The last decade has been a unique era in the financial markets. If you are wondering how to invest $100,000 or more, it would be a good idea to consider all of the options that are out there. There are a number of new investment products on the market, and they could make your investment life a lot easier.
The first thing to do is to decide what your investment goals are. The two most common things that investors want are capital appreciation (the value of an investment rises) and income. In some cases, the same investment can deliver both of these to an investor, but often there will be more risk involved.
There are numerous ways to invest your money, and each one will have different advantages and drawbacks. Most people think about things like stocks and bonds when it comes to investments, but if you have $100,000 or more to invest, there are loads of options that wouldn’t be possible for smaller investors to take advantage of.
Invest $100k: What are Your Goals?
- 1 Invest $100k: What are Your Goals?
- 2 How To: Build a Portfolio
- 3 Diversification in Established Markets
- 4 No Such Thing as ‘One Size Fits All’
- 5 Financial Instruments and Investment Types
- 6 Go Tax-Free or Stay Flexible?
- 7 Income and Safety in The Debt Market
- 8 Bonds Have Been in a 30 Year Bull Market
- 9 Commercial Paper
- 10 Municipal Debt
- 11 REITs
- 12 ‘Guaranteed’ Income With an Annuity
- 13 Direct Lending to Consumers with Peer-to-Peer Lending
- 14 Big Gains in The Stock Market
- 15 Stocks/Shares
- 16 ETFs
- 17 Leveraged ETFs
- 18 Robo Advisors are Changing the Investment Landscape
- 19 Cryptocurrency Investments
- 20 Precious Metals
- 21 Building a Balanced Portfolio
There are no sure things in the world of investments, but some assets are more likely to be stable than others. If you are looking for a way to preserve your capital, you will need to take a different approach to investing than a person who is looking for aggressive growth.
The more risk you take on, the more likely that you are to create market-beating gains. Of course, the chances of big losses go up as well, which is why many investors choose to take a diversified approach to their asset mix.
Some forms of investment will require that you put all your money into a single asset (like rental property), and this is another risk to carefully consider. While the asset itself is considered to be stable, there have been times when real estate has fallen in value on a market-wide basis.
How To: Build a Portfolio
When you decide how to invest $100,000 one of the first decisions to make is the amount of diversification you want to build into your portfolio. The kind of investment you make will play a big role in determining how diversified you can be.
For example, if you want to invest directly in rental property in the UK or USA, $100,000 probably won’t be enough to buy more than one home or apartment. In fact, it is likely that you will have to get a loan to finance the purchase of the rental property.
The net result of this is a highly concentrated bet on both the value of real estate in the area your rental property is in and the economic viability of renting it out at a profit. The introduction of debt also makes this kind of investment more dangerous, as falling real estate values could mean having your principle (the money you used to secure the loan) wiped out.
Using a higher level of diversification will prevent the total loss of your investment capital in the event of an adverse market. Instead of making a one-way bet on a single asset, buying a broad range of assets is a good way to make sure that you don’t get caught on the wrong side of a market.
A few decades ago asset diversification was much harder than it is today. A new class of investment products has made it extremely simple to create a portfolio that includes both debt and equity (stocks), as well as diversification across the world’s biggest markets.
Diversification in Established Markets
The last twenty years have seen a rise in the number of low-cost ETFs, and other investment funds. Mutual funds were the forerunners of this new class of investment vehicles, but today’s ETFs deliver a wide range of investment options at with super low fees.
If you want to build a highly diversified portfolio, this is probably the best time in history. As long as you can open a bank account in the USA or UK (as well as a few other banking centers) there are seemingly countless low-cost investment options for you to choose from.
In addition to buying low-cost ETFs directly, you can also invest via a robo adviser. The idea of automated investing has caught on over the last ten years, and there are loads of automated investment platforms available today.
Many robo advisers use low-cost ETFs, and charge their clients a small fee for trading the funds. The fees that robo advisers charge to trade in and out of ETFs are almost always lower than brokerage fees, and some give their clients a huge amount of manual control over how the money is invested.
