Smart Ways To Invest Your $100,000 Savings

Investing a sum of £100,000 or $100,000 can be difficult, especially when it comes to a large amount of money. Before investing, it is important to define your investment goals, risk appetite, and strategy. It is also crucial to understand your investor profile, which includes your saving purpose, financial background, and attitude towards risk.

There are various investment options available, including stocks, shares, exchange-traded funds (ETFs), real estate, savings accounts, and bonds. Diversifying your portfolio by investing in a combination of high and low-risk assets is generally recommended to manage risk and maximise returns.

Seeking financial advice from a qualified professional is always a good idea to ensure you make well-informed investment decisions.

Define your investment goals

Before investing your savings, it is important to define your investment goals. These goals should be realistic and tailored to your life plan, risk tolerance, and financial situation. Here are some key considerations to help you define your investment goals:

Determine Your Investor Profile:

Decide whether you want to be a do-it-yourself investor or seek professional guidance. If you prefer to manage your investments independently, you will need to conduct thorough research, create your asset allocation, and handle trades on your own. On the other hand, if you want more assistance, you can opt for a robo-advisor or a financial advisor. Robo-advisors offer automated investment services at lower fees, while financial advisors provide more personalised guidance but at a higher cost.

Assess Your Risk Tolerance:

Your risk tolerance is a crucial factor in defining your investment goals. If you have a high-risk tolerance, your portfolio may be predominantly composed of equities (stocks). You may also be willing to invest in smaller companies, which entails greater growth potential but also a higher risk of loss. Conversely, if you have a lower risk tolerance, you may favour more conservative investments, such as bonds or diversified funds.

Set Clear and Measurable Goals:

Use the SMART framework to set your investment goals. Make your goals specific, measurable, achievable, relevant, and time-based. For example, your goal could be to save for a down payment on a house or to build a retirement fund. Ensure that your goals align with your short-term, intermediate-term, and long-term financial objectives.

Consider Your Financial Situation:

Evaluate your income, expenses, and financial obligations. Determine how much you can realistically invest without compromising your current financial stability. If you have high-interest debt, such as credit card debt, consider prioritising paying it off before investing your savings. Additionally, build an emergency fund that covers at least three to six months' worth of living expenses to protect yourself from unforeseen events.

Seek Professional Guidance:

Consider working with a trusted financial advisor to help you define and achieve your investment goals. They can provide personalised advice based on your financial circumstances, risk tolerance, and life plan. A financial advisor can also assist you in creating a comprehensive financial plan and making informed investment decisions.

Defining your investment goals is a crucial step before allocating your savings. It ensures that your investments align with your financial objectives, risk tolerance, and life plan. By taking the time to set clear and realistic goals, you can increase your chances of investment success and work towards a secure financial future.

Define your risk appetite

When it comes to investing, risk is unavoidable. Whether you're investing in stocks, crypto, bonds, or real estate, there's always a chance you could make no money, lose money, or get a return on your investment. Therefore, understanding your risk appetite is crucial, as this will help you tailor your investment portfolio accordingly.

Risk appetite is the degree of risk an investor is willing to take to achieve their financial goals. It is a broad description of the amount of risk an investor is prepared to accept and can be defined as a statement that describes an investor's attitude towards risk-taking.

Types of Risk Appetite

There are typically three types of risk appetite:

• Aggressive Risk Appetite: An investor with a high-risk appetite is willing to lose large amounts of money to achieve huge gains. They are often either looking for a get-rich-quick opportunity or are highly knowledgeable and unbothered by market conditions.
• Moderate Risk Appetite: An investor with a moderate risk appetite is comfortable with risk but is cautious about losing too much money. They carefully weigh their options and only invest what they are willing to lose.
• Low-Risk Appetite: A low-risk investor is the most conservative. They are satisfied with small profits and focus on low-volatility instruments that bring gradual returns. These investors are typically older, less wealthy, or new to investing.

Factors Affecting Risk Appetite

Several factors influence an individual's risk appetite, including:

• Income Level: Investors with higher disposable income can typically afford to take greater risks.
• Age: Younger investors tend to have a higher risk appetite as they have more time to recover from market losses. Older investors, closer to retirement, usually have a lower risk appetite as they need their investments to be more stable and readily available.
• Investment Expertise: An investor's knowledge and experience can affect their willingness to take risks.
• Investment Objective: Those investing for a specific goal within a fixed period may have a more conservative risk appetite. If investing is not a necessity for survival, an investor's risk appetite may be higher.
• Investment Horizon: The duration of an investment also affects risk appetite. Longer-term investments can accommodate higher risks, while shorter-term investments are better suited to lower-risk options.

Understanding Your Risk Appetite

To understand your risk appetite, consider the following questions:

• How much money do I have to invest, and how much am I willing to lose?
• How worried would I be if the share markets fell dramatically?
• Will I be tracking my investments daily?
• Am I financially buoyant enough to invest?
• Do I have other stable sources of income?
• How many people depend on my finances?
• What are my financial goals and objectives?
• What is my reaction to market movements?

By answering these questions and assessing your financial situation, you can determine your risk appetite and make more informed investment decisions.

Diversify your investments

Diversification is a key principle of investing, and with $100,000 to invest, you can employ this strategy to manage risk and maximise returns.

Diversification is the process of spreading your investments across different asset classes, sectors, and geographies. By doing so, you reduce the risk of your portfolio's value changing dramatically if a single company or sector encounters difficulties. It also helps to offset any short-term fluctuations with gains made elsewhere in your portfolio.

A well-diversified portfolio will typically include a mix of equities (stocks) and bonds, with some investors also adding real estate, peer-to-peer lending, commodities, and hedge funds.

