Smart Strategies For Investing $100K In Etfs

Investing $100,000 can be a great way to build long-term wealth, but it's important to make sure you're doing it right to avoid losing money instead of generating returns. Before investing, it's recommended to pay off any high-interest debt, such as credit cards, and to have an emergency fund of three to six months' worth of essential expenses set aside. Once you've taken these steps, there are several options for investing your money, each with its own advantages and considerations. You can invest in stocks, either by picking individual stocks yourself or using a robo-advisor, or you can opt for exchange-traded funds (ETFs) or mutual funds, which provide instant diversification. Real estate is another option, although $100,000 may not be enough to get into traditional property ownership. Instead, you could consider real estate investment trusts (REITs) or real estate crowdfunding. Additionally, you could maximise your retirement accounts, such as a 401(k) or an IRA, to take advantage of tax benefits. Lastly, peer-to-peer lending offers strong returns and passive income while helping others. When deciding how to invest your $100,000, it's crucial to understand your financial goals, risk tolerance, and the level of involvement you want in managing your investments.

Pay off high-interest debt

When investing a large sum of money, such as $100,000, it is important to first consider any high-interest debt. Credit card debt, for example, often has interest rates exceeding 20%, and can quickly accumulate if only minimum payments are being made. Therefore, it is generally a good idea to pay off such debt as quickly as possible.

One strategy for paying off high-interest debt is to consolidate it. This involves taking out a new loan at a lower interest rate to pay off multiple high-interest debts. This approach can simplify your financial obligations and reduce the amount of interest you pay. It is also beneficial to negotiate with creditors to lower interest rates, if possible.

Another strategy is to focus on making larger payments towards the debt. Instead of making the minimum monthly payments, consider doubling or tripling these payments to chip away at the principal balance and accrued interest. It is also important to be mindful of hidden fees associated with loans, such as origination fees, application fees, and late payment fees, as these can increase the overall cost.

Additionally, it is crucial to address the underlying spending habits that may have contributed to the high-interest debt. This may involve cutting back on unnecessary expenses, such as excessive travel or dining out, and adopting a more disciplined approach to spending. It is also important to break the reliance on credit cards as a crutch or lifestyle tool, and to practice delayed gratification instead.

Finally, creating a structured plan and budget can help ensure that you are allocating your money effectively. This may involve making tough financial choices, such as changing schools for your children, but it will help you stay on track and work towards financial stability and freedom from debt.

Set up an emergency fund

Setting up an emergency fund is an important step in achieving financial security. While it may seem daunting at first, it is a crucial step towards protecting yourself from unexpected financial setbacks. Here are some detailed instructions on how to set up an emergency fund with your 100k ETF investment:

Step 1: Determine your monthly expenses

Start by calculating your essential monthly expenses, including rent, groceries, utilities, insurance, and any other necessary costs. This will give you a baseline for how much money you need to cover your basic needs.

Step 2: Set a savings goal

Typically, financial experts recommend having enough savings to cover at least three to six months' worth of essential expenses. Based on your monthly expenses, calculate how much you should ideally save. For example, if your monthly expenses are $3,000, a good goal would be to save between $9,000 and $18,000.

Step 3: Choose the right account

You have several options for where to keep your emergency fund. A traditional checking or savings account is a safe choice, but these accounts may not offer significant returns. If you're looking for higher yields, consider a money market account, high-yield savings account, or a Certificate of Deposit (CD). These options offer higher interest rates but may have restrictions on withdrawals.

Step 4: Automate your savings

To make saving easier, automate your contributions to your emergency fund. Set up regular transfers from your main account to your emergency fund account. This way, you save effortlessly without having to remember to transfer funds manually each time.

Step 5: Build your fund

Start building your emergency fund with a portion of your 100k ETF investment. You can also boost your savings by using any extra income, such as bonuses, tax refunds, or gifts. If possible, try to make saving for emergencies a priority so that you can reach your savings goal faster.

Step 6: Discipline and patience

Remember that building an emergency fund takes time and discipline. Stick to your savings plan and be patient as your fund grows. Even if you can only save a small amount each month, it's important to maintain consistency.

By following these steps, you'll be well on your way to establishing a robust emergency fund that will provide financial peace of mind and security.

Diversify your portfolio

Diversifying your portfolio is a crucial step in investing wisely and minimising risk. Diversification goes beyond simply not putting all your eggs in one basket. It involves spreading your investments across various asset classes, such as stocks for growth, bonds for stability, commodities for inflation and cash for security.

When building a diversified portfolio with ETFs, you can follow these steps:

Step 1: Determine the Right Allocation

Consider your investment goals, risk tolerance, time horizon, distribution needs, tax situation, and personal circumstances. These factors will help you decide how to allocate your $100,000 across different asset classes and sectors.

Step 2: Implement Your Strategy

Select ETFs that align with your allocation targets. You can choose from various ETF options, including sector ETFs (e.g., financials, healthcare), international ETFs (e.g., emerging markets, developed markets), and commodity ETFs (e.g., gold, agricultural commodities).

