Investing $100,000 (How to invest $100,000)

Investing Lets You Enjoy Compound Returns: Not only does investing give you higher returns, your investment returns will also have their own benefits. As you reinvest your profits, your money will grow at a compound rate.

Legendary American investor Warren Buffett perfectly sums up why investing is so much better than saving in these words: “People with cash equivalents don’t have to feel comfortable, they’ve chosen the worst kind of asset that pays almost nothing and is sure to go down in value.

To build wealth with $100,000, putting that cash into a savings account is not a smart strategy. In this article, we will look at what you can invest $100,000 in to get the best returns.

But before we begin, it is important to clarify that we are assuming that you do not have any debts to pay, and that you have built up an emergency fund. These two tasks are considered two main pillars of the wealth building process for the following reasons:

Pay off debt: If the interest accruing on unpaid debt is higher than the average returns you’re getting, investing your money while your debt remains unpaid could hurt your ability to grow your net asset value.

Build an emergency fund: Investing $100,000 without having an emergency fund on hand is a huge mistake. Emergencies may force you to borrow at an interest rate that may be higher than your investment returns, which will lead to losing the opportunity to increase your money.

Keep in mind the following basic investment principles that will help you grow your wealth:

Many novice investors make the mistake of focusing only on the returns of their investments while excluding risk factors, but the advent of the Nobel Prize-winning Modern Portfolio Theory (MPT) has taught us that risk is a critical component of smart long-term investment strategies. So when you think about the return you can get from an investment, you should also consider the risks.

The best way to reduce risk is to have a diversified portfolio of assets that are not positively correlated. When the value of one asset decreases, the value of other assets within the portfolio may rise, thus offsetting the losses. Since not all of your eggs are in one basket, losing one basket won’t affect you greatly.

Understanding the difference between active and passive investing is essential when investing $100,000.

Active investing is a strategy in which investors attempt to outperform benchmarks by timing the market and actively managing their investments. But because of the time it takes to manage, active investing is more expensive, and active investors often underperform the market when trying to outperform it. The S&P Dow Jones Indexes report shows that 87.2% of active mutual funds have failed to beat the market over a 15-year period.

In one of his letters to Berkshire Hathaway shareholders, Warren Buffett said: “Aggressive trading, attempts to ‘time’ market movements, inadequate diversification, high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy decent returns that one could enjoy. Owner of shares for life.”

In order to match market performance and reduce fees and taxes, investors should adopt the passive investing approach which states building a diversified portfolio of assets and passively watching the growth of funds. This is done through the use of modern portfolio theory, as well as a strategic portfolio consisting of well-researched exchange-traded funds.

Having understood the importance of diversification and passive investing, let us now focus on the best $100k investment, by looking at the different ETFs in the market.

This is the best investment of $100,000 in the stock market. But while stocks offer the highest returns, they are also the riskiest. It’s easy to earn huge returns by buying stocks, but it’s also easy to lose your money.

Smart investors seek to maximize their potential return from a stock and minimize risk through diversification. This means that rather than holding a small group of individual stocks, you can diversify your risk by holding stocks of several companies that are negatively correlated with each other, i.e. those that belong to completely different industries such as technology and healthcare.

Buying ETFs is the best way to buy stocks while achieving all this diversification and reducing risk. If you buy the Vanguard S&P 500 (VOO), for example, you will have a stake in the companies that make up the S&P 500 index.

If you want to reduce the risk even further, you can buy ETFs that include shares of companies outside the United States. Even if the US market is down, your portfolio will not contract. There are many equity funds around the world that you can invest in such as Vanguard Total World Stock (VT).

“In the beginning, ETFs were the preserve of institutional investors and seasoned fund managers only, but the great thing about these funds is that they are democratic,” says Mark Fitzgerald of Vanguard. If you or I want to buy an ETF product, we pay the same price as a sovereign wealth fund. There are no hidden prices, the cost is the cost.”

Bond funds are the second best investment at $100,000. While bonds do not provide the returns of stocks, they are less risky and have a negative correlation with them, as when one goes up, the other often goes down. “When growth is slower than expected, stocks go down, and when inflation is higher than expected, bonds go down,” explains Ray Dalio, former CEO of Bridgeway Associates. Data from the FTSE All-World Index from 1999 to 2020 shows that bonds provided an average quarterly return of 2.2% during periods when the stock market was down 8.6%.

Like stocks, the best way to buy bonds is through bond funds rather than individual bonds that charge higher fees and taxes. You can buy international bond funds such as the Vanguard Total International Bond Index Fund ETF (BNDX) for example, or US market bond funds such as the Vanguard Total Bond Market ETF (BND).

Third in the list of the best investments of $100,000 are real estate investment traded funds. Buying real estate is expensive and involves many management fees. Properties are also illiquid and risky, making it difficult to achieve any kind of diversification to reduce those inherent risks. But by investing in REITs, investors can enjoy some of the benefits of the real estate industry without the risks.

Like bonds and stocks, the best way to buy REITs is through ETFs. You can buy the Vanguard Real Estate Index Fund (VNQ), which focuses on the US market, or Vanguard Global ex-US, which focuses on the global real estate market excluding the United States.

After you’ve looked into where you can invest $100,000, the next step is to build a diversified portfolio.

Basically what you’re going to do here is split the $100,000 between ETFs, bond funds, REITs, and the rest of the other asset classes. But how will you do that? And which customization formula works best for you?

Before deciding on an allocation formula, the first step is to determine your risk tolerance level. There are six types of investors, based on individual risk tolerance levels:

Extremely Conservative: An extremely conservative investor will have almost all of his investment in bonds because they are the safest.

Conservative: The conservative investor is open to more investments in stocks and real estate in his portfolio, as he tends to look for an allocation formula of 50:50 (50% in bonds, 50% in stocks and real estate investment funds).

Moderate Conservative: The moderate conservative is open to owning more stocks than bonds, usually approaching a 60:40 allocation formula.

Balanced: Balanced investors are open to owning fewer bonds in their portfolios.

The bold: has more bonds than aggressive investors.

Aggressive: Aggressive investors have the lowest level of bonds in their portfolio (10% or less).

Your general attitude towards risk and your time horizon will determine your risk tolerance level and where to invest your $100,000. If you’re about to retire, you might be on the conservative side. If you are far from retirement age, your investments should fall into  the group that best suits your individual attitude towards risk. So ask yourself these important questions: How much risk is right for me? Am I far or close to retirement?

Deciding on the allocation formula is not the last stage, but only the beginning. Now you need to choose the ETFs that will make up each category.

Instead of doing all the tedious research on each individual fund, you can automate your investments with a robo-adviser. The bot advisor will ask you questions that will help determine your risk tolerance, and then it will decide which investments are best for you. Robo-advisors usually determine which ETFs offer the best diversification, maximum return, and minimum risk for each asset class, and then allocate your funds accordingly.

Many investors think that it is better to invest their money in multiple streams rather than a huge amount in one time. This includes passive investing techniques such as dollar cost averaging, which is a system in which you invest a certain amount of money at regular intervals regardless of the state of the market at the time.

The first problem with this approach is that you are holding your money back instead of making it work for you. Instead of making returns from this $100,000, this capital will sit idle in a savings account, and may lose its value due to inflation. In addition, you lose out on compound returns, which are the beating heart of wealth creation. A study by Vanguard shows that an aggregate investment beats the dollar cost 64% of the time over six months and 92% over 36 months (for a 60/40 portfolio).

Rather than timing the market or using dollar cost averaging, financial experts agree that investing $100,000 right away is the best strategy to start building your wealth.

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