Having an extra $100,000 sitting around and trying to figure out how to invest it would be a nice problem to have for most of us. This is not as unlikely as it might seem. Perhaps you received an inheritance or maybe you sold a home in order to downsize, netting $100,000 from the transaction. Or perhaps you’ve built up your emergency fund to the point where you have $100,000 you’d like to put to work for long-term growth.
For these or any number of other reasons, you might find yourself with $100,000 that you’d like to put to work. In looking at how to invest $100,000, here are some things to consider.
Identify your goals and assess your situation
Before you invest $100,000 or any amount, be sure to identify your financial goals and your time horizon for needing the money. Your age and family situation will play into this. Is saving for retirement a priority? Do you have kids and want to save for their education? Are you nearing retirement and need to invest for income in retirement? The answers to these and similar questions will help you decide how to invest this money.
Additionally, take an assessment of your current overall financial situation. Do you have high interest debt, such as credit card debt, that is a drag on your financial situation? Do you have student loan debt that you’d like to be done with? It might make sense to use some of this money to reduce or eliminate this nagging debt.
Another consideration, do you have an adequate emergency fund? Many experts suggest that you have 3-6 month’s-worth of your basic ongoing living expenses set aside in the event of a situation like a job loss or an unexpected large expense. Your emergency fund should be held in a liquid, low risk vehicle like a money market fund or a savings account. This should be in place prior to making longer-term, higher risk investments.
Decide on your investment style and risk tolerance
Before investing $100,000 or any amount of money, it's important to step back and assess your risk tolerance, along with your investment goals and your time horizon for the money. These factors will help you determine your investing style.
Risk tolerance may mean different things to different people. Perhaps the best way to look at it is how much tolerance do you have for losing money during the inevitable periods where the stock market suffers a correction.
Your investing style, or put another way, your overall investing strategy should be an outgrowth of your time horizon, the nature of your financial goals and your risk tolerance.
Determine what type of investor you are
If you feel comfortable doing your investment research and selecting your own investments, you are probably a do-it-yourself investor. You will want to open a brokerage account and decide on an investing style that you are comfortable with. This might be frequent trading or buy and hold. You will also need to make decisions as to the type of investments you plan to hold. This can include individual stocks, mutual funds, ETFs and others.
For those investors looking for advice there are a couple of solid options.
Robo advisors are relatively new on the scene. These online advisory services use mathematical algorithms to allocate and invest your money based on an asset allocation that’s appropriate to your situation. Robo advisors generally use ETFs as an investment vehicle for your money. Some robos offer additional services such as access to human financial advisors and other services. The level of service will often depend on the amount you have with the robo advisor and fees for these extra services will vary as well.
A traditional human financial advisor might also be a good option for you. There are many types of financial advisors to choose from. It makes sense to select a fee-only advisor who is paid a fee by their clients versus an advisor whose compensation is based all or in part upon selling you financial products from which they earn a commission. There are financial advisors who work with clients on an as needed basis or an ongoing basis. NAPFA, the largest organization of fee-only advisors in the U.S. offers a listing of fee-only advisors by location.
Asset allocation and strategy
Over the years, many financial and investing experts have indicated that an investor’s asset allocation is one of the most important factors in determining their returns and the variability of those returns.
Asset allocation is about how your portfolio is allocated among various assets classes such as stocks, bonds and cash. Within these broad asset classes there are numerous sub-asset classes such as large cap and small cap stocks. There are growth stocks, value stocks, international stocks, as well as intermediate and short-term bonds. There are corporate bonds, government bonds as well as municipal bonds. For cash investing there are money market funds, CDs and other options.
Within these various asset classes, investors can invest directly in individual holdings such as stocks and bonds. Or they can invest in ETFs or mutual funds that invest in a more diversified portfolio of holdings within their target asset class.
Whether the $100,000 represents your only investments or the majority of your portfolio, this is a good time to come up with an asset allocation that fits your goals, time horizon and risk tolerance. You can use additional money that you are able to invest to add to these asset classes including rebalancing your allocation back to your overall target.
If you already have a good jump on your portfolio, the $100,000 can be put to good use in rebalancing to your asset allocation. You will want to fill in any gaps in your portfolio where the allocation is a bit light.
Best ways to invest $100K
Here are some ideas as to the best way to invest $100,000.
