How to Invest $10k

So you got your hands on $10,000. Cool! Unless you got it through less-than-legitimate means and are currently on the lam, give yourself a huge pat on the back. Saving any amount of money isn’t easy, and $10,000 is an exciting milestone. Now it’s time to figure out what to do with it. If you have credit card bills, pay them first, and it’s also a very good idea to have enough savings banked in case of an emergency. If you’ve got those things taken care of, get busy investing.

So when is the best time to invest $10k?

Invest it as soon as possible to begin experiencing the “magical” power of compounding. But you’ll need a plan, since investing requires discipline and commitment. Should you invest in, for instance, the tech IPO that just can’t lose? Or the cryptocurrency that doubled while you were in the restroom? Unless you have aspirations to turn your $10,000 into $2,500, avoid any investment that offers too-good-to-be-true returns. Respect your money and it will return the favour.

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Factors that dictate how to invest $10k

First, you’ll want to assess four factors that will dictate your next move.

Goals: The first step is understanding what you intend to do with this nice pile of money. Is this $10,000 the money you hope to be your first big push towards keeping the lights on, the cat fed, and the fridge stocked during your retirement in thirty years? Or is this the miracle inheritance from Aunt Beatrice that you’re going to use to put towards a down payment on a bigger apartment so you no longer have to live in a place where the bathtub’s in the kitchen?

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 $10,000 investment to be available in three weeks, three months or even 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, the last thing you want is to do is have to withdraw it all when the market is down. How long you can afford to invest for matters a lot when it comes to choosing where to invest your $10,000. 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 $10,000 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 $10,000 you won’t be able to come up with next month’s mortgage payment, your risk tolerance is extremely low. In a situation like the latter, you’d want to put the entirety of your $10,000 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 on your own and end up panic selling or buying when the market dips a little. A DIY option requires a certain level of willpower in sticking to your investment strategy through choppy seas.

If you’re scratching your head wondering how all this applies to your investing strategy — it might be a good time to take a risk survey offered by many automated investing services. They’ll then build a personalized portfolio for you based on these factors and others.

The best accounts for investing $10,000

Don’t underestimate the power of choosing the right investment account to store your $10k. Taxes are like investment termites – they’ll chew clear through your investment if you let them. Ideally, you should do anything you legally can to lower 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 become taxable when you withdraw money 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.

401(k):

If you have a full-time job, you very likely have an employer-sponsored 401(k) that will allow you make tax-deferred deposits into the account and most employers will kick in either a set annual amount or percentage in matching funds. Current tax laws allow you to contribute up to $18,500 a year, and employers can add up to $36,500 more. If you don’t need it for a while, you should consider contributing your money to a 401k to benefit from the tax breaks. If that’s not an option, max out your traditional IRA, SEP-IRA, and/or your Roth IRA.

State Sponsored 529 Plan:

If you hope that your $10,000 will be used to fund your kid or kids’ education, invest in your state-sponsored 529 plan. Not only will the investment grow tax-free but your state may also offer other tax breaks on contributions. Some states’ plans are better than others. But remember, when in doubt fund a retirement account; your kid will be able to borrow money for school, but you won’t be able to borrow money for your retirement.

Personal Investment Account:

Open a personal investment account, if you’ve maxed out tax-advantaged accounts or the purpose of those accounts does not align with your investing goals. A personal investment account allows you to build wealth and although these accounts are taxable, the main advantage is that you can withdraw your money at any time without penalty.

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 probably never invest in just one stock, bond, or even sector. Many 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 $10,000

At last, we’re ready to actually invest that $10,000 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 the smartest destinations for your 10k.

The Stock Market

Here is a totally uncontroversial opinion. If history is anything to go by, the quickest way to make your $10,000 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

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.

Real Estate

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. Homeownership 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 or come up with $100,000 or more for a down payment; 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.

ETFs

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 drag 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 solid option. Some investment platforms allow you to take a risk survey and build a portfolio to suit your investing goals. Rather than sweating the details, you can have a special portfolio built according to your risk tolerance and goals and get back to the truly important stuff in your life, like those dragons in Westeros.

Best way to invest $10k

Investments are nothing like that Slanket your mom bought you; one size will absolutely not fit all (and you probably won’t try to re-gift your investments.) So without knowing your specific situation, it’s hard to tell you precisely where to put your $10,000 dollars. That being said, there are some best practices we recommend for all investments.

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. It’s not uncommon for an actively managed mutual fund to carry a 1% management expense ratio (MER). This means that every year, regardless of how well the fund performs, 1% of the entire fund will be deducted to pay salaries and expenses of everyone who works on the fund. One or two percent might not sound like a huge sum, but one 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 $10,000 investment. There’s absolutely no predicting what would happen to this same investment in the future, but in the past, had you invested in historically average years, your $10,000 investment would have earned almost $2,100 less over 10 years, about $6,150 less over 20 years, and a whopping $14,169 less over thirty years, nearly enough to buy yourself a brand spanking new car.

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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. Most 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.

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How to invest $10,000 safely

If safety is what you’re looking for then you will need to look for low-risk investments, though you should know that there are no guarantees in investing. 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 absolutely can’t risk any fluctuation, you’ll be better served with a savings account or a savings investment account, that typically carry virtually little to no risk. That said, you can’t expect the kind of returns you might get from investing in ETFs made up of stocks, bonds and real estate. In fact, interest rates have lately been so low that 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.

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, and the longer you hold a stock, the more predictable the results will be. 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.

The conventional wisdom is the longer your investment horizon, the higher the ratio of stocks to bonds your portfolio can contain. If you don’t need to withdraw money in the short term, you can afford to ride the wave of the stock market.

How To Invest 10k to make $100,000 – if only we knew!

Without the use of the dark arts, how do you turn 10k into a 100k? 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 grew by 7% per year. So, had you invested 10k during that time, the miracle of compounding could have turned your 10k into a cool hundred thousand in about 33 years. The more you’d put in along the way, the sooner you would have gotten to $100,000. For example, had you contributed an additional $100 a month to that $10k — you’d have reached your goal of hitting $100,000 in about 20 and a half years. If you contributed $200 a month, you could have cut the period down to about 15.5 years. Want it in ten years? Deposit $459 to the account every month.

Again, these are hypothetical amounts based on historical market growth. 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 being said, if your disciplined, your risk is minimized through a highly diversified portfolio, and fees kept low, you might be very happy with what your $10,000 grows into in the long term.

Although we’re biased, we reckon the absolute best way to invest $10,000 is with Wealthsimple. 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. Get started or learn more about our portfolios here.

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