There are a lot of reasons why you might want to invest $1 million. Maybe you received a windfall, want to grow your nest egg or want to manage some of your wealth. There are also a lot of ways to invest that money. You can choose to invest the $1 million in the market at once (as a lump sum) or over time (which is called dollar-cost averaging).
You will unlock plenty of investment opportunities with $1 million, from real estate to jumbo deposit accounts. If you’re unsure what to do with a million dollars, understanding your risk tolerance and investment goals is essential to determining the right strategy for you.
How much would you like to invest?
Different investors have different needs when it comes to investing. For example, if someone already has significant assets in addition to their $1 million investment, they might be able to pursue riskier strategies than someone who has to stretch that money over a few decades of retirement.
The first thing you should do is ensure that your basic financial setup is addressed. If you need to pay off any debts or put together an emergency fund, you should consider doing those things before deciding how to invest the rest of your money.
Age can be another factor. Younger investors can usually afford to be more aggressive with their investments than older investors can because they have a longer time horizon and are better able to withstand market volatility. Those approaching retirement are often advised to maintain a safer portfolio.
There are a few different approaches for the best way to invest $1 million dollars depending on your risk tolerance, financial goals and the amount of time for which you plan to invest it. Here are two of the best ways to do so.
Some investors may choose to invest the entire $1 million immediately, with a strategy called lump sum investing. A 2012 study from the brokerage firm Vanguard found that lump sum investing generally outperforms dollar-cost averaging over the long run in the U.S., U.K. and Australian stock and bond markets. Even though dollar-cost averaging mitigates the risk of a sudden downturn, Vanguard determined that lump sum investing nets higher returns two-thirds of the time.
Investing all of your money at once makes a lot of sense: The sooner that money’s invested, the sooner it can start growing in the stock market, the bond market or in a deposit account. For savings accounts and certificates of deposit (CDs), lump sums earn interest faster than periodic deposits.
Lump sum investments in the stock market don’t always outperform dollar-cost averaging. The biggest risk is a downturn in the market after you’ve invested, wiping out a significant portion of your investment’s value. For investors who intend on keeping their money in the market for several years or decades, this may not be a huge concern, but those downturns can definitely shake investor confidence.
Investing $1 million in predetermined intervals instead of all at once is considered to be a safer, more conservative investment strategy — even if the returns are generally lower in the long run. That approach is similar to common investment techniques like payroll contributions to an employer-sponsored retirement plan: steady, consistent investments that are meant to grow with market trends.
Limiting exposure to volatility is a key reason why investors choose the dollar-cost averaging strategy. While all investments in the market carry inherent risk, investing money over time rather than all at once can help to minimize those risks. Choosing a dollar-cost averaging strategy also eliminates the guesswork involved with trying to buy into the market at the opportune time if you stick to the investment schedule.
A CD ladder is a method of saving that could be considered a dollar-cost averaging strategy. It involves spreading your deposits over several fixed-term, fixed-interest deposit accounts that mature periodically. Unlike market investments, CDs are safe, stable and carry no potential downsides (except perhaps the opportunity cost of earning higher returns).
Investors have plenty of options when it comes to how to invest $1 million dollars. With that much capital, many investors choose to diversify their assets. For example, most investors try to maintain an asset portfolio with fixed percentages of stocks and bonds, but investors with more capital can invest in other assets like real estate.
The stock market is perhaps the most popular way to invest, and many people are already tied to the market with a 401(k) or other workplace retirement account. To invest in stocks outside of those accounts, you must open a brokerage account. Some brokers offer customers the ability to trade individual stocks, though to make money in the stock market, many experts recommend a diversified portfolio made up mostly of index funds. Reinvesting dividends — a shareholder’s portion of a company or fund’s profit — is another way to grow your investment over time.
The S&P 500 index is composed of 500 publicly traded companies that represent different sectors of the economy. It can work as a rough proxy for overall market performance, even though plenty of stocks aren’t included in the S&P, particularly for smaller companies. The S&P has performed well over the long run: The index has gained value in 15 of the last 20 years, and an investment made 20 years ago would be worth almost four times as much now.
There are downsides to stock investments though, particularly if the broader economy starts to struggle. In 2008, the start of the Great Recession, the value of the S&P 500 shrunk by 38%. Even as part of a well-balanced portfolio, stocks can carry risk.
A popular alternative to stocks are bonds, which are financial instruments that are used by corporations or governments to raise money. Investors can purchase individual bonds with a predetermined term, interest rate and price through a brokerage account or buy a fund that tracks a variety of these assets. Bonds function as an I.O.U. between the issuer and the buyer.
Bonds typically offer less risk and lower returns than stocks, which is why many investors choose to complement their stock investments by holding onto some bonds, as well.
Bonds aren’t entirely without risk, however. If the U.S. Treasury issues a bond, it’s a virtual guarantee that the government will be able to pay the value of the bond once it’s reached its maturity date. But if a corporation issues a bond, there’s a chance that it may not be able to fulfill its debt obligations — which is why these bonds tend to promise a higher rate of return than government-issued bonds.
With a million-dollar budget, investors can choose to enter the real estate market. There are several ways to invest in real estate. For example, you could buy a home to be your primary residence and eventually sell it, you could rent out an investment property to gain some extra income or you could invest in commercial properties.
While $1 million might not be enough for some types of real estate purchases, a real estate investment trust (REIT) is a way for people to invest in a fractional share of a real estate holding. A REIT works much like a mutual fund; instead of investing a significant amount of money into one property, investors spread the risk over a broad range of properties with a small investment interest in each of them.
Real estate is a tempting investment opportunity, as prices generally tend to rise over the long run. Still, these investments carry some risk, as well as additional costs related to maintenance and taxes for the properties.
The safest kind of investments are deposit accounts through a financial institution that offers either FDIC or NCUA coverage. That insurance provides a government guarantee that any deposit up to $250,000 will be paid out, even if the financial institution fails.
Some popular deposit accounts designed to gain interest are savings accounts, money market accounts and CDs. Money market accounts work much like savings accounts do, though they’re held differently by the financial institutions.
CDs offer less liquidity than either money market or savings accounts, but they can offer higher interest rates. If you seek to withdraw funds from a CD before it reaches its maturation date, you incur a penalty that’s often calculated as a percentage of the account yield.
For investors who wish to keep their million as safe as possible, deposit accounts are a solid option, even if the interest rate environment provides little return on those balances. Jumbo accounts, which often require balances of six figures, provide higher interest rates than normal accounts.
There are entire industries dedicated to helping people determine how to invest their money with as much or as little oversight as they’d like.
Robo-advisors are often available through financial institutions or brokerages, and they can automatically manage your portfolio with algorithms determined by your goals, risk tolerance and other factors. Registered investment advisors (RIAs) are certified professionals who can help guide your investments. Different RIAs may specialize in different types of investments, serve different communities and have different theories as to the best way to invest.
Ultimately, you may decide that you know the best way to invest $1 million dollars yourself and you don’t need to work with a robo-advisor or RIA. Advice and guidance can be useful, but savvier investors often have a good idea of what their goals are and how the market works. However you decide to invest your money, be sure to orient your strategy around those goals.
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.