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 a million dollars. You should celebrate this monumental accomplishment that very few can boast. Sincere congratulations. So when is the best time to invest it? Probably as soon as possible as you'll begin experiencing the power of compounding. But you'll need a plan since investing requires discipline and commitment. Should you invest in 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 million into $500,000, avoid any investment that offers too-good-to-be-true returns. Respect your money and it should return the favor.
Questions to Ask Yourself Before Investing a million
Even before you decide exactly how to invest this considerable pile of dough, you’ll want to ask yourself five important questions.
What are your goals?
Just what do you plan to do with this sizable pile of money? Is this million the money you want to put away and spend on early bird specials and Jack Daniels in your retirement? Or is this the miracle inheritance from Aunt Beatrice that you’re going to use to put a down payment on a bigger apartment so you no longer have to live in a place where the bathtub’s in the kitchen? You want to pay for your kid's college or private school? A million is enough so that your plans might include some or all of the above, but your responses to the below will directly dictate your strategy.
What’s your time horizon?
Basically, how long do you plan on having this money invested? It’s an oversimplification, but in most cases, the shorter your horizon, the less aggressive you should be investing your money. With a million, it’s hard to imagine you’d need it all right away, but if you need to have some of it available in a month, a year, or even three years, you’ll probably want to avoid investing that portion heavily in equities, aka stocks, since they can fluctuate considerably in value—and may not be all there when you need it.
What are your circumstances?
These are all the nosy questions. How old are you? How's the old ticker holding up? How much money to do you make a year? If you’re married, what are the chances you’ll still be five years from now? And do you imagine that you’ll be inheriting any money anytime soon—or do you have a rich relative just dying to help you out if you found yourself in a bind during a down market? Your circumstances will dictate how aggressive you can afford to be in your investment strategy.
What’s your risk tolerance?
After answering all of the above, you should have a pretty good idea of your risk tolerance, a term that just means how much of your investment you can afford to lose. If having a couple hundred thousand dollars dematerialize overnight wouldn’t really have any demonstrable effect on your life, you’ve got a very high-risk tolerance. If being down ten percent will mean that your kids will have to eat cardboard, your risk tolerance is super low. If the latter is the case, you’ll absolutely want to keep a portion of your million safe and liquid, in a cash equivalent account that earns a tidy bit of interest, like saving investment accounts.
How are you? Like emotionally?
Emotions play a big role in investing. The absolute last thing you want to do is be up all night worrying about your money in times of market turbulence. If you’re by temperament nervous about money and you think you might be tempted to cut your losses and convert your investments to cash if the market dips, you're a very bad candidate to start trading stocks on your own. Entering and exiting investments according to perceived market conditions is called market timing, and it’s been shown to consistently be a losing strategy. If you look in the mirror and see Chicken Little, it’s best to entrust professionals with the management of your money, rather than doing it yourself. Getting sound financial advice and sound, professional money management need not be expensive. One great way to assess these and other factors is to take a quick risk survey offered by many automated investing services.
The best accounts for investing a million dollars
We’ll be getting to the specific investments later, but what’s of paramount of importance is first figuring out in exactly what kinds of accounts you will be locating these investments.
Max out tax-advantaged accounts
Taxes are absolutely no fun at all; they'll devour your gains if you allow them to. You should do everything the law allows in order to avoid paying them. Surprisingly, the government has given you a whole bunch of great opportunities to avoid taxes by creating substantial tax breaks that incentivize citizens to sock away money for retirement and other big-ticket expenses. As a whole, these legal dodges either allow investments to grow within them tax-free or the government will only collect taxes when you withdraw money years down the line in retirement. Officially, they’re called “tax-advantaged” accounts; we prefer to call them free government money. Provided these accounts fit with your goals and time horizon, grab as much of the “free money” as you can by maxing these accounts out first.
You’ll likely need to open a personal investment account as well, but you can think of tax-advantaged accounts as the top glasses in those crazy champagne towers; only after the top ones get filled should your money trickle down into any other type of accounts. One thing to remember: it’s simple to have money that’s invested through regular brokerage accounts transferred annually to tax-advantaged accounts. So even if you fit the entire million in tax-advantaged accounts right away, over the years you should be able to. Transferring investments from one kind of account to another are called “in-kind” contributions.
Nine to fivers will most likely have access to employer-sponsored 401(k) accounts. These should be your absolute first priority because not only will your entire contribution be tax-deferred (meaning you pay no taxes on it now) employers usually 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 ($24,500 if you’re over 50), and employers can put in an additional $36,500.
If you’re a freelancer, or you don’t have access to a 401(k), you’ll be able to find many similar benefits through a traditional IRA, SEP-IRA, and/or a Roth IRA.
If you want to spend some of your million funding your children’s higher ed tuition and expenses, after maxing out your retirement accounts, you should absolutely contribute to your state-sponsored 529 plan. They’re great for two reasons. Investments will grow in these accounts tax-free and many states offer other irresistible table tax breaks for those who contribute. Individuals can contribute as much as $15,000 per year.
Diversify your investments
Whatever you invest your million dollars in—be it stocks, bonds, real estate, or smelly but adorable alpacas you should spread your money around so it’s not too overly concentrated in one stock, sector, or even one country’s economy. This kind of diversifying prevents unnecessarily large losses if one stock, sector, or even a country’s economy falters. This guide will offer solid advice on diversifying.
Where to invest a million dollars
Finally, we’re ready to invest that million dollars.
But wait! How could we forget the mandatory disclosures? Investments are speculative and past results should never be understood to be guarantees, but instead imperfect predictors of future performance.
The Stock Market
If we history is our guide, the most reliable way to make your million dollars grow is through stock market investments. But which one?
