Investing $100,000 can be daunting because of the magnitude of the task at hand. There are so many categories to choose from. Stocks, bonds, mutual funds, ETFs and REITs. High-yield savings products, treasury securities and P2P investing. What should your portfolio mix be, how willing are you to risk your capital? These questions can keep a person awake at night.

In this article we’ll get into all that, and more.

Introduction: How To Invest $100,000

 

Because $100,000 provides more investment options, we’re going to focus primarily on asset classes, and then suggest platforms where they can be acquired and held.

There are three basic asset classes:

  • Stocks
  • Real estate
  • Fixed income securities

Below is a detailed discussion of each of the three, as well as the best investment platforms to acquire them through.

Stocks

If you read any articles or listen to any financial experts talk about long-term investing or retirement, you’ll see or hear a heavy emphasis on stocks.

There’s an excellent reason for this.

Stocks provide equity ownership of companies that represent the means of production of both the national and global economies. Put another way, stocks represent ownership in the business organizations that create wealth.

As a long-term investor, looking to build your own wealth, stocks need to form the cornerstone of your investment portfolio.

For the past 90 years, the stock market has had an average annual return of about 10%, based on the S&P 500 Index. That isn’t to imply you can expect a 10% return each year. But that is the long-term average, and you need to be heavily invested in it.

Where to Invest in Stocks

One of the advantages to having a portfolio at least $100,000 is that you have a choice as to how you will invest in stocks. There are three basic ways to do this:

Robo-advisors

Here at Autopilot Finances we strongly encourage you to try a robo-advisor, at least when you’re starting out. They’ll invest your money for you based your age, time horizon, investment goals and risk tolerance. Robo-advisors design and manage your portfolio at a very low fee. It’s autopilot investing at it’s best, since all you need to concern yourself with is funding your account.

Betterment and Wealthfront are the two most popular robo-advisors. Each will provide you with a diversified portfolio of stocks and bonds, and in the case of Wealthfront, real estate. Each will manage your portfolio for a very low fee of 0.25%.

Another very interesting robo-advisor is M1 Finance. What makes it unique is that while it works like a robo advisor, you can actually choose the investments in your portfolio.

It works on a concept called “Pies”. Each pie is a portfolio dedicated to a certain investment goal. The platform has more than 60 prebuilt pies, but you can also create your own. Each pie has as many as 100 “slices”, which can be ETFs or individual stocks. Once you’ve created a pie, it’s then automatically managed by the platform.

Best of all, M1 Finance has no minimum investment, and charges no fees to manage your account.

Invest in Individual Stocks

You can invest $60,000 in the stock of 12 different companies, with an average investment of $5,000 each. That’s like creating your own mutual fund. The best way to do this is through investment brokers.

If you’re a self-directed investor, and you want to choose your own stocks, it’s best to work with a diversified investment platform. Examples include Fidelity and Ally Invest. Each platform offers trades on stocks and ETFs at a low $4.95 per trade.

TD Ameritrade is another excellent investment platform, though trading fees are a little bit higher, at $6.95. Best of all, all three platforms also offer a robo-advisor option, should you decide you want to have part of your portfolio professionally managed.

If you’re an active trader, which we don’t recommend, Robinhood and Firstrade offer free trades.

Funds

You can choose to invest in stocks through either exchange traded funds (ETFs) or mutual funds. This will give you an opportunity to invest in a portfolio of stocks, without having to concern yourself with the day-to-day tasks of managing it.

ETFs are generally based on underlying market indexes. For example, the most common index is the S&P 500. Others can include sectors, like energy stocks, health care stocks, and emerging market stocks. ETFs are considered passive investments because they are not actively traded. The only trades made are to keep the fund consistent with the underlying index. For this reason, ETFs have lower expense ratios than mutual funds.

ETFs can be purchased through investment brokers, generally at commissions equal to those for stocks.

Mutual funds are typically actively managed. Rather than investing in an underlying index, the fund invests in a more narrow selection of stocks that are expected to outperform the general market. This is fundamentally different from ETFs, which only attempt to match the performance of the market.

Mutual funds can be purchased through stock brokers, but the commissions are usually higher than they are for stocks and ETFs. They can also be purchased through mutual fund families, such as Vanguard or T. Rowe Price.

If purchased through fund companies, there is generally no commission. But many mutual funds have what are known as load fees, which can be equal to between 1% and 3% of the fund value.

Because of load fees, and the fact that very few mutual funds actually outperform the market consistently, investors heavily favor ETFs.

Individual Stocks vs. Robo-advisors vs. Funds

Here are the three methods of investing in stocks compared side-by-side:

 Individual StocksRobo-advisorsFunds
Minimum investmentVaries$0 and upNo minimum on EFTs, generally $3,000 for mutual funds
FeesTrading commissions $0 to $6.95 per trade0% to 0.50% per year$0 to 3% on purchase or sale
Available for IRAsYesYesYes
Professional managementNoYesYes
Investment expertise neededHighLow/noneModerate/low
Best forSelf-directed investorsInexperienced investorsModerately experienced investors

Real Estate

With a portfolio of $100,000, you have three options to invest in real estate:

  • Direct ownership of property
  • Real estate investment trusts (REITs)
  • Real estate crowdfunding

Direct Ownership

With $100,000 you’ll have sufficient funds to invest in an individual property. Unlike owner-occupied residential real estate, you can’t purchase an investment property with a minimum down payment of 5% or less. Investment properties normally require a down payment of at least 20% of the purchase price.

