When you are looking to invest a large sum of money, the options are limitless. However, you need to have a strategy so that the choices you make are aligned with your goals and values. Working with a professional advisor can help to narrow down the choices, but there are many apps and websites that make it easy for investors to invest by themselves. In this article, we'll help you refine your approach and suggest seven investment options that can help you meet your goals.
Set your goal
Before you decide what and where to invest, you need to know what you want this money to do for you. Creating your goals is like deciding where you want to travel to. If you don't have a goal, any road will get you there. However, when you know your destination, it is easier to pick the best path to get there.
Many investors want to grow their money to be able to retire early or create generational wealth. Others are more concerned with preserving their cash and generating monthly income. Depending on what your goals are, you can assemble a portfolio of investments that matches your style.
Decide your investment style and risk tolerance
In addition to setting your goal, there are other factors that investment professionals use to determine where to invest. Your investment style and risk tolerance are two of the biggest factors. And the third is your time horizon – how quickly you want to reach your goals.
Investment style is the way that you like to invest. It is made up of multiple factors, including the size of investments, growth vs. value, risk, location, and funds vs. individual investments. The good thing is that most investing platforms allow you to create a portfolio that matches your investment style without incurring additional costs or becoming needlessly complex.
Risk tolerance determines how much risk you're willing to take with your investments. Most investments that offer the greatest returns also tend to have the highest volatility in prices. While investments with the greatest safety usually offer the lowest returns. Depending on your time horizon for investing, you may be more willing to accept risk today. Then, you may become more conservative with your investments as you get closer to your goal.
Where to invest right now
There are numerous investment categories where you can invest $1 million. While there is no one right answer for everyone, some investment categories are better choices depending on your goals and risk tolerance.
The stock market offers one of the highest returns and longest track records of success of any investment option. When you buy shares in a publicly traded company, you'll own a fractional interest in the company's assets and profits. Most shares even allow you to vote on important issues facing the company at its annual shareholder meeting.
While stocks are generally focused on growth, bonds are designed for income. Bonds are a loan from an investor to a borrower. There are a variety of borrowers ranging from the U.S. government to corporations to state and local municipalities. Bonds typically pay interest to bondholders on a regular basis and then repay the amount borrowed (aka face value) after a specified period of time.
You can buy bonds directly from whoever is issuing them or you can buy them from other investors on the open market. When you buy them on the open market, their value may have fluctuated from their face value depending on interest rates, the credit risk of the issuer, and the overall economy.
There are numerous ways to invest in real estate today. One of the most popular real estate investment strategies is to purchase single-family homes and convert them into rental properties. With $1 million, you can buy one or more properties outright and have no debt on them. If you have a higher risk tolerance, you can buy even more properties by incorporating leverage. You'll split your million-dollar investment into down payments on multiple properties and borrow the rest from the bank.
Other real estate investment options include REITs, fix-and-flips, tax liens, raw land, and commercial properties. Recently, real estate crowdfunding platforms have made it easy for investors to participate in numerous opportunities at once. They have low minimum investments, professional management, and instant diversification.
Mutual funds and ETFs
Mutual funds are a diversified collection of stocks, bonds, real estate, and other investments. Exchange-Traded Funds (ETFs) are very similar to mutual funds, but they tend to have lower costs and trade throughout the day like a stock. Both of these options provide instant diversification, even when you invest a small amount of money. They also can niche down into specific types of investments, industries, size of companies, and geographic location.
One of the most popular index funds is the S&P 500, which tracks the 500 largest companies in the U.S. On average, the S&P 500 has returned 10.9% on an annualized basis over the last 50 years. Additionally, the S&P 500 has gained value in 40 out of the last 50 years. Many investors use an S&P 500 index as a foundational investment in their portfolio.
Alternative investments are those that don't fall into the conventional categories of stocks and bonds. They can include venture capital, hedge funds, options, art and collectibles, and commodities. Many of these assets are non-correlated to stocks and bonds, which means that their changes in value are not affected by what's happening in the stock or bond markets.
Some alternative investment options require investors to qualify as accredited investors. This means that they must have a net worth of $1 million (excluding their primary residence), have an income of at least $200,000 the last two years, or have specialized training. However, many FinTech apps are democratizing alternative investments so that the common investor can participate. Examples include Fundrise, Masterworks.io, Rally, and Live Stock Wealth.
Although cryptocurrencies like Bitcoin have been around for more than a decade, they are only now starting to gain a broader audience. Many new apps and platforms have made it easier for investors to purchase cryptocurrencies. And some established brokerage accounts now allow investors to buy into a limited selection of cryptos.
Cryptocurrencies are an alternative asset that has the traits of a currency and a volatile stock. These investments typically are not regulated and are not backed by specific assets that generate income, like a stock, bond, or rental property. While more retailers are adopting cryptocurrency as a form of payment, very few crypto investors actually use it to buy anything. Instead, most investors buy-and-hold or daytrade crypto in a speculative manner.
Buy or start a business
Many investors have an entrepreneurial spirit at heart. They want to invest in something that they have direct influence over. That leads to them buying or starting a business based on their education, experience, or connections.
Franchises are also a popular business option because they take advantage of an established brand name and business processes. Buying a franchise typically requires paying an upfront fee to own the license and start-up costs for supplies, equipment, signage, and other relevant items. You can also purchase an existing franchise location. Speak with the brand's franchise rep to ask if about buying an existing store or search websites like Franchise Flippers for opportunities.
Asset allocation and minimizing risk
With any size portfolio, it is wise to diversify your investments among several asset classes. Having a mix of different types of investments is known as "asset allocation." A common asset allocation technique is to subtract age from 110 to determine how much you should have in stocks. The rest would be invested in bonds with the goal of reducing risk as you get older and closer to your goals.
However, this approach doesn't take into account other investment classes beyond stocks and bonds. A better asset allocation approach involves stocks, bonds, real estate, and alternatives (like crypto, commodities, or precious metals). The stocks should include small, medium, and large companies from the U.S. and foreign countries.
Having a diversified portfolio that involves numerous asset classes allows you to minimize risk and reduce volatility. When reviewing all of your investment options, you may be tempted to pick just one investment. This is known as concentration risk, and your investments could be lost if that investment fails. By comparison, if you have a diversified portfolio, it is very unlikely that all sectors of the economy will fail all at once.
The bottom line
With $1 million to invest, you have a wide variety of investments to choose from. We've covered seven broad categories of investment options for you to consider. And within each category, there are many investments that you can select. Most investors decide to diversify their investments to have a broad portfolio to increase their chances of success and reduce risk.
Many of today's investment accounts and FinTech apps have tools to help you decide what investment choices will help you meet your goals. If you feel overwhelmed with the choices, consider working with a financial advisor. They can help you develop a game plan to reach your goals and provide ongoing advice to keep you on track.