• Stocks and Mutual Funds/ETFs: You can invest in a diverse basket of stocks or opt for mutual funds and exchange-traded funds (ETFs), which provide instant portfolio diversification. Mutual funds are managed by a professional and may include a mix of stocks, bonds, or both. ETFs are similar but trade like stocks and often have lower costs.
• Real Estate: With $100,000, you may be able to make a sizable down payment on a property, especially outside of major cities. You can also invest in Real Estate Investment Trusts (REITs), which are professionally managed portfolios of properties. REITs often pay higher dividends than stocks and can be purchased through a broker or directly from the REIT company.
• Bonds: Bonds are debt securities that entitle the holder to receive interest payments. They are considered less risky than stocks and are well-suited for short-term investing or investors who prefer certainty. You can invest in individual bonds or opt for bond ETFs, which are more affordable and already diversified.
• Peer-to-Peer Lending: Peer-to-peer lending platforms allow you to lend your money directly to borrowers, cutting out the middleman (the bank). This can provide higher interest rates than traditional savings accounts, but it's important to note that this type of lending is not currently covered by the Financial Services Compensation Scheme (FSCS).
• Savings Accounts and Certificates of Deposit (CDs): While savings accounts and CDs may not provide high returns, they are low-risk options. In the current economic climate, you can find savings accounts and short-term CDs with interest rates above 3%.
• Annuities: Annuities provide a guaranteed income stream for a certain period, but once set up, you cannot access the lump sum.
• Green and Sustainable Investments: If you want your investments to have a positive impact, consider green investment funds, which focus on companies committed to sustainability and social responsibility.

Remember, diversification doesn't mean investing in as many different things as possible. It's about carefully allocating your capital across various assets to balance risk and return. A financial advisor can help you create a diversified portfolio that aligns with your goals and risk tolerance.

Keep costs low

"Keeping costs low" is a key principle when investing your savings, especially when considering a sum of $100,000. Here's a detailed guide on keeping your expenses in check while maximizing the potential of your investment:

Minimize Fees: One of the most important ways to keep costs low is to pay attention to fees. Investment fees can eat into your returns over time, so it's crucial to minimize them. Look for low-cost investment options such as index funds or exchange-traded funds (ETFs) that track a particular market index. These funds typically have lower expense ratios than actively managed funds, resulting in higher returns for you. Also, be mindful of brokerage fees when buying or selling investments. Consider using a discount brokerage that offers low-cost or free trades.

Avoid Active Trading: Active trading, or frequently buying and selling investments, can incur significant costs in the form of brokerage fees and potential capital gains taxes. Unless you are a skilled and knowledgeable trader, it's generally more cost-effective to adopt a buy-and-hold strategy. This approach reduces transaction costs and can provide tax benefits, as you'll only realize capital gains or losses when you eventually sell the investment.

Choose No-Load Funds: When selecting mutual funds or ETFs, opt for no-load funds, which do not charge a sales commission or load fee. Load funds can have front-end or back-end sales charges that directly eat into your investment returns. No-load funds offer a more cost-effective way to invest, ensuring that more of your money is actually invested in the market.

Utilize Tax-Advantaged Accounts: Take advantage of tax-efficient accounts, such as Individual Retirement Accounts (IRAs) or, if you're investing outside the US, similar tax-sheltered accounts. These accounts offer tax benefits that can help your investments grow faster. For example, with a traditional IRA, you may be able to deduct your contributions from your taxable income, lowering your tax burden. Alternatively, with a Roth IRA, you contribute after-tax dollars, and your investments grow tax-free, providing a significant long-term benefit.

Negotiate Fees: Don't be afraid to negotiate fees with your financial advisor or investment manager. These professionals often have some flexibility in the fees they charge, especially if you are investing a substantial sum. Ask about potential discounts or reduced fee structures for larger accounts. If you're working with a robo-advisor, you may still have some room to negotiate, especially if you're willing to increase your investment amount.

Regularly Review Expenses: Finally, it's important to regularly review the expenses associated with your investments. Over time, fees can change, and new, more cost-effective options may become available. Reviewing your investments annually ensures that you're still getting good value for money and that your costs remain competitive. This proactive approach can help ensure that your investments continue to align with your financial goals.

Consult a financial advisor

Consulting a financial advisor is a great way to make the most of your savings and ensure you're on the right track to achieving your financial goals. Here are some reasons why consulting a financial advisor could be a good idea:

• Financial advisors have the necessary credentials and expertise to advise you on various financial matters, such as retirement planning, tax planning, investment strategies, and more. They can provide valuable insights and guidance tailored to your specific needs and goals.
• A financial advisor can help you make informed investment decisions by evaluating your current financial situation, risk tolerance, and investment objectives. They can construct a diversified investment portfolio that aligns with your risk appetite and financial objectives.
• Financial advisors can offer a range of services, from money management and budgeting to investment management and estate planning. They can also assist with complex financial matters, such as tax strategy and insurance needs.
• When choosing a financial advisor, it's important to consider their credentials, compensation structure, and whether they are a fiduciary. A fiduciary is legally obligated to act in your best interest. You can verify their credentials and check for any disciplinary issues through their Form ADV and FINRA's BrokerCheck website.
• The cost of financial advisors can vary depending on their expertise and fee structure. Some charge a percentage of your assets under management (typically 0.25% to 1%), while others charge a flat hourly or annual fee. It's essential to understand their fees before engaging their services.
• Online services and robo-advisors are also available if you prefer a more digital and cost-effective approach. These platforms use algorithms to build and manage your investment portfolio based on your financial goals and risk tolerance.

Remember, the right financial advisor will be someone who understands your unique financial situation and can offer personalised advice to help you make the most of your savings.

Frequently asked questions