Going all in on with a million dollars on Amazon back in 1997 would probably mean you’d own your own continent now. On the other hand, if you’d bet your million on Snapchat in 2017 you might be living in your mom’s basement by now. The point is: stock picking is really, really hard. Warren Buffett became one of the richest men in the world by investing in specific stocks and companies, but he’s told his heirs that they’ll do much better if rather than investing in specific stocks, they just invest their inheritances in low-fee, highly diversified stock funds.
If you’re a wise investor, some of your million will undoubtedly end up in bonds. Bonds are essentially loan agreements —one party loans another party money with the promise that they’ll get back their loan plus some interest. Government-issued bonds are considerably less risky than stocks, and for this reason investments in bonds are a tried and true method to counteract the volatility of the stock market within a portfolio. While getting into the nitty-gritty of bonds is not for the faint-hearted, investing in them couldn’t be easier through investments in highly diversified bond ETFs, available through discount brokerages or your finer investment platforms.
If you’re addicted to house flipping shows, it’s easy to assume that if you buy a tape measure and a case of hair gel you too can make millions in real estate. In reality, many speculators have found themselves ruined through unwise decisions. There is, however, one way to reap the benefits of the real estate market without ever having to change a light bulb, fix a leaky faucet, or track down rent from weasly tenants; real estate investment trusts, or REITs, are big firms that divvy up and sell shares in their real estate investments. REIT ETFs are a particularly good way to diversify in that for one price, _you can own slivers of hundreds of REITs. REITs offer tax benefits you won’t find anywhere else. For this reason, they’ve become incredibly popular investments for the superrich.
Exchange Traded Funds
Nothing can quite touch the diversifying power of Exchange Traded Funds (ETFs). They’re essentially wrappers containing many, many individual investments. There are ETFs for bonds, for real estate, even for weed, though sadly no ETF yet exists for the snack foods that the pot smokers eat. Many of the most popular ETFs mimic indexes like the S&P 500 so one for one price you can buy slivers of the 500 most valuable publicly traded companies in America. This kind of diversification means they tend to perform well in different kinds of market conditions, though with investing there are no guarantees.
If the idea of selecting your own mix of ETFs is particularly daunting, you’d do well to consider automated investing. 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 a million dollars
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 million dollars. That being said, there are some best practices we recommend for all investments.
Keep fees low
Fees are about as unloveable as taxes; left unchecked, they’ll devour everything you value. Smart investors know that once they become cold-hearted fee murderers, they’ll be able to save a truly stunning amount 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 every year 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 million dollar investment. There's absolutely no predicting what would happen to this same investment in the future, but in the past, had you been invested in historically average years, your $1,000,000 investment would have earned more than $207,000 less over 10 years, about $615,000 less over 20 years, and a whopping $1,416,912 less over thirty years - enough to buy a castle or two.
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.
How to invest $1,000,000 safely
If safety is what you're looking for then you will need to look for low-risk investments, though you should know that 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 for some reason, you’re going to need to spend your million in the next few years and you are looking for a truly safe option, you would be best served with a savings account or a savings investment account. These accounts typically carry virtually no risk but over the long term, your returns will likely be a fraction of a portfolio of ETFs of stocks, bonds, and real estate. In fact, a savings account isn't the best place to keep large sums for a long period of time because 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 million of yours away for a considerable amount of time.
If you do need to keep your million safe, make sure that it’s in at least four different financial institutions since the FDIC only guarantees savings accounts up to $250,000.
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. Conventional wisdom states that the longer your investment horizon, the higher the ratio of stocks to bonds your portfolio should contain. If you don't need your money in the short term, you can afford to ride the wave of the stock market.
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 allow you to book a one-on-one financial planning session. This can be valuable for high net worth individuals, someone with complex needs or those who would like to have a human talk them through their investment options.
How to invest a million dollars for a guaranteed income
If you’re a few decades from retirement, we recommend following the advice outlined above for investing your million. Build a low-fee, highly diversified portfolio of investments, and let the miracle of compounding returns work its wonders on your nest egg. Historically, the annualized returns on the S&P 500 over the last 90 years have been just under 10%. Had you invested in the past and earned net returns of 7%, your million would have grown to $2,009,661 after 10 years, $4,038,738.85 after 20, and $8,116,497 after 30. If you're only a few years from retiring, you might want to choose less volatile investments so there's less of a chance your investment will dip down right as you want to sell it.
Guarantees aren’t super prevalent in the world of investing. In fact, there are no guarantees. If you’re looking for a guaranteed income, you could consider buying a fixed annuity from an insurance company. This guarantees you a certain percentage monthly return on your money for a defined number of years. The monthly amount you can draw in retirement will depend on many factors too numerous to go into here. Heed one mammoth warning if considering the world of annuities; practically no investment class comes with higher fees than annuities. You’ll pay dearly for the security of that check.
How to invest a million dollars to live off the interest
Want to see retirement experts red-faced and screaming at one another? Bring up the so-called 4% rule, a research-based guideline introduced by a financial advisor named William Bengen which states that if you withdraw 4% of your retirement savings annually and adjust up annually for inflation, you’ll never run out of money. Everybody has issues with the 4% rule, but for our purposes, it’s a decent, conservative rule of thumb.
Applying the 4% rule to the numbers in the section above this one, based on a hypothetical annual net return of 7% of your investment, if you retired now with your million, you’d want to try to get by on $40,000 a year. After 10 years invested, you would have earned returns that would have allowed you just over $80,000 annually, after 20, $161,500 a year, and after 30, almost $325,000 a year. Now if you wanted to live off the interest alone—as in, you wanted to put your million in a savings account and only spend the interest— based on today’s low-interest rates, you shouldn’t expect to earn even $20,000 a year on the million.
Although we're biased, we reckon the absolute best way to invest your precious million 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.