No Such Thing as ‘One Size Fits All’
With all the investment products that are out there, it is easy to make a custom portfolio that is in-line with just about any market outlook or investment goal. Everyone will be a little bit different when it comes to risk tolerances, or how they think the market will move over the coming years.
This article isn’t designed to be an investment guide. Instead, it will give you a feel for the kind of investment options that are out there, and how they can be used to your benefit. Any investment will carry the risk of loss, even investments that are currently perceived as ultra-safe, like government bonds.
If you need specific investment advice or have questions about how your investments will be taxed, it is a good idea to talk to a licensed investment planner or accountant. Some of the automated investment platforms can help you to save a lot of money on fees, but there is no replacement for a human investment or tax adviser, at least for certain jobs.
Financial Instruments and Investment Types
There are two major categories that almost every investment will fall under; debt or equity. Physical objects like houses or precious metal would represent equity, as do shares in a company. Debt is usually bought in the form of a bond, or some other kind of obligation to pay back borrowed money with interest.
Almost any portfolio will have both debt and equity investments. Some forms of debt are used as an equivalent for cash, such as short term government debt, or so-called ‘money market’ funds. Longer-term government debt is also commonly used as a stand-in for cash but is more likely to be subject to fluctuations in price.
There has been a rise in direct lending by investors to the public in recent years, which is another way to invest in consumer debt.
Stocks are by far the most common form of equity investment and are very easy to buy and sell. Most people think of the stock market as a way to make faster returns. Over the last decade, this has been the case, but historically, equities have been far riskier.
Go Tax-Free or Stay Flexible?
If you are in the USA, there are special retirement accounts that allow you to defer taxes until you are about to retire (defined as 59 ½ years old). Traditional IRAs allow you to save money without being taxed on it, while Roth IRAs allow you to deposit post-tax dollars in an account to grow and later be withdrawn tax-free.
A normal brokerage account will be taxed, although you can use the money for anything you want. Once you deposit money into a tax-deferred account, there are numerous regulations concerning how it can be invested, and also penalties for early withdrawal.
Income and Safety in The Debt Market
Bonds and other debt-based investments tend to be the most stable and deliver some income to their owners.
Over the last 100 years, interest rates have been substantially higher than they have been in the last decade, as central banks have used low-interest rates to stabilize the economy in the wake of the crisis that began in 2008.
From a practical investing perspective the low-interest-rate environment we are still in means that government bonds won’t produce much of a yield, and getting any kind of return in excess of 5% per year will mean buying riskier bonds from a company.
There are also money market funds that are very safe but don’t create much in the way of returns. Buying any kind of short term debt (for example 6-month US government bills) is going to be more or less the same as far as returns go, though there won’t be any risk associated with an intermediary.
Bonds Have Been in a 30 Year Bull Market
Short-dated government debt (called notes and bills in the USA) instruments aren’t usually affected by long-term interest rate expectations, but bonds (with a maturity measured in years) are.
Ever since Paul Volcker raised interest rates into the double digits in the early 1980s, long term bond prices have been going up (yields go in the opposite direction). The trend of falling bond yields probably ended in the last decade, as central banks pushed interest rates to record lows.
There is no way to know how much bond yields will rise over the coming years, but any investors should consider the idea that bonds may not be as safe of an investment as they have been in recent times.
Read: What are Bonds?
Buying corporate bonds is another option for investors who want to have the safety of debt, but also want higher interest rates.
In general, the higher the risk of default, the more a company will have to pay to borrow money. That means higher interest rates for investors, and also a greater risk of losing the money used to buy the bonds.
One way to get around the risk of default is by buying into a bond fund that invests in a broad range of commercial paper. The overall rate of interest will be much higher than government bonds (from safe counties), and the risk of default is much lower.
There are both active and passive bond funds. If a bond fund is actively managed, it means that experienced portfolio managers will trade bonds and try to create better performance. A passive bond fund isn’t managed, and will likely be balanced on a quarterly or annual basis.
Like national governments, state and local governments also need to borrow money from the public.
