Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
So you got your hands on $100,000. Give yourself a huge pat on the back. This is a huge accomplishment. A surprisingly small number of people can boast of being a hundred thousand-aires. Now it's time to invest it. An important goal is to invest with discipline—i.e., pick a prudent, research-based strategy and don’t get distracted by the latest faddish tech stock or cryptocurrency that has turned a handful of speculators into overnight millionaires.Need some advice on how to invest a $100k? Book a complimentary call with one of our licensed Portfolio Managers.
Even before you decide exactly how to invest your $100,000, you’ll want to assess four factors that will dictate your next move.
Five Factors that dictate how to invest $100k
Goals: The first step is understanding what do you intend to do with this sizable pile of money. Is this $100,000 the money you plan to use to keep the lights on, the cat fed, and the and the fridge stocked for your retirement in thirty years? Or is this the miracle inheritance from Aunt Florence that’s immediately going to get your family of five out of a one-bedroom apartment and any place with more than one bathroom? Maybe this is the money that will be used to fund the university education of your kid, who’s now 13. Your goals will directly dictate number two below which is why it's important to think why exactly you want to invest.
Time horizon: This refers to how long you plan to hold a particular investment. In general, if you have a short time horizon, you’ll want to pursue a less aggressive investing strategy. An investor who needs the full $100,000 investment to be available in three weeks, three months or oven three years will want to avoid a strategy that invests heavily in equities (aka stocks). Stocks are prone to fluctuate in value much more than other investments such as government-backed bonds. If you need your money in the short term, it simply won't be there if the market is down. How long you can afford to invest for matters a lot when it comes to choosing where to invest your $100,000. If your investment is for retirement, your time horizon will be affected by your age and the years between now and when you plan to retire. The more time between now and your retirement the longer the time horizon is.
Circumstances: How old are you? How's your health? How much do you earn? Any chance you'll soon be getting married or divorced? This one covers all the subjects your mother taught you it’s impolite to talk about at dinner parties. Circumstances would cover how much money you have now—and how much money you anticipate you’ll be getting in the future, via factors like inheritance. Money can be liberating — if you feel like you’ll have a cushion to depend on should your investments be momentarily down, you might allow yourself to be more aggressive in your strategy.
Risk tolerance: All of the above factors will dictate your risk tolerance, a term that simply means how much of your investment you can afford to lose. If your $100,000 was abducted by aliens and your life wouldn’t be materially affected in any way, you have an incredibly high-risk tolerance. If without your $100,000 you won’t be able to come up with the down payment on the house you’re planning to move into in a month and you don’t have anywhere else to live, your risk tolerance is extremely low. In a situation like the latter, you’d want to put the entirety of your $100,000 somewhere incredibly safe, a cash equivalent that throws off some interest, like saving investment accounts.
Your emotions: Believe it or not, your ability to handle emotions play a big part in dictating where you should invest. The last thing you want to do is start trading yourself and end up panic selling or buying when the market moves a little. A DIY option requires a certain level of willpower in sticking to your investment strategy rather than deviating from it.
If you're scratching your heading wondering how all this applies to your investing strategy — it might be a good time to take a risk survey offered by many robo-advisors. They'll then build a personalized portfolio for you based on these factors and others.
The best accounts for investing $100,000
Don't underestimate the power of choosing the right investment account to store your $100k. Taxes are like investment termites -- they'll chew clear through your investment if you let them. Ideally, you should do anything do anything you legally can to lover your tax bill.
The government has actually created tax breaks to incentivize citizens to save for retirement and other big life expenses. An incredible amount can be saved by investing the maximum possible into what are known as “tax-advantaged” accounts. These investment vehicles either allow investments to grow within them tax-free or only collect taxes when you withdraw it years down the line in retirement. Provided the time horizon on these accounts fits with your goals, grab as much of the “free money” as you can by maxing these accounts out first.
Think of tax-advantaged accounts as the top cups in those cool champagne towers; only after the top cups get filled should your money trickle down into other types of accounts. Then, it will be a good idea to open a personal investing account where you can keep all your other investments.
Which one? Well, it really depends. If you’ve been working for a while, and have never contributed to either account, chances are good you’ll have a lot of contribution room in both accounts.
TFSAs are great for two types of investors: those who make less than $50,000 a year and/or those who plan to do something with the investment before retiring because unlike RRSPs, there are no tax penalties for withdrawing money pre-retirement. If you’ve lived in Canada since 2009, are not a US citizen, you could immediately deposit up to $57,500 immediately into the account. Right here you’ll find a deeper dive on all things TFSA.
