How to Invest $100,000

If you want to invest $100,000, you’re in a good position. Combine that nest egg with the power of time and you could have real financial security in the future. In fact, you could turn that money into a million or two over time, even without being an investing genius. You’ll need to carefully consider how to invest that money, a process that involves much more than finding the best stock or fund to invest in.

Here are six smart things to consider when investing $100,000 and things to look out for along the way.

How to invest $100,000: 6 top tips

1. Get started today

It is difficult to overestimate how important time is for your returns. Compounding can do wonders for 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 using some typical investment returns:

Starting with $100,000 and adding no more money, you could raise more than $1 million with an annual return of 8 percent over 30 years. But if you can give yourself another five years, you can get almost 50 percent more, while another decade could net you over $2 million. Of course, the numbers get much better with 10 percent annual returns and more time.

If an annual return of 8 percent seems high, you should know that this is below the average return of 10 percent for an investment that is accessible to everyone, regardless of knowledge or income. (More about that exact investment later.) So it is important to start investing today. If you’re looking for strong investments, a financial advisor can also help you find the investments that meet your needs.

2. Determine what you want to invest for

You need to understand what you are investing in and why, as you may be able to take advantage of additional bonuses that can help your money build even faster:

• General wealth: If you want to build long-term wealth with your money, you can use a standard investment account available from all online brokers. You’ll have to pay tax on any dividends and realized capital gains, although any investment you don’t sell can compound without having to pay immediate tax. If you want to use your money before retirement age, for example if you are a FIRE investor, this option may be best for you.
• Pension assets: If you want 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 allow you to defer or avoid taxes on your investment gains, meaning you can compound your money more quickly. Employer accounts may offer you a matching contribution, allowing you to grow your wealth even faster. However, they are more difficult or expensive to access before you reach retirement age, normally defined as 59 ½.
• Specific purpose: If you want to invest for a specific purpose, for example a house, you must carefully tailor your investments to when you need the money. The further away the time horizon, the more risk you can take and the higher the potential return. To get the best returns, you need an investment account instead of a bank account.

Your goal will help you determine what type of account to open and later how to invest.

Do you need an advisor to help you set your goals?

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3. Figure out how you’re going to invest

Now you can start thinking about how exactly you’re going to invest your money, and you have three major options in front of you:

• Manage it yourself: When you manage your own money – whether it’s in a taxable account or a retirement account – you get to call the shots, for better or for worse. So you want to know what you are doing. The good news is that even new investors can beat most investors, even the professionals, with a few simple mutual funds.
• Go with a robo-advisor: If you’d rather not manage your money, turn to one of the best robo-advisors. A robo-advisor can build a portfolio based on your time horizon (when you need the money) and how much risk you are willing to take. You can then simply deposit your money into the account and the robo-advisor will do the investing. A key advantage of robo-advisors is that their management fees are relatively cheap, often around 0.25 percent 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 flat fee or an amount based on your assets, and with the latter you can expect to pay 1 percent of the assets per year. You will need to find an advisor who will work with you and meet your needs, with some legwork up front. With Bankrate’s financial advisor matching tool, you can find someone near you in minutes.

Each approach has its own pros and cons, so you need to understand how much time and effort you want to put into your investments.

4. Make your investments

Investing may not be as complicated as some think, and that’s especially true if you work with a robo-advisor or 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 IRA, you need to choose the investments. A good choice for investors is an index fund based on the S&P 500 index, which includes hundreds of top American companies. Over time, the average annual return is about 10 percent, and any investor of any skill level can buy the fund, hold it, and ultimately beat the vast majority of investors — even the pros. New investors who manage their own accounts should look for a mutual fund or exchange-traded fund with an excellent long-term track record.
• If a robo-advisor manages your money: Once you’ve created your investment plan, you deposit money into the account and the robo-advisor does the rest. Many robo-advisors let you track your progress toward important goals, and you can view your account at any time of the day.
• If a human financial advisor manages your money: One of the main benefits of working with a financial advisor is that the advisor does 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 is tailored to your needs. These are the most important questions you can ask a financial advisor.

Whichever way you go, you want to know how your money is invested.

If you invest for the long term (more than five years down the line), you can afford to take on more risk. In practice, this means that you can have a portfolio that is heavily weighted in shares or equity funds. A broadly diversified stock portfolio usually delivers the best returns, but you’ll need to overcome stocks’ notorious short-term volatility to enjoy those attractive returns.

If you need the money sooner, greater exposure to safer assets works better. While you can still own stocks, advisors generally recommend balancing your stocks with bonds or bond funds. Bonds tend to fluctuate less and pay income regularly, smoothing out a portfolio’s returns.

5. Use dollar cost averaging and add more money to your account

If you have a large sum of money, such as $100,000, and you are willing to invest, it is a good idea to invest that money regularly over time, such as for a year. Putting all your money into the market at once exposes you to “timing risk”: the risk that you buy too high and lose a lot of money quickly when the stock market falls. There are a number of ways to combat timing risk:

• Use dollar-cost averaging: Dollar cost calculations are all about adding money to your investments over time, thereby reducing the risk of buying at a relatively high point. You get an average purchase price over time so you don’t buy too high.
• Make additional investments: While you may start investing with a lump sum, it’s important to add additional money to your account over time, beyond your initial $100,000. You will continue to equalize your purchase price with each purchase.

In addition to the value of reducing timing risk, adding money gradually allows you to continue to grow your savings. Instead of relying solely on that initial $100,000 investment, you’ll accumulate more money faster if you continue to invest more money into the market on a regular basis, and that’s where real wealth is built. Each incremental investment can continue to increase.

6. Reinvest those dividends

Finally, whichever route you choose, make sure you reinvest the cash dividends you receive along the way. Reinvesting your dividends is like another form of dollar-cost averaging, but this practice also helps you compound your money faster. If you spend your dividends instead of reinvesting them, you’re cutting out a big chunk of your ability to compound your money.

In short

Investing $100,000 can be a great stepping stone to wealth and financial security, but you’ll want to think about your goals for the money and then think about the long term. However you decide to invest your money, stick to the established investing principles that have made millions for others.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.