Step 3: Monitor and Assess

Regularly review the performance of your ETF portfolio, ideally once a year or quarterly. Compare each ETF's performance to its benchmark index, and make adjustments if necessary. Stay committed to your original allocations and avoid trying to time the market.

• Simple Portfolio: You can invest in a total world stock market ETF and a total bond market ETF. This provides a balanced portfolio with 60% stocks and 40% bonds. While simple, this approach may not offer the level of customisation you desire.
• Intermediate Portfolio: Consider investing in around eight ETFs, including large-cap, small-cap, international developed-market, and emerging-market stocks. For bonds, you can choose a core bond ETF and diversify with sub-investment-grade and international bond ETFs.
• Fine-Tuned Portfolio: If you want more precise control over your investments, you can use 20 or more ETFs to allocate your funds to specific sectors, countries, or styles (e.g., growth, value). This approach allows you to focus on the exact parts of the market you expect to perform best but comes with increased complexity and trading costs.

When constructing your ETF portfolio, keep in mind that ETFs are typically passive funds that track a specific index or benchmark. They offer diversification, transparency, and relatively low operating expense ratios. However, you may need to complement your ETF portfolio with other investment vehicles, such as mutual funds or individual stocks and bonds, to achieve your desired level of diversification.

Minimise fees and taxes

When investing in ETFs, fees and taxes can eat away at your returns. Here are some ways to minimise them:

Understand the Fees

Firstly, it's important to understand the fees you're paying. While regulations require investment fees to be disclosed, they are often buried in long prospectuses. Fees can include expense ratios, which cover administrative fees, management, advertising, and other back-office expenses, as well as commissions if a brokerage firm is used.

Choose Passive Investments

Active management of investments typically incurs higher fees. By choosing passive investments, such as index funds or ETFs, you can lower the fees you pay. According to Morningstar, the average fee for actively managed funds is 1.2%, while the average ETF charges 0.44%. If you prefer active management, look for funds with an expense ratio of 1% or less.

Choose No-Load Mutual Funds

Mutual funds can have loads or commissions associated with them, which can be as high as 5% of the invested assets. Avoid front-end and back-end loaded funds, and choose no-load mutual funds instead.

Choose a Discount Broker

If you like to pick and choose your stocks, consider using a discount brokerage firm with lower fees per trade. Reducing the number of trades you make can also help keep costs down.

Be Aware of Annual Fees

Some brokerage firms charge annual fees if you don't trade or maintain a certain account balance. Be aware of these rules to avoid unnecessary fees.

Understand ETF Tax Rules

ETFs are generally considered more tax-efficient than mutual funds due to their structure. However, selling your ETF shares is a taxable event, and taxes depend on how long you've held the shares. In the US, holding an ETF for more than a year qualifies for a lower long-term capital gains tax rate. Selling within a year incurs a higher tax rate as a short-term capital gain.

Take Advantage of Tax Strategies

You can use ETFs for tax-planning strategies, such as closing out positions with losses before they reach the one-year mark and holding onto positions with gains for more than a year. This allows you to take advantage of the lower long-term capital gains tax rate. Additionally, look into tax-loss harvesting strategies, where you sell investments at a loss to offset gains from other investments.

Decide how you want your money managed

Deciding how to invest a sum of $100,000 can be both exciting and overwhelming. There are several options for how you can manage your money, depending on the type of advice you want, the level of guidance you need, and how involved you want to be in the process. Here are some options to consider:

Managing Your Own Investments

If you feel confident in your knowledge of diversification and risk tolerance, you may choose to manage your investments yourself. You will need to open a brokerage account to deposit your funds and then select from various assets such as stocks, bonds, mutual funds, ETFs, and index funds. This option gives you full control over your investment choices and strategies.

Automating the Process with Robo-Advisors

Robo-advisors offer a low-cost and low-hassle solution by providing automated portfolio management services. These companies use algorithms to compose, monitor, and rebalance your portfolio based on your goals and risk tolerance. While they typically don't allow you to choose individual stocks, some providers offer access to financial advisors who can answer your questions or provide customization.

Seeking Full-Service Guidance from Online Financial Advisors

If you prefer more personalized investment recommendations and ongoing financial planning, consider hiring an online financial advisor. These professionals will make investment suggestions, manage your money, and address other financial tasks. Online financial advisors are generally less expensive than traditional financial advisors but offer a similar level of service.

Working with a Traditional Financial Advisor

If you want a high level of personalisation and human input, consider engaging the services of a traditional financial advisor. They will create a tailored financial plan for you, taking into account your goals, risk tolerance, and investment preferences. However, this option tends to be more costly than the previously mentioned choices.

Combining Approaches

It's worth noting that you don't have to choose just one approach. You can combine strategies by managing some of your investments yourself while seeking the guidance of a robo-advisor or financial advisor for other portions of your portfolio. This allows you to benefit from professional advice while still maintaining some level of personal control and involvement.

Frequently asked questions