RRSPs are a better idea for people who are making more now than they anticipate they’ll make in retirement since they’ll be taxed at a lower rate when they withdraw the funds down the line than they would now. RRSP contribution room will have accumulated for as long as you’ve been working, so if you’ve never contributed, it’s possible you could deposit much or even all of your $100,000 into one right away—plus, you can choose when to take the tax break if you anticipate you’ll benefit more in a future year than you will now. Though RRSPs have a reputation as being impossible to crack open pre-retirement without huge tax penalties, there are ways to spend the money and not get killed by the CRA. You can take interest-free loans from your RRSP to finance a down payment on a house or fund yours or your spouse’s education. More details can be found here.
RESP: If you want some of your $100,000 to be used to fund your kid's university education, you should consider funding a RESP. RESPs are great for three reasons. First, the money grows within them tax-free. Also, it isn’t considered taxable income when it's withdrawn and spent on educational expenses. And best of all, thanks to a program called the Canadian Education Savings Grant (CESG), the government will match 20% of your contributions, up to a lifetime limit of $7,200 per child. Yup, the government is willing to give your kid the cash equivalent of a reliable, 10-year-old used car.
One last point before discussing what you’ll invest in. You should understand the philosophical how of investing. You may choose to invest in stocks, bonds, real estate, or even marijuana, but you should never invest in just one stock, bond, or even sector. Smart investors diversify to prevent unnecessary losses in the case one stock or entire sector falters. Here, you’ll find some top-shelf tips for diversification.
Where to invest $100,000
At last, we’re ready to actually invest that $100,000 of yours. There are infinite ways to invest your money — alpacas, anyone? It’s necessary to warn you that investments are speculative and past results should never be understood to be guarantees, but rather imperfect predictors of future performance. That said, here are all your options when it comes to investing that 100k you have.
The Stock Market
Here is a totally uncontroversial opinion. If history is anything to go by, the quickest way to make your $100,000 to grow will be by investing in the stock market. So what stocks should you buy?
Chances are you’ve heard stories about some dude who invested a thousand bucks in Amazon in 1997 who now lives in a castle. What you don’t hear about as much, however, are the stories about some other guy who went all in on Snapchat and now lives in his mom's basement.
Stock picking is extraordinarily hard. Famously rich stock picker Warren Buffett has spent the last decades discouraging pretty much everyone not named Warren Buffet from trying to make money picking individual stocks, and in fact has encouraged his heirs to invest the lion’s share of their inheritance in low-fee, highly diversified stock funds.
Bonds are another option for your nest egg. Bonds are almost like a loan agreement — essentially, one party gives another party money with the understanding it will be paid back in the future with interest. There are many types of bonds from government bonds to municipal bonds.
Bonds are typically seen as a less risky investment when compared to something like stocks. As a result, many investors have some of their investments in bonds. Investing some of your money in bonds counteracts the volatility of the stock market.
While getting into the nitty-gritty of bonds is not for the faint-hearted, investing in them is relatively easy. Bonds can be bought directly from the government, via discount brokerages, or through investment platforms.
Watch enough cable TV, and you’ll assume that anyone with a tape measure and a barrel of hair gel can make millions flipping real estate. In reality, it's a business with huge risks that have been known to ruin unwise speculators.
Home ownership has been for generations a kind of forced saving plan for undisciplined investors. Without that monthly mortgage payment, many might not have saved anything at all.
There is one way to benefit from the real estate market without having to actually buy an apartment; real estate investment trusts, or REITs, are companies that sell shares in their various real estate investments. Just as diversification is important in stock holdings, REIT investors can spread their risk among dozens or even hundreds of REITs through REIT ETFs, of which are literally hundreds to choose from.
Because REITs offer some major tax benefits you won’t find elsewhere, they’re a particularly good investment for the kind of investors who have enough money to do their all their Christmas shopping at James Edition. That said, it's much better to diversify your investment portfolio across stocks, bonds, real estate and more which can be done with exchange-traded funds.
Exchange Traded Funds
Exchange traded funds (ETFs) invest your money in hundreds of stocks in a variety of sectors, you’ll minimize risk. You could say the easiest way to diversify your portfolio is through exchange-traded funds. They consist of many stocks rather than just a single company stock. This means that they tend to perform well in different kinds of market conditions — that said, with investing there are no guarantees.
Many ETFs also contain other investments in bonds and real estate. This means if one sector is not performing well, it does not pull down your entire investment portfolio. There are many ETFs to choose from. Index ETFs mimic an index like the S&P 500, so one for one price you can buy slivers of the 500 most valuable publicly traded companies in America.
If the sound of an ETF is confusing, let alone trying to choose them yourself, automated investing is a good option. Some investment platforms allow you to take a risk survey and build a portfolio to suit your investing goals. This means you can sit back, stick the kettle on and know that your $100k is essentially being invested while you watch television.