1. Build an emergency fund
As mentioned above, if you don’t have an adequate liquid emergency fund, you might consider using some or all of the $100,000 for this purpose.
Investing in individual stocks is not a bad idea, but especially if the $100,000 represents all or a substantial portion of your investing capital, you need to be cautious here. Individual stocks can offer a path to wealth if the stock you choose takes off. There are investors who have done very well by investing in companies like Apple, Amazon and others.
However, not all stock investments pan out. Some stocks lose money for various reasons. Sometimes what looks like a promising company and a solid investment ends up not meeting expectations. Individual stocks are risky and with an amount like $100,000 this doesn’t represent a diversified portfolio.
3. ETFs and mutual funds
Managed portfolios like ETFs and mutual funds represent an excellent vehicle for investing an amount like $100,000. Combining several ETFs and mutual funds together can help you build a diversified portfolio even with a relatively small amount to invest.
Mutual funds might invest in stocks, bonds or a combination of the two. There are also money market mutual funds, which are cash-like holdings. Mutual funds have a professional manager who invests the money in the fund on an actively managed basis or passively to track an index like the S&P 500 or the Russell 2000. Mutual funds trade after the market closes, purchases or sales will typically be reflected in your account the next business day.
ETFs are similar to mutual funds in many respects. The biggest difference is that ETFs trade during the day while the stock market is open just like individual stocks. ETFs tend to be mostly index funds which normally carry lower expense ratios than actively managed funds. Due to their structure ETFs also tend to be more tax efficient than mutual funds.
Using ETFs, mutual funds or a combination of both is an easy way to build a diversified portfolio with $100,000 or virtually any amount you have to invest. ETFs and mutual funds are available in a wide range of asset classes making the task of building a portfolio based on an your chosen asset allocation strategy very doable even with $100,000 or less to invest.
4. Real estate
There are a number of ways to invest in real estate. With $100,000 to invest, this would likely cover some or all of the down payment needed on a property. This might be a bit low for properties in very high cost real estate markets.
Another way to go is to invest in real estate mutual funds or ETFs. These funds typically hold shares of REITs or real estate investment trusts. REITs can be publicly traded or private securities that hold pools of various types of properties or mortgages on properties. For smaller investors, real estate funds can provide exposure to this asset class as part of a diversified portfolio.
5. Retirement accounts
You can use some or all of the $100,000 to contribute to your retirement accounts such as a 401(k) or an IRA account. Unless the $100,000 represents a distribution from a retirement account, your contributions to retirement accounts will be subject to the annual contribution limits.
In the case of a 401(k) plan, the annual contribution limits are $19,500 with an extra $6,500 catch-up contribution available for those who are age 50 or over. If you go this route you might consider increasing your salary deferral amount to reach the maximum contribution limit for the year. You could use the $100,000 to reimburse yourself for the extra salary deferral. If you are married and your spouse also has access to a 401(k) plan, you can both do this. At this rate it might take several years to use up the full $100,000.
Annual contribution limits to an IRA are $6,000 with an extra $1,000 catch-up contribution for those who are 50 or over.
If you are self-employed you can establish a SEP-IRA or Solo 401(k) depending on your situation. The contribution limit on a SEP-IRA can be as high as $58,000 for 2021, with the maximum contribution limit for a Solo 401(k) is $58,000 plus an extra $6,500 for those who are 50 or over. Your ability to make those maximum contributions will be based on your income for the year.
6. Savings accounts
There are a number of different types of savings accounts and similar places to put some or all of the $100,000. You might consider these vehicles if you are looking for a relatively safe parking place while you decide how to invest or if you already have other investments. Some options include:
- Savings accounts. These are typically offered by banks and credit unions. Online banks generally offer better interest rates. These accounts are usually federally insured and offer access to your funds if needed.
- A money market account is similar to a savings account. These accounts typically offer a higher interest rate than a basic savings account. In exchange for these higher interest rates, money market accounts may have higher minimum balance requirements or other restrictions.
- CDs or certificates of deposit are offered by banks, credit unions and some brokerage firms. CDs require that you keep the money on deposit for the stated term. Withdrawing the money early will result in a penalty. CDs can be laddered to have them maturing at various points in time.
If you find yourself in the position of having $100,000 to invest, you have a number of options to choose from. You can put it all into one type of investment or select from a number of options including those discussed above.
The important thing is that you focus on your overall financial situation and use the money to improve your financial situation in line with your overall goals and objectives.