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If you are looking to invest $100,000, you are in a good position. Combine this nest egg with the power of time and you could be looking at real financial security in the future. In fact, over time, you could turn that money into a million or two, even without being an investment genius.
Here’s how to invest $100,000 and what to watch out for along the way.
How to invest $100,000
1. Start today
It’s hard to overstate how important time is to your returns. Compounding can work wonders on your money, which is why it’s essential to start investing today, even if you don’t have $100,000. For example, look at the power of time when using typical ROIs:
|Starting amount||Annual return||After 10 years||After 20 years||After 30 years||After 35 years||After 40 years|
|$100,000||8%||$215,893||$466,096||$1.01 million||$1.48 million||$2.17 million|
|$100,000||ten%||$259,374||$672,750||$1.74 million||$2.81 million||$4.53 million|
Starting at $100,000 and without adding any money, you could accumulate over $1 million with returns of 8% per year over 30 years. But if you can give yourself five more years, you can have nearly 50% more, while another decade will net you over $2 million. Of course, the numbers improve with annual returns of 10% and more time.
If an annual return of 8% seems high, know that it is lower than the average rate of return of 10% for an investment accessible to everyone, regardless of their knowledge or their income. (More on this exact investment in a moment.) So it’s important to start investing today.
2. Determine what you want to invest in
You will need to understand why you are investing and why, as you may be able to take advantage of additional bonuses that could help your money grow even faster:
- General wealth: If you are looking to create long-term wealth from your money, you can use a standard brokerage account available at all online brokers. You will have to pay tax on dividends and realized capital gains, although any investment you don’t sell may accumulate without immediate tax liability. If you want to use your money before retirement age – say, if you are a FIRE investor – this option may be the best for you.
- Retirement assets: If you’re looking to use your money to fund your retirement, your options include employer-sponsored retirement plans, such as a 401(k) as well as an IRA. These accounts can help you defer or avoid taxes on your investment gains, which means you can accumulate your money faster. Employer-based accounts can offer you a matching contribution, helping you grow your wealth even faster. However, it is more difficult or expensive to access it before reaching retirement age, normally defined as 59½.
- Specific objective: If you are looking to invest in a specific goal, such as a house, you will need to carefully calibrate your investments based on when you will need the money. The longer the time frame, the more risk you can take and the higher the potential return. you will need a brokerage account to get the best returns rather than a bank account.
Your objective will help you determine what type of account to open and then how to invest.
3. Determine how you will invest
Now you can think about exactly how you are going to invest your money and you have three big options in front of you:
- Manage it yourself: If you manage your money yourself – whether in a taxable account or a retirement account – you can decide everything, for better or for worse. So you will want to know what you are doing. The good news is that even new investors can beat most investors, even pros, with a few simple investment funds.
- Opt for a robo-advisor: If you prefer not to manage your money, you can contact one of the best robo-advisors. A robo-advisor can create a portfolio based on your time horizon (when you need the money) and the level of risk you are willing to take. Then you can simply add your money to the account and the robo-advisor makes the investment. One of the main advantages of robo-advisors is that their management fees are relatively inexpensive, often around 0.25% of your assets per year, or $25 for every $10,000 invested.
- Hire a financial advisor: Another option is to hire a financial advisor to provide you with a comprehensive investment strategy and help you plan for the future. An advisor can charge a fixed or asset-based fee, and with the latter, you can expect to pay one percent of assets per year. You will need to find an advisor who will work with you and who will meet your needs, which will require some preliminary steps. Bankrate’s Financial Advisor Matching Tool can help you find someone in your area in minutes.
Each approach has its own pros and cons, so you’ll need to understand how much time and effort you want to spend on your investments.
4. Make your investments
Making investments might not be as complicated as some people think, and that’s especially true if you’re working with a robo-advisor or a human advisor. But investing your money is not that difficult even if you do it yourself:
- If you manage your money: Whether you manage a retirement account such as a 401(k) or an IRA, you will need to choose the investments. An excellent choice for investors is an index fund based on the Standard & Poor’s 500 index, which includes hundreds of major US companies. Over time, this averages an annual return of around 10%, and any investor of any skill level can buy the fund, hold it, and end up beating the vast majority of investors, even the pros. . New investors who manage their own accounts should look for a mutual fund or an exchange-traded fund with a good long-term roadmap.
- If a robo-advisor handles your money: Once you have your investment plan in place, you deposit money into the account and the robo-advisor takes care of the rest. Many robo-advisors allow you to track your progress towards key goals, and you can check your account at any time of the day.
- If a human financial advisor manages your money: One of the main advantages of working with a financial adviser is that the adviser takes care of everything. So you can let the advisor manage your portfolio, but it’s a good idea to make sure you’re working with a financial advisor who matches your needs. Here is top questions to ask a financial advisor.
Whichever way you go, you’ll want to understand how your money is invested.
If you’re investing for the long term – more than five years – you can afford to take on more risk. In practice, this means you can have a portfolio heavily weighted in stocks or stock funds. A broadly diversified stock portfolio tends to provide the best returns over time, but you’ll have to work it out notorious short-term equity volatility to take advantage of these attractive returns.
If you need the money sooner, more exposure to safer assets works better. Although you can still own stocks, advisors generally recommend balancing your stocks with bonds or bond funds. Bonds tend to fluctuate less and pay regular income, smoothing portfolio returns.
5. Use spend average and add more money to your account
If you have a large sum of money like $100,000 and you are ready to invest, it is a good idea to invest this money regularly over time, for example, over a year. Putting all your money in the market at once exposes you to “timing risk” – the risk that you buy too much and lose a lot of money quickly when the stock market goes down. You have several ways to combat synchronization risk:
- Use the purchase average: Recurring purchases by fixed sums involves adding money to your investments over time and thus reducing the risk of you buying to a relatively high point. You’ll get an average purchase price over time, ensuring you don’t buy too much.
- Make additional investments: Although you can start investing with a lump sum, it is important to add additional money to your account over time beyond your initial $100,000. You will continue to match your purchase price with each purchase.
Along with the value of reducing timing risk, adding more money over time allows you to continue to grow your nest egg. Instead of just relying on that initial investment of $100,000, you’ll accumulate more money faster if you continue to invest more money in the market on a regular basis, and that’s where real wealth is built. Each additional investment can get worse and worse.
6. Reinvest those dividends
Finally, whichever route you take, be sure to reinvest any cash dividends you receive along the way. Reinvest your dividends is like another form of dollar cost averaging, but the practice also helps you accumulate your money faster. If you spend your dividends rather than reinvesting them, you reduce a large part of your ability to accumulate your money.
At the end of the line
Investing $100,000 can be a great stepping stone to wealth and financial security, but you’ll want to think about your goals for money and then think long term. However you decide to invest your money, stick to well-established investment principles who have made millions for others.