Smart Ways To Invest $100,000

Investing 100k is a great way to build your financial future. Before you start investing, it's important to consider your short- and long-term financial goals, risk tolerance, and time horizon. Here are some options for where to invest 100k:

- Pay off high-interest debt and build an emergency fund: It's generally recommended to prioritise paying off high-interest debt, such as credit card debt, and building an emergency fund of about three to six months' worth of living expenses before investing a large sum of money.

- Invest in the stock market: You can use a traditional brokerage account to buy stocks in growth industries, purchase dividend-paying stocks and bonds, or invest in exchange-traded funds (ETFs) and mutual funds, which provide instant portfolio diversification.

- Save for retirement with a tax-advantaged account: Consider contributing to a traditional or Roth IRA, 401(k), or similar employer-sponsored retirement plan. These accounts offer tax advantages and can help you save for the future.

- Invest in real estate directly or through REITs: You can use the 100k as a down payment for a rental property or invest in a real estate investment trust (REIT), which offers the benefits of real estate investing without the hassle of property management.

- Peer-to-peer lending: This involves lending money to people or businesses through online platforms, providing an ongoing source of passive income.

- Start a side hustle or business to establish an additional source of income or test a business idea.

Define your investment goals

Before investing, it is important to define your investment goals. These goals will be unique to you and will depend on your current circumstances, including your age, life stage, salary, and risk tolerance.

Short-term vs long-term goals

Your investment goals can be simple and short-term or more complex with long-term objectives. Short-term goals are those you want to achieve in the near future, usually within one to two years. Examples include buying a new car or renovating your home. Long-term goals, on the other hand, will take significant time, effort, and planning, and can stretch from a couple of years to a couple of decades. Examples include upgrading to a new home, purchasing an investment property, saving for your children's education, or building wealth for retirement.

Be realistic

It is important to be realistic about your goals. They should be clear, measurable, and achievable within a realistic timeframe. For example, rather than rushing to achieve a goal by a certain birthday, you could aim for long-term benefit without sacrificing too much of your current lifestyle.

Match your goals to your investment strategy

Your goals will influence your investment strategy. For instance, if you are looking for investments that provide frequent income in the short term, you might choose shares that pay higher dividends. On the other hand, if you are looking to build wealth over the long term, you might invest in stocks with higher potential for capital growth.

Time frames and risk

Time frames are important as they will help determine your risk tolerance. For short-term investment goals, you may prefer lower-risk investments that provide more stable, lower returns. These could include cash, bonds, or some ETFs. For longer-term investment goals, you may be willing to consider high-risk investments with the potential for higher returns.

Keep yourself motivated

Having clear investment goals will not only keep you motivated but also help keep you on track. They will form the basis of your investment strategy, help you decide which assets to invest in, and determine your tolerance for risk.

Define your risk appetite

Before investing $100,000, it is important to define your risk appetite. Risk appetite is the amount of risk an investor is willing to take to achieve their objectives. It is a broad description of an investor's attitude towards risk-taking and is usually shaped by age, lifestyle, and goals.

As an investor, you should understand your attitude towards risk. Taking on too much risk may cause you to panic and sell at a bad time, while exposing yourself to too little risk may lead to disappointing returns and the inability to achieve your objectives.

• Age: Generally, younger investors with a longer time horizon are more willing to take greater risks to earn higher potential returns. Older investors with a shorter investment timeframe tend to be more cautious as they need their money to be more readily available and have less time to recover from losses.
• Income: Individuals with higher incomes and more disposable income can typically afford to take greater risks with their investments.
• Investment objectives: Be clear about your investment goals and time horizon. For example, saving for a holiday or a deposit on a home is different from investing for retirement.
• Risk tolerance: This refers to the practical application of risk appetite and considers the degree of variability in returns an investor is willing to bear. Understanding your risk tolerance can help you determine the appropriate level of risk for your investments.

It is worth noting that risk appetite and risk tolerance are not the same things. While risk appetite is a broad description of an investor's willingness to take risks, risk tolerance is the deviation from the risk appetite that an investor is willing to accept to achieve a specific objective.

By understanding your risk appetite, you can make well-informed financial decisions, identify opportunities to take on more risk, and adjust where you may be exposed to unnecessary risk. Additionally, you can avoid being caught up in the emotion of market activity, where panic can lead to poorly timed and costly decisions.