The market for municipal debt (munis for short) is big and offers tax breaks for US citizens. For most of the post-WW2 era, munis were some of the safest bonds available, but that has changed over the last decade.
State and local governments are facing higher outlays, and some states in the US may be on the edge of insolvency. There is no reason to think that munis are going to be immune from problems, even though state and local governments have the ability to levy taxes.
Unlike commercial bonds, many munis still trade at low-interest rates. It is very important to learn as much as you can about the financial position of the government that is issuing the municipal bonds you are interested in, as the current interest rate may not be a great indicator of their safety.
Some people might think of REITs as a stock because they trade on stock exchanges, but they are more like a debt instrument in some ways. REIT stands for Real Estate Investment Trust, and they are basically a corporation with a very specific business model.
A REIT will invest specifically in real estate, and return most of its operating income to shareholders in a few ways. This business model means a steady stream of income, and ‘dividends’ that are generally far higher than the broad market.
The rules that govern a REIT are complex, but they limit the amount of ownership a single shareholder can have, and the amount of profit it can keep annually. Additionally, some of the money that is returned via ‘dividends’ isn’t taxable as income, which is another advantage of the REIT structure.
REITs are a great alternative to buying real estate directly and can be bought and sold as easily as any other stock. They offer income like a debt instrument and hold real estate as their chief asset.
‘Guaranteed’ Income With an Annuity
If you want to lock in a guaranteed income over a given time frame, an annuity could be a good investment. The annuity model is simple; you pay a given amount of money, and the company that is offering the annuity will pay you a given amount of money periodically (usually monthly).
When interest rates were higher, annuities were a more viable option for people that wanted to retire. Now, with interest rates at a low level, annuities can’t offer much. Investors also have to assume the credit risk of the company that is offering the annuity, which is a major risk.
Direct Lending to Consumers with Peer-to-Peer Lending
In the wake of the crisis in 2008 many people were turned off by how the world’s major banks were given loads of taxpayer money and allowed to stay in business (not to mention the huge bonuses for the people who basically blew up the global financial system).
Now, there are a few platforms that allow investors in the US to make direct loans to individuals and businesses, without a bank in the middle. Called Peer-to-Peer (P2P) lending, platforms like Lending Club and Upstart (among many others) allow investors to make loans to a variety of borrowers.
While many of the P2P lending platforms do require that their lenders have a certain net worth ($100,000 and up should be fine), the actual minimum investments are generally low. Depending on how risky you are with the loans you make, it is possible to receive in excess of 6% on your investment annually.
There are numerous P2P lending platforms, and P2P lending could be a good way to diversify away from the established financial market. If you want to learn more about P2P lending, check out this informative article.
Read: Our Review of Prosper
Big Gains in The Stock Market
Pretty much everyone is familiar with the stock market. If you are sitting on $100,000 to invest, you probably have owned stocks in some form already. The last decade has been amazing for stocks. Most of the global indices have tripled since they hit their lows in 2009, and valuations might be a little overstretched at the moment.
Regardless of current valuations, there is always an opportunity in the equity markets. Today specialty made ETFs allow investors to short the market, so even a falling market has the potential to generate gains.
There has been a lot of innovation in ETFs over the last few decades. Now, investors have a host of options when it comes to deploying their investment money into publicly traded equities. The cost of trading equities has also cratered over the last 20 years, with discount brokers offering stock trading at super low rates.
Traditionally the stock market was a place to buy and sell equity or ownership in a company. Pretty much everything that trades on stock exchanges today still derives its value from ownership in a company, though it may be indirect ownership.
When it comes to making money, there are few other investments that can create unleveraged returns at the rate that equities can. As an example, shares in Apple Computer have more than doubled over the last five years. Performance like this isn’t going to be easy to replicate in any other asset class. Of course, stocks can also lose value quickly, and returns can be wiped out as easily as they came.
One of the biggest things to consider when investing in stocks is risk tolerance. As people get older most investment advisers will recommend less exposure to equities, as a large amount of your portfolio can disappear in a matter of months. While a younger investor can recover from these losses, an older one could be shut out for life.
