Maybe you won the lottery or received a significant inheritance, sold a business or were rewarded at work with a life-changing bonus. Coming into a significant amount of money is an exciting opportunity. But what should you do with it? In many cases, people who come into a large sum of money make the decision to invest some or all of it with the aim to grow the money for future goals.
If you’re ready to invest it in the market, how exactly should you actually go about investing $100,000? While the considerations below can typically work for any large sum, for the purposes of this piece, let’s assume you have $100,000 to invest.
How to invest $100,000
Consider these moves before you start investing
Before you commit to anything, it is a good idea to review your financial plan. Two areas to pay close attention to are any high-interest debt you may be carrying and whether you’ve set aside enough money for emergencies.
If you’re currently carrying high-interest debt, such as a credit card balance or personal loan, it can be a good idea to dedicate a portion of your funds to paying it off ahead of schedule. Doing so could save you thousands of dollars in interest payments over time.
Likewise, if you don’t have an emergency fund, using a portion of your $100,000 to start one is an excellent idea. Doing so will give you a solid base to stand on as you put the rest of your money to work and offers you significant peace of mind that comes with knowing you are financially prepared for most emergencies.
Already have an emergency fund? Consider revisiting it to make sure that it still meets your needs (typically, it’s a good idea to have at least six months' worth of expenses set aside). If your expenses have increased since establishing your fund, you may want to add more cushion to your savings before investing the remainder.
Considerations as you start investing
Before making any investment decision, it’s important to have a firm grasp of who you are as an investor. This will require you to identify your risk tolerance, your investment timeline and the financial goals you are working toward. This is critical, as it will help to define how you invest your money.
Dollar-cost averaging vs. lump-sum investing
One of the most common questions asked by people who are looking to invest a large sum of money is “Should I invest the money all at once, or should I dollar-cost average into the market over a couple of weeks or months?”
Investing everything at once risks the chance of a big market drop shortly after you invest your money. Dollar-cost averaging can help to mitigate this risk. However, internal research conducted by Northwestern Mutual finds that lump-sum investing can lead to better returns in the long-term.
Therefore, if your investment goal is to maximize your potential growth, the data would suggest that lump-sum investing is the way to go.
Of course, doing so may increase the impact of price volatility on the performance of your portfolio in the short term, as you are buying into the market all at once. This volatility may prove difficult for some investors to handle emotionally. If the thought of performance swings in the early days of your portfolio is enough to make you queasy, you might choose dollar-cost averaging as a way to smooth out your average purchase price.
Properly diversifying your investments based on your goals
It’s important to diversify your portfolio across a number of different asset classes. Doing so will help reduce your risk of total loss compared to investing in a single asset or asset class.
Because different asset classes perform differently depending on factors like high inflation, rising interest rates, slowing economic growth, etc., diversification allows you to build a portfolio that should serve your needs regardless of these trends.
Exactly what diversification looks like to you will, as mentioned above, largely depend on your risk tolerance, investment timeline and investment goals. Depending on each of these factors, the ideal portfolio for you might be a simple one split between stocks and bonds. However, at some point you may want to add other asset classes, such as real estate, or commodities, but those are generally used by experienced investors with large amounts of money to invest.
While asset-class diversification tends to garner the most attention when it comes to investing, it may be important to consider tax diversification as well. You can do this by holding your investments in a mix of tax-advantaged and non-tax advantaged accounts. Likewise, within your tax-advantaged bucket, you can diversify further by holding your investments in a mix of both traditional (pre-tax) and Roth (post-tax) accounts.
Leveraging a variety of accounts in this way might give you flexibility to a) access your money when you need it and b) better manage your tax requirements during retirement.
Should you hire a professional when investing?
If you find yourself overwhelmed by the idea of designing an investment portfolio that is properly diversified, you’re not alone. A lump sum like $100,000 is a lot of money, and it’s understandable that you might feel some anxiety or pressure to “get it right.”
While it’s possible to go it alone with your own investment strategy, it’s by no means a requirement. If you’re an investment novice, or even if you have experience but still want to access the expertise and knowledge of a professional, working with a financial advisor might be the right move for you. He or she can get to know you and your goals and can build a financial plan that uses a range of financial options, including investments, to help you reach your goals in the most efficient way possible.
The scenario indicated in the article is hypothetical, and no guarantee of investment returns through utilizing the strategies indicated.
No investment strategy can guarantee a profit or protect against loss.
All investments carry some level of risk including the potential loss of all money invested.
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