Define your investing strategy

There are several investing strategies to choose from, and the right one for you will depend on your personal circumstances and preferences. Here are some of the most common strategies:

• Value investing: This strategy involves searching for stocks that are trading at a discount and buying them at a bargain. It requires a long-term commitment and diligent research and analysis. Warren Buffet is a famous example of a value investor.
• Growth investing: This strategy focuses on finding the 'next big thing', such as new technologies, and investing in their potential for growth.
• Momentum investing: This strategy involves looking for patterns of high returns and investing in those stocks, while avoiding those with poor patterns.
• Passive investing: This strategy is less hands-on and involves using exchange-traded funds, mutual funds, or unit trusts to gain similar returns to market benchmarks. Historically, passive investing has outperformed active investing over the long term.
• Active investing: This strategy involves a more hands-on approach, with portfolio managers continuously monitoring activity and buying and selling to try and outperform the market. It requires more research and forecasting and tends to be riskier than passive investing.

When deciding on an investing strategy, it's important to consider your risk tolerance and the amount of time and effort you're willing to put into managing your investments. Passive investing is generally considered less risky and better suited for those who want a more hands-off approach, while active investing may be more suitable for those who want to take a more active role in managing their portfolio and are comfortable with higher risk.

Additionally, it's worth noting that your investing strategy may evolve over time as your financial situation and goals change.

Create a portfolio mix

Before creating a portfolio mix, there are a few things you should consider. Firstly, it is important to assess your short- and long-term financial plans and objectives, as well as your risk tolerance. It is also a good idea to pay off any high-interest debt and build an emergency fund of around six months' worth of living expenses before investing.

Once you have dealt with these personal finance issues, you can start thinking about creating a portfolio mix. Here are some options to consider:

• Retirement accounts: If you have access to a workplace retirement plan, such as a 401(k), you should contribute enough to get the full match offered by your employer. This is essentially "free money". You can also consider opening an individual retirement account (IRA) and investing up to the annual contribution limit.
• Mutual funds, ETFs, and index funds: These funds hold baskets of assets that provide a simple way to diversify your portfolio. Mutual funds are actively managed and tend to have higher costs, while ETFs and index funds passively track a stock market index and have lower fees.
• Dividend-paying stocks: These stocks offer the prospect of share price increases as well as regular cash dividends. Even if the share price sags, companies will usually continue to pay out dividends.
• Bonds: Bonds are considered less risky than stocks and can help to diversify your portfolio. Government bonds, also known as Treasurys, are generally considered the safest option.
• Alternative investments: These include precious metals, cryptocurrencies, real estate, and collectibles. Alternative investments can provide diversification and higher potential earnings but are often more complex and risky.
• Real estate: With $100,000, you could make a down payment on a rental property or buy a property outright. Real estate can generate a steady income stream and offer tax benefits. You could also consider investing in a real estate investment trust (REIT) or real estate crowdfunding.

When creating your portfolio mix, it is important to diversify across various asset classes, such as equities, bonds, and cash, to minimise risk. You can also consider working with a financial advisor or using a robo-advisor to help you create and manage your portfolio.

Rebalance your portfolio regularly

Portfolio rebalancing is when you realign the assets in your portfolio to maintain an investment mix that supports your financial goals and risk tolerance. The aim of rebalancing is to mitigate volatility and manage potential risk in your portfolio. It's a negotiation between risk and reward that can help your portfolio stay on track amid market highs and lows.

There are two main rebalancing strategies: periodic time-based rebalancing and threshold or price-based rebalancing. Periodic time-based rebalancing involves rebalancing at regular intervals, such as annually or quarterly, regardless of asset price movements. Threshold or price-based rebalancing sets a limit on how far the portfolio can deviate from your desired target mix, such as a 60/40 stocks-to-bonds ratio.

There is no one-size-fits-all answer for how often to rebalance a portfolio. It depends on your goals, risk tolerance, and investment style. Some people choose to rebalance monthly, quarterly, biannually, or annually. Others rebalance when their asset allocation reaches a specific tipping point, such as when the stock portion of their portfolio grows to 85%.

The key is to avoid overdoing it. For example, if you follow a set calendar for quarterly rebalancing, it may be counterproductive if your asset allocation hasn't shifted significantly. Similarly, rebalancing when your asset allocation moves beyond a set percentage range could result in higher brokerage fees.

When rebalancing your portfolio, start by taking an inventory of your current holdings. Break down the percentage of your portfolio dedicated to different asset classes, such as stocks, bonds, cash and cash equivalents, and real estate. Then, compare your current asset allocation to your desired asset allocation and make adjustments as needed by buying or selling securities.

Frequently asked questions