Exchange Traded Funds (ETFs), and their predecessors, Mutual Funds, are a way for investors to gain diversified, or focused, exposure to the stock market. Modern Portfolio Theory states that it is better for an individual investor to buy the market as a whole, instead of trying to ‘beat the market’ by managing their money.
There is a lot of research that suggests that most investment managers can’t outperform the S&P 500 over time, which is why buying an ETF that tracks the direction of the major indices could be a better idea. Investment managers also add costs to money management, while ETFs are generally low cost.
ETFs trade like stocks, and can be bought and sold in just about any US or UK brokerage account. For long term investment in the stock market, low-cost index-tracking ETFs are probably a better bet than buying managed funds, at least over the long-haul.
Read: What is an ETF?
If you feel like doing some speculation on equities, leveraged ETFs are an interesting product. Instead of tracking a market directly, leveraged ETFs amplify the movement of the market by two or three times.
Leveraged ETFs can really move when the volatility gets cranked up, and can make a lot of money if an investor is on the right side of the trade. These funds can also be used to hedge other positions, which is a far safer way to use them.
There aren’t many investments that work well in a time of widespread selling, like the last quarter of 2018, or the latter half of 2008. Bonds and cash equivalents can help to save your principle, but making money in falling markets is next to impossible without going short. Leveraged funds allow you to do this, without using actual leverage in the futures market, or CFDs.
Robo Advisors are Changing the Investment Landscape
Robo advisors are coming into the investment world in increasing numbers. There isn’t a firm definition for a ‘robo advisor’, but they all automate investments in common asset classes. Some rely on human portfolio management and use your personal investment goals to determine which pre-made portfolio fits your needs.
Other robos use advanced algorithms to make investment decisions for you. There is usually a substantial discount for investors at either the $50,000 or $100,000 dollar mark, which could make sense if you are looking for a one-stop investment option.
Most robos rely on low-cost ETFs, and rarely cost more than 1% of your total invested assets per year in fees. No matter how you look it is, robos are an attractive option, especially when compared to human management which can add up quickly.
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Cryptocurrency made a big splash in 2017 when Bitcoin almost touched the $20,000 mark. Pretty much every crypto has been under pressure since 2018 began, but over the last few weeks, the major cryptos have started moving higher.
The long term fate of cryptocurrency isn’t certain, though some major banks have added crypto trading desks for their clients. One big advantage to cryptos is the fact that they are a stand-alone asset that doesn’t require the backing of a government to exist.
It probably isn’t a great idea to plow all of your investment capital into cryptos, but taking up a small position in a basket of the bigger cryptos could act as a hedge against turmoil in the established financial system. It is easier to do that today, as anyone in the developed world can buy into cryptos with ease.
Precious metals like gold and silver are under-owned in the Western world. Despite the fact that gold has risen from $300 USD an ounce to near $1300 today, many investors don’t buy any substantial amount of gold or silver.
Like cryptos, gold has an intrinsic value that exists outside of the financial system. In fact, until 1971, the US dollar was backed by gold. Now, there is nothing backing global currency besides heavily indebted governments, which makes gold look like a decent insurance policy against any issues that could arise in the global monetary system.
Precious metal mining stocks, as well as royalty companies, are also out there, and many of them haven’t really participated in the FAANG (Facebook, Apple, Amazon, Netflix, and Google) led tech rally over the last few years.
Read: Investing in Gold
Building a Balanced Portfolio
There are a lot of investment options out there, and there is no need to make concentrated investments in a single sector or financial instrument. Modern Portfolio Theory states that diversification will help investors avoid catastrophic losses which is probably a good place to start, regardless of your investment goals.
Tax planning is another area to consider, especially if you have $100,000 or more to invest. If you don’t have any money in tax-deferred accounts, it might be a good idea to start setting some aside. If you can avoid paying taxes on your investments for a decade or two, the amount of money that you end up with when you are 60 years old will be much higher.
Robo advisers are another innovation to consider, as they make portfolio management simple. If you aren’t into making active investments, using professional grade investment management at sub 1% per annum rates could make a lot of sense.