If you wanted to purchase a property for $150,000, and rent it out to tenants, you would need a down payment of $30,000.

With a $100,000 investment portfolio, you’ll be able to do this, and still have plenty of capital left over for other investments.

Advantages:

  • You’ll be the sole owner of the property, and take 100% of the profits
  • There are significant tax advantages to owning rental real estate, including depreciation expense and favorable long-term capital gains tax rates.
  • The profit potential on a single property can be high, particularly if the property is located in a strong housing market.

Disadvantages:

  • A property will require a large down payment, which will reduce your ability to buy multiple properties.
  • The down payment requirement will reduce the amount of money you’ll have available for non-real estate investing.
  • In a declining real estate market, you could lose money.
  • Rental real estate is a hands-on venture, that can often get messy.
  • There may be times when your expenses will exceed your rental income.
  • Real estate isn’t as liquid as other investments, so your money will be tied up for years.

Direct ownership of investment real estate is highly specialized, and more complex than other types of investing. Carefully consider if you want to get involved on a direct basis.

Real Estate Investment Trusts (REITs)

In a real way, REITs make real estate investing no more complicated than owning mutual funds. In fact, a REIT is basically a mutual fund for real estate. The fund purchases the properties, manages them, then pays income to the investors. By law, REITs are required to pay 90% of their income to their investors as dividends.

In recent years, returns on REITs have been comparable to those of stocks. But since real estate often moves in a different direction than stocks, it offers an opportunity to continue earning high returns even during a bear market in stocks.

REITs typically invest in commercial real estate, including office buildings, retail space, industrial space, and large apartment complexes.

You can purchase REITs through investment brokers, in much the same way as mutual funds. And because the REITs are publicly traded, you can usually sell them quickly. In the meantime, you can collect a steady stream of income, without ever getting your hands dirty.

Real Estate Crowdfunding Platforms

These are essentially peer-to-peer (P2P) investment sites, where investors buy either loans or equity positions in real estate investments provided by sponsors. The sponsors are basically the entrepreneurs behind individual deals. They either own the property, or are redeveloping it, either to rent it out, or to flip for a profit. They’ll come to the platform either looking for financing or to sell equity shares in the particular project.

This type of investing is both complicated and sophisticated. First, many real estate crowdfunding platforms require that you be an accredited investor. That requires a minimum annual income of $200,000, a minimum net worth of at least $1 million (not including your house), or both. Even with $100,000 to invest, you may not qualify.

But there are other sites that allow you to invest even if you are not accredited. For example, with Groundfloor you lend money to property sponsors who are doing property flips. You invest in slivers of loans, called “notes”. You can spread a $5,000 investment across 500 different loans, at $10 per note.

Meanwhile, Rich Uncles and Fundrise enable you to invest in private REITs. Those trusts invest in commercial real estate, and claim to provide higher returns than publicly traded REITs.

Though real estate crowdfunding platforms claim to provide higher returns, there are some downsides:

      • Private REITs are not liquid, and will require you to remain invested for several years.
      • Like any equity-based investment, you could lose money.
      • The individual real estate deals included in real estate crowdfunding platforms tend to be more speculative than those in publicly traded REITs.

Real estate crowdfunding investing is primarily for those who have a desire for higher-than-average returns, and are willing to accept higher than average risk.

Direct Ownership vs. REITs vs. Real Estate Crowdfunding

To help you decide which real estate investment is best for you, we’ve prepared the following table:

 Direct OwnershipREITsReal Estate Crowdfunding
Minimum investment$20,000 and up, with the rest financed$500 and up, but varies considerably by REIT$0 to $10,000 or more
FeesSeveral thousand dollars in closing costs, plus carrying costs if expenses exceed rentUp to 10%$0 to 3%
Professional managementNoYesYes
Investment expertise neededHighLow/noneHigh/moderate
Best forSelf-directed investors with real estate investment experienceInexperienced investorsInvestors willing to accept high reward/high risk

Fixed Income Securities

The main purpose of fixed income securities is to add stability to your investments. Unlike stocks and real estate, which can fluctuate in value, fixed income securities maintain their value, while paying you interest. Adding at least a small allocation to this asset class can reduce the overall volatility in your portfolio.

You should decide on a certain percentage of your investments that will be held in fixed income securities. Generally speaking, the older you are, the higher the fixed income allocation should be. Conversely, the younger you are, the lower it should be.

We’re going to focus on four different types of fixed income securities: bonds, US Treasury securities, high yield savings products, and peer-to-peer lending.

Bonds

A bond is a debt security with a term of 20 years or more. They’re typically available through investment brokers, and can be purchased in amounts of $1,000, but you may be required to buy them in blocks of 10.