Best way to invest $100k
It’s important to remember that no one plan is appropriate for all investors, so it's hard to specify the best way to invest $100,000. There are some best practices we recommend when it comes to investing a sum in the region of a hundred thousand dollars:
Keep fees low
Just like taxes, fees are like investment termites too; left unchecked, they’ll devour everything you value. If you can become a cold-hearted fee exterminator, you won’t believe how much money you’ll be able to save over the long term. The average Canadian mutual fund carries a management expense ratio (MER) of about 2%, meaning that every year, regardless of how well the fund performs, 2% of the entire fund will be deducted every year to pay salaries and expenses of everyone who works on the fund.
Two percent might not sound like a huge sum, but one Toronto-based investment advisor showed that a fee of just 2% could decrease investment gains by half over the course of 25 years. Fiddle with a fee calculator like this one to see how trading a 2% MER for a .5% one could affect a hypothetical $100,000 investment. There's absolutely no predicting what would happen to this same investment in the future, but in the past, your $100,000 investment would have earned almost $21,000 less over 10 years, about $60,500 less over 20 years, and a whopping $141,691 less over thirty years. That's nearly enough to buy this little number.
Invest in a passive portfolio
Hold on, you might be thinking. If the fund managers are super good at picking the best-performing stocks, those fees shouldn’t be a problem. The funds will be throwing off returns that far exceed those of the stock market as a whole. The problem is they’re not.
Many studies show that professionals paid to pick stocks will fail to outperform the overall market over the long term. So if active pickers can’t beat the stock market and still charge fees, what's a better route? One particularly effective way is through passive investing, that is: buy an ETF that requires no management so has very low fees. Rather than attempting to beat the market, an ETF simply mirrors the market, a job easily handled by a computer algorithm. Low fee passive portfolios of ETFs can be designed with any goal, time horizon, and risk tolerance in mind.Our team of Portfolio Managers can help you set goals that are meaningful. And make a plan to get there — book a call now.
How to invest $100,000 safely
If safe is what you're looking for then you will need to look for low-risk investments. Although you should know that with investing, there are no guarantees. Stocks, being naturally risky, will fluctuate in value. In exchange for taking on this risk, investors will generally be rewarded with higher returns than they'd get from less risky investments.
If you are looking for an option that's seen to be safer, you might be better served with a savings account or a savings investment account. These accounts typically carry much less risk. That said you don't always get as good returns as investing in ETFs made up of stocks, bonds, and real estate. A savings account might not be the best place to keep large sums for a long period of time. Inflation is likely to outpace the interest rate, and in the long run, you’ll essentially be losing money by keeping your money stuck in one. This is why investing is an option to consider if you can afford to put that 100k of yours away for a considerable amount of time.
Government bonds come with less risk, but also provide comparatively low returns. Stocks behave a little like a penny tossed in the air; the more times you do it, the more likely it is you'll get to a one-to-one heads-to-tails ratio. The range of outcomes tend to narrow over time, so in the past, those who held onto a variety of stock investments for more than a decade were most likely rewarded with returns that offset any short-term risk. Many believe that the longer your investment horizon, the higher the ratio of stocks to bonds your portfolio should contain. You can afford to ride the way of the stock market as you won't need to withdraw money in the short term.
There's no one-size fits all equation to cover precisely how a person should allocate their $100,000, so it’s a good idea to speak to someone who can take stock(!) of your entire financial picture. Some investment providers offer a one-on-one financial planning session this can be valuable for investors with a high net worth, someone with complex needs or who would like to have a human talk them through their investment options.
How To Invest 100k to make 1 million - I wish we knew!
Without the use of the dark arts, how do you make it a million? There's no sure answer to this question. If there was — we'd all be rich. With investing, you can make money but you can also lose it.
That said, if we dust off the history books, we can see how this could have happened in the past. Between the years of 1950-2009, the stock market (S&P 500) grew by 7% per year. So, had you invested 100k during that time, the miracle of compounding could have turned your 100k into a cool million in about 33 years.
The more you'd put in, the sooner you would have got to a million. For example, had you contributed an additional $250 a month to that $100k — you’d have reached your goal of making a million in about 28 and a half years. If you contributed $400 a month, you could have cut the period down to about 26.5 years. Had you wanted to make that million in less than twenty years you'd have needed to contribute an additional $1,145 a month.
This is how you could have made a million from $100k in the past. That said, when it comes to investment advice, there's a very good reason you often hear “past performance, does not equal future results”. It's because past performance absolutely does not equal future results. That said, it’s how you would have made a million from $100k in the past.
Although we're biased, we reckon the absolute best way to invest $100k is to start investing with Wealthsimple today. We offer state of the art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from an automated investing service. Sign up now or learn more about our free portfolio review.