Question

as financial adviser. A 35-year old teacher with $100,000 dollars to invest has approached you. The teacher is married and has two children who are five years and seven years old. Please share the specific advice you would give to the teacher in terms of investment assets (types of mutual funds, bonds etc....) and allocations to be chosen.

Answer 1

How to Invest $100,000

So you’ve got $100,000, and you’re ready to invest it. Maybe a relative has passed away and left you money in a will. Maybe you’ve been building up savings in a retirement account and you’re finally ready to get serious about investing it. Regardless of where you got the money, $100,000 is enough that you have a lot of investing options.

Before You Invest…

Before investing any of your money in the stock market, you should strongly consider taking care of two other financial priorities: Paying down debt and creating an emergency fund.

Pay down your (high-interest) debt.

If you have debt with a high interest rate, your best bet is to pay this down before putting anything in the market. That includes credit card debt and debt from other loans, such as payday loans. The average credit card interest rate is 16%, which is significantly higher than the average annual stock market return. This means that wiping out high-interest debt is a better use of your money than investing in the market… even a bull market.

If you have debt on multiple credit cards, consider a balance transfer credit card. This allows you to consolidate your debt and tackle it all at once. It might even have an introductory 0% APR, allowing you to put interest on pause while you pay it down.

Create an emergency fund.

Another thing you should prioritize is an emergency fund. An emergency fund is simply money that you set aside for yourself to use when something comes up. As an example, what would you do if you unexpectedly lost your job? Would you have enough savings to bridge the gap until you found another job? What if your car suddenly needed a big repair or if you got sick and had to pay some medical bills?

With an emergency fund, you have money set aside to help you through these challenges. If you already have an emergency fund, great! Look it over again to make sure it’s still well funded. For most people, a strong emergency fund covers six months’ worth of living expenses.

How much you put in your emergency fund, and where you keep it, is a matter of risk tolerance. The safe route is to go the full six months and keep it in a deposit account where there’s no risk of losing principal (like a savings or money market account). Others might keep as little as three months’ worth of expenses. They might also choose to invest the money in their fund, willing to risk their principal a bit if it means seeing a higher return. However you approach it, though, make sure you have a liquid emergency fund that can last you at least a few months.

Decide What Kind of Investor You Are

There’s another thing you need to do before investing your money: Take a few minutes to think honestly about what kind of investor you are. This also dictates the kinds of investments you make and which services or companies you use.

If you’re interested in doing your own research, creating your own asset allocation and handling trades on your own, then you’re more of a do-it-yourself investor. You probably want to open a brokerage account that offers you access to a variety of financial products.

If you don’t have a lot of investing experience or just don’t particularly want to worry about the nitty-gritty of finding investments, you may want to use a robo-advisor.

If you want more in-depth financial guidance, consider working with a (human) financial advisor. An advisor can help you create a comprehensive financial plan and manage investments on your behalf. This option is the most expensive than robo-advisors, but it also provides the most personalized help. If you’re on the fence, check out this guide to whether or not you need a financial advisor.

Best Investments for Your $100,000

1. a. Mutual Funds: are effectively baskets of investments. They might be all stocks, all bonds, or a combination thereof. Mutual funds have a manager – a person who is choosing what to include within the fund. This could provide a nice in-between for people who want to invest in individual funds but don’t have the time or know-how to research every stock. So instead, you just research a mutual fund and/or mutual fund company. Then you leave the specific investing decisions in the hands of the fund. The big trade-off is that some mutual funds, especially actively-managed funds, can have high management costs.

b. ETFs: are similar to mutual funds, but they trade like stocks. They often, but not always, have lower costs than mutual funds. You can invest in just certain types of companies (e.g. large corporations), specific sectors of the economy (like technology or healthcare) or in other types of investments, like bonds and real estate. There are also ETFs that center on an idea, such as supporting renewable energy.

2. Trading Individual Stocks

When many people think of investing, they imagine picking that one stock that’s going to take off as the next Apple or Amazon. The truth is that trading individual stocks is time-consuming and risky. You need to do thorough research on companies, and ideally you’ll be well-versed in methods of equity analysis like technical analysis and fundamental analysis. While there is potential for big gains, there is also potential for big losses. There’s nothing wrong with using your money to invest in this way, but it does require a fair amount of time and knowledge.

3. Real Estate

If you want to invest in real estate but don’t know where to start, consider investment funds. REITs are particularly popular and allow you to invest in real estate without buying any property yourself. There are also ETFs that include multiple ETFs, allowing you to track the real estate market as a whole.

For people you want to purchase property, $100,000 is enough, in many places, to make a sizable down payment. If you live in a very expensive area like New York or Los Angeles, consider purchasing a property outside of your city or even out of state. Living in one state and owning property in different states could complicate your taxes, but don’t let that discourage you if you want to buy property. Just make sure to first speak with an expert, like a financial advisor, for advice on how to best set up and manage your finances.

4. Safer Savings Options

If you already have investments or if you just aren’t quite sure yet how you want to invest your money, there are some safe places you can store your money. The simplest way to save your money is in a savings account. Most big banks offer very low interest rates on their savings accounts (think 0.05% or less). Instead, look for a high-interest savings account. Companies like Ally, Synchrony and CIT Bank all offer rates above 2%. A money market account (MMA) is a similar option, and interest rates for MMAs are typically higher than for savings accounts.

Another safe place to park your money is in a certificate of deposit (CD). A CD has a set term, ranging from a month to up to 10 years; you cannot touch your money until the term has elapsed. The trade-off for this reduced liquidity is higher interest, and longer terms generally have higher rates (around 3%, as of early 2019). You might also get a higher rate with a jumbo CD, which are specifically for balances of $100,000 or more.

CDs require you to give up access to your money for a while, but they offer a guaranteed payout. And so long as the bank is FDIC-insured, your money is safe.