However, you’ve come into $100,000—saved it up, inherited it, or sold a house or business—it’s a significant amount and there are a lot of ways to divvy it up for investing. How you do that will likely depend on what your financial picture looks like. With $100,000 to invest, you might want to consider a little pre-investment housekeeping. Once you’ve covered these items, there are many ways to invest a large sum of money.
Your pre-investment checklist and what to do next
What to keep in mind before investing $100,000.
1. Should you add to your emergency fund?
To start an emergency fund, most financial advisors suggest setting aside a sum equal to three to six months of income. With $100,000 at your disposal for investment, the assumption would be that your emergency fund is already covered but you might consider bolstering it before putting funds in the market.
2. Do you have toxic debt to pay off?
“Toxic debt” refers to loans that the borrower may be unable to repay—which is different from standard debt. Toxic debt might have interest rates that can change, and the default rates for toxic debt are high. Many people became familiar with the term during the 2008 financial crisis, when banks issued loans to homebuyers that had low teaser rates, but then reset at much higher rates. Borrowers and lenders assumed the property would be sold before the reset. When the housing bubble popped, many borrowers couldn’t sell and were stuck with unaffordable payments. Holding toxic debt can cannibalize assets.
Carrying some debt, however, such as lower-rate home mortgages or auto loans, can help build credit scores if credit utilization stays low (the rule of thumb is below 30% of available credit), and the borrower makes payments regularly and on time. Most experts recommend paying off high-interest debt like credit card debt before investing your money because it can eat investment profits.
3. What are your personal goals for these funds?
Investors often have both short- and long-term goals, and this time horizon—the period they expect to hold an investment until they need to draw the funds from it—may help determine their investment strategy. A $100,000 sum could help pay for a private college education, the down payment on a house, or go a long way toward retirement goals.
Investors often consider their time horizon to help determine how to allocate funds now and in the future. The idea is that the longer you have to invest, the more risk you can take on.
- Short-term horizon: Less than five years. Those who are thinking short-term likely need access to cash soon for the down payment on a house, a new car or other large purchase—or they’re nearing retirement. Investments that can easily be converted to cash include CDs, savings accounts, short-term bonds, and money market accounts.
- Medium-term horizon: Less than 10 years. Investors generally make these investments with the idea that they’ll need money for a child’s college education, or that they’re nearing retirement. The American Association of Individual Investors’ asset allocation models for moderate-risk investors who are transitioning toward retirement include a balanced 50/50 between stocks and bonds.
- Long-term horizon: More than 10 years. These investors might have a higher risk allocation when they’re younger and adjust it as they age. Some investors look to anchor their portfolios with index funds, which track the broader market and historically provide a dependable return over time.
Many people now also want to invest based on environmental, social, and governance (ESG) criteria, avoiding companies or industries that produce or distribute alcohol, tobacco, arms and fossil fuels. A number of mutual funds and exchange-traded funds (ETFs) are designed to appeal to socially responsible investors.
4. What is your risk tolerance?
Risk tolerance, or an investor’s willingness to take a loss, is highly personal, and often connected to time horizon. A sum like $100,000 might even alter someone’s risk tolerance. Determining risk tolerance is key to creating a mix of investments. Usually, risk tolerance falls into one of three categories:
- Aggressive—willing to take on volatility, perhaps in the form of growth stocks, for the possibility of a high return
- Moderate—seeks balance between stocks and income-generating bonds
- Conservative—puts money in low-risk vehicles like certificates of deposit (CDs)
An investor’s life goals, time horizon, age, and portfolio size will influence their tolerance for risk. Many people have a higher tolerance for risk when they are younger, employed, and won’t need access to their money for some time. They might reduce their risk as they near retirement, when they’ll need their money. For this reason, older investors tend to hold a larger percentage of income-producing bonds versus equity investments.
5. What does your investment portfolio look like right now?
Investment portfolios are divided among asset classes, or groups of investment types, such as stocks, bonds, and cash. As a very general rule of thumb: Conservative investors, or those investing for stability, hold more bonds than stocks; those with a longer time horizon, who have the time to make up shortfalls, have more tolerance for the ups and downs of the stock market.
