decide if you’d prefer passive or active investing
Finally, when figuring out your best way to invest $100k, you need to consider your own investment strategy preferences. Because $100k is a significant amount of money, you should carefully consider how involved you want to be in the day-to-day decisions.
If you enjoy hands-on, DIY investing, you may want to choose your own stocks or funds, and take on the job of rebalancing your portfolio. You’ll have to spend time and energy researching your choices.
On the other hand, if you prefer to let others do most of the heavy lifting, you can automate with a robo-advisor, or hire a human investment advisor to manage your portfolio. That way, you can provide a general direction and goals, while either an algorithm or a human professional largely manages your investments.
Where to invest $100k
ETFs and mutual funds
Mutual funds, which represent a collection of investments that are similar, can give you a degree of instant diversity. Rather than owning one stock or bond, you could own pieces of hundreds of securities, all in one fund. You might, for example, consider an index fund that tracks a stock market benchmark like the S&P 500. This can potentially protect you to some degree when a single stock drops, as it doesn’t have as big an impact on your portfolio. At the same time, if the broad stock market drops, your index fund will drop along with it. Through mutual funds, you can invest in stocks, bonds (both domestic and international) and a variety of specific sectors, such as energy, health care and industrials.
Exchange-traded funds (ETFs) are similar, in that they can give you exposure to a wide variety of investments in a single fund. A key difference is that an ETF trades like a stock on the exchange, meaning you can trade it throughout the day, like an individual stock. Mutual funds can only be traded once a day.
Mutual funds and ETFs may be considered less risky than choosing just a few individual investments, because of their diversity and wide market exposure. They also represent different degrees of risk. For example, a stock ETF may have more risk than a bond ETF, because bonds in general are often considered less risky than stocks.
ETFs can be a good choice for those who want a somewhat hands-off approach to investing. You can focus more on asset allocation than on picking individual securities. You can invest in stocks, bonds, currencies and commodities, and different sectors. You can rebalance your allocations according to your risk tolerance and time frame as you approach retirement or other financial milestones.
Individual stocks are often considered riskier than mutual funds and ETFs. When investing in individual stocks, you encounter single-stock risk. This means you could lose all of your initial capital if bad news bankrupts a company, or there is some other problem that sends the stock reeling. However, for those who like to choose their own investments or trade frequently, individual stocks can provide a potentially rewarding way to invest a portion of $100K. And you can choose several stocks in order to diversify, instead of focusing on only a few.
It’s important to note that average annual returns depend on various companies, and trying to pinpoint exactly what individual stocks will return can be difficult. You may have one small-cap stock that is extremely volatile and loses 50% in a week on bad news, while you have another that returns 300% in a year, and yet another that is less volatile and returns only a small percentage in a year. You can do your research and see how the company has performed in the past, but you must understand that when it comes to stocks or funds, past performance is no guarantee of future returns.
There are different ways to trade stocks, including buying and holding for long periods of time and day trading. Day trading is often considered far riskier than buy and hold, and many experts advise against it for everyday investors.
Additionally, you can look for dividend-paying stocks, which pay shareholders a portion of a company’s earnings, often on a quarterly basis. Some funds offer dividend payments as well. Dividend aristocrats, for example, are companies that have raised dividends consistently for decades. While nothing is a sure thing, a company that can keep increasing its dividends may be a solid choice for the long term, even if the annual returns aren’t dramatic.
Real estate investment trusts (REITs) can provide a way to add real estate exposure to your portfolio without the need to buy properties. REITs can also provide some income, as these entities are required to pay out 90% of their taxable income annually to shareholders. Income investors disappointed with dividend yields from some stocks, or with income from bonds, can consider adding REITs to their portfolio to provide access to potential dividend income.
However, there are tax complications associated with some REITs, so you need to understand these. This may be something you choose to discuss with a financial advisor or tax professional. Additionally, there are some higher-risk REITs that could potentially offer bigger returns — but also increase your chance of loss. It’s important to carefully consider the types of REITs you choose and make sure you understand them before you invest.
For those who are interested in having a more hands-on experience with real estate, putting some money toward investment properties with tenants can offer a source of income.
There are a number of different savings products available, including savings and money market accounts and CDs. Depending on the type of account and the current interest-rate environment, you might see yields as low as 0.01% on traditional savings accounts to 2% or more on high-yield savings accounts or CDs.
CDs often require you to lock your money away for longer periods of time, and there can be penalties for withdrawing before that period is up. While they can offer higher returns than even a high-yield savings account, it’s important to note that in a low-rate environment, you might have a hard time finding yields of even 1%.
In general, savings can be good for those using a bucket strategy when they need to access cash. For example, you might keep what you need to cover expenses in the next six months to a year or more in a cash account you can access easily. That way, if you need cash quickly, you don’t need to sell investments at a loss, or pay capital gains tax on a gain in order to access it.
Savings also can be a good choice for those who need to shore up an emergency fund, or are putting aside money for a short-term goal, such as a down payment on a home. Remember that, in a low-rate environment, your cash may not earn enough interest to even keep up with inflation. However, the main goal with cash savings is not to get great returns but to have it on hand if needed. It might make sense to put the entire $100k in a high-yield savings account for six months or more while you consider your options.
What to keep in mind before investing $100,000
- You don’t need to invest $100k all at once: Rather than trying to pinpoint your best way to invest $100k all at once, you can consider dollar-cost averaging. With this strategy, you put your money into the stock market in increments, allowing for consistent investing that can provide you with a way to take advantage of market drops through buying shares at lower prices.However, there is research that indicates you might benefit by putting all your money into the stock market at once. Carefully consider your own risk tolerance and needs, as some people prefer to spread out the risk of a volatile market.
- Make sure you diversify: When trying to figure out how to invest $100k, you shouldn’t put it all in one place. Consider a portfolio allocation that is likely to help you reach your goals while providing you with some stability. A mix of assets including stocks, bonds and short-term reserves, such as cash, can prevent you from being too exposed to one particular asset class.Eventually, through a careful balance of risk and protection in your portfolio, you may be able to turn that $100K into $1 million or more. But remember that you can never fully predict the performance of your portfolio, as there are many unexpected events that may shake it up at a difficult time, such as when you are close to retirement.
- Don’t forget about fees: Pay attention to fees. Higher fees can erode your real returns. For example, if you use individual stocks and trade frequently, commissions may reduce how much you actually end up with (not to mention that you might have to pay short-term capital gains). However, you can reduce this risk by choosing one of the many platforms that offer commission-free trading. Also keep in mind that actively managed mutual funds and ETFs can charge higher fees than passive funds that simply track an index, and a human financial advisor might charge more than a robo-advisor. Consider your needs and then look for your best way to meet them in a cost-efficient manner.
- Regularly check in on your asset allocation: You’ll want to review your asset allocation to make sure it’s on track. If you have one asset class that has gained, you can sell the excess shares and use the profits to buy into other asset classes at lower prices. Depending on your situation, you might want to rebalance your portfolio at least once a year, or when your asset allocation strays by 4% to 5%.
- Give your money time to grow: Realize that no matter what you decide to do with $100k, you need to give your money time to grow. Any investment strategy requires a degree of patience and discipline. Don’t be swayed by short-term volatility, and instead put together a long-term strategy that can help you grow your wealth consistently.
If you have less than $100,000 to invest, you still have several options. Check out our guides to learn how to invest based on your current assets.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.