They’re issued by corporations and governments. Bonds issued by state and local governments are referred to as municipal bonds, and are exempt from federal income taxes. They’re also exempt from state income taxes in the state of issuance. Municipal bonds are good for taxable accounts, but not retirement accounts, since those accounts are tax sheltered.

If you don’t want to purchase individual bonds through an investment broker, you can also buy them through either ETFs or mutual funds. This will also enable you to diversify among hundreds of bond issues within each fund, as well as reduce the risk that comes with holding individual bonds.

US Treasury Securities

These are considered the safest investments in the world, because they’re fully guaranteed by the US government. Treasury bills run from four to 52 weeks. Treasury notes have terms of two to 10 years. Treasury bonds are 30 years. All can be purchased in denominations of $100. Current returns on all US Treasuries are well in excess of 2% APY, even on the shortest maturities.

There are also “TIPS”, or Treasury Inflation Protected Securities. They pay interest, and add additional principal to provide protection against inflation. However, the interest rate paid on TIPS is lower than on other Treasury securities, and the additional principal is taxable on an annual basis.

All US Treasury securities are available through Treasury Direct, where they can be bought, held and sold, free of charge.

High Yield Savings Products

These include savings accounts, money markets, and certificates of deposit (CDs). They’re available at nearly all banks and credit unions. But the vast majority of local banks and credit unions pay only microscopic interest rates. The better option is to invest through online banks, which offer much higher rates.

For example, CIT Bank is currently offering high yield savings accounts that pay over 2% APY, with a minimum investment of $100. Meanwhile, Ally Bank and Capital One 360 each currently offer CDs paying well over 2% APY with no minimum investment.

Investment brokers typically offer CDs, but they charge a fee to purchase them. But if you invest directly through the issuing bank, no fee is involved.

Peer-to-Peer (P2P) Lending

P2P lenders are online lending platforms where consumers come to borrow money – generally for unsecured personal loans – and investors come to buy those loans. The underwriting process is generally easier for a borrower, and the interest rate is often lower than what they can get with a bank. Meanwhile, investors can get much higher rates of return than they can through traditional bank assets, or even US Treasury securities and bonds.

The top two P2P lending platforms are Lending Club and Prosper.

P2P lending pays higher rates than you can get on bank investments. But you should also be aware that it carries more risk. The personal loans you’re investing in are not secured, and are subject to default. In addition, P2P lending has certain financial requirements to participate. But if you have at least $100,000 to invest, you’ll easily meet those requirements.

Perhaps the best use of P2P lending is to include an allocation in your fixed income portfolio. The higher interest rates will increase the overall return on your fixed income investments, without dramatically increasing risk.

Bonds vs. US Treasury Securities vs. High Yield Savings Products vs. P2P Lending

If you’re looking for a diversified fixed income portfolio, you may want to invest in two or more of these investments. The table below will provide you with a side-by-side comparison to help you make that decision.

 BondsUS Treasury SecuritiesHigh Yield Savings ProductsP2P Lending
Minimum investment$1,000 - $10,000 $100 and up$0 and up$25 to $1,000
Fully designed portfolioNo unless purchased through a fundNo unless purchased through a fundYes, with REITsNo
Ongoing portfolio managementNo unless purchased through a fundNo unless purchased through a fundNoNo
Fees$1 to $10 per bondFree if purchased through US TreasuryFree if purchased through bank or credit unionAbout 1% per year
Available for IRAsYesNoYesYes
Best forExperienced investors with large portfoliosInvestors of any size looking for completely safe investmentsInvestors of any size looking for completely safe investmentsInvestors looking for high fixed rate yields, with risk

Final Thoughts on How To Invest $100K

Just as is the case with smaller sums of money, you should start by having an emergency fund holding living expenses for at least three to six months. You should also pay off any high interest credit cards, since the rates you’re paying on those are almost certainly higher than what you can earn on your investments.

And while $100,000 is an excellent nest egg, you should have a comprehensive strategy to increase it with additional contributions.

That should start with participation in a retirement plan. If your employer offers a plan, you should absolutely participate. At a minimum, you should contribute the minimum contribution necessary to get the highest matching contribution from your employer.

For example, if your employer provides a 50% match up to 3%, you should contribute a minimum of 6% of your income to the plan, to get the 3% match. That will give you a cumulative 9% annual contribution.

THE LINK BELOW NEEDS TO BE CREATED

If you don’t have an employer sponsored plan, you should start an IRA account, either traditional or Roth. And if you’re self-employed, you should set up a SEP IRA, SIMPLE IRA or Solo 401(k) plan. Each will provide higher contribution limits than an IRA.

Contributing to a retirement plan will ensure that at least some part of your investment portfolio is tax sheltered. But you can and should make regular contributions to taxable accounts as well.

The basic strategy should be to grow your $100,000 portfolio into something much bigger, through a combination of investment earnings and regular contributions.

Note: This article is about how to invest $100,000, but the strategies provided are also relevant if you’re investing $200,000, $250,000, $300,000 – all the way up to half a million dollars. If you fall outside this range, check out one of these articles for a more personalized description of your investing options.

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