Investors can look at their basic breakdown and then break down asset classes further to understand their current allocation. For instance, stocks can be classified in a number of ways (large cap, small cap, international, and other categories). They can also be broken down by sector (for instance, technology), and industries within the sector (software, hardware and equipment, and semiconductors).
Depending on how an existing portfolio is structured and how much is in it, adding $100,000 in a particular asset class could significantly change the allocation.
6. Do you want to actively manage your investments or outsource this to someone else?
Broadly speaking, investors can be active and select which securities to buy or delegate that process in a style known as passive investing. There are multiple ways to invest actively and passively:
Active investing: Active investors trade with the goal of beating average market returns. This way of investing has become more accessible through online brokerage accounts and smartphone apps. Investors can pick an online broker, fund it with a starting investment amount directly from their bank account, purchase shares of public companies, and track their investments. Most online brokers also have apps you can install on your phone if you like to actively track the market all day long. Active investors also can use a human broker to execute their trades.
Passive investing: Those who don’t have the time or inclination to actively maintain their own investment portfolios have several options. They include:
- Robo-advisors. A robo-advisor is a digital tool that automates portfolio management. Investors fill out a questionnaire on their financial goals, and an algorithm invests based on those goals. Robo-advisor fees average about 0.25% of the assets in the investment account, compared with about 1% for a human financial advisor.
- Investment advisors. Investors with large holdings, a complicated financial situation, or who have very specific goals—like buying a vacation home, sending a child to an expensive private university, or retiring early—often turn to investment advisors who will be charged with making investment choices.
- Index funds. Index funds are simply investment products that passively track various subsets of the stock market. The most popular are the S&P 500, the Dow Jones, and the Nasdaq 100. Investing in these doesn’t require much hand holding because they essentially parallel the performance of the index.
7. Are other asset classes of interest?
Some investors turn to newer asset classes as well as retirement accounts. A large sum like $100,000 may allow some investors to branch out.
- Cryptocurrency. Most crypto is traded by active investors, although managed crypto funds for passive investors now exist. The crypto market is volatile and its performance isn’t necessarily tied to the regular markets or to financial fundamentals because there are none. Investors can buy crypto through managed accounts, brokerage accounts, or crypto exchanges.
- Real estate. The recent boom in real estate, driven by some of the lowest interest rates in decades, has made investing in real estate attractive to many people. A sum of $100,000 is enough for a down payment on a home or rental property in many areas. Real estate funds can also give investors access to the market without the responsibilities of a physical property. For instance, a REIT, or real estate investment trust, is a publicly traded company required to pay investors 90% of their taxable income each year as dividends.
- Retirement. Contributing to a tax-deferred retirement account is one way to maximize funds. These accounts are subject to annual contribution limits, but investors are allowed to contribute to different types of accounts, such as 401(k)s and IRAs. Investors with an employer-sponsored 401(k), may also enjoy an employer match.
- College investments. Qualified tuition plans, such as a 529 savings plan, allow your money to grow without paying federal income tax. Nor is the money taxed when withdrawn to pay college tuition. There are no income limits, although there are limits on yearly contributions.
- Peer-to-peer lending, crowdfunding, and other ways to invest in startups
Investors have some other ways to put their money to work. These include:
- Crowdfunding. Individual investors can invest in startups via crowdfunding sites, although the Securities and Exchange Commission limits the amount individual investors can pour into one of these sites in a 12-month period.
- Private offerings. Investors can purchase shares in a startup at a fixed price by investing in a private offering or placement. These share sales usually are limited to accredited investors who meet an income threshold and are invited to participate by the company. There are exceptions to this rule: According to the SEC’s Regulation D Rule 506, a company can sell its securities to an unlimited number of accredited investors and up to 35 non-accredited investors, as long as they have sufficient knowledge to be considered capable of evaluating the risk.
- Convertible securities. Investors can buy convertible securities, or an investment that eventually becomes equity. Convertible securities, like convertible notes, are often found in seed- and early-stage investments. Regulation D allows several exemptions for non-accredited investors, although it is much easier for investors to buy notes when they meet the accreditation threshold.
The bottom line
There are many ways to invest $100,000. Depending on how an investor’s portfolio is already allocated and how much it contains, and what their tolerance and time frame are, $100,000 can make a big difference in one’s overall investment strategy. Diversification, paying off debt, and setting specific financial goals can help an investor maximize every dollar.