What are the best investment options when having extra money and no debt?
I'm 28 years old with a salary of $120,000 in the San Francisco Bay area. I have no debt and I max out my 401(k) as well as Roth IRA. Over the years, I have saved over $100,000 in a savings account currently accruing only 1.75 percent interest. What are some good investment options to grow my money? I'm single and don't see myself getting married in the near future. I would very much like to invest in real estate, primary residence or rentals, but with the Bay area housing market, it might not be an option for me. Therefore, I am looking for other investments.
Thank you for your inquiry and your excellent question. The first thing that I noticed in your question is your ROTH IRA contribution and income. Just be aware of the adjusted gross income (AGI) limitations for ROTH IRA contributions since you are approaching the bottom of the phase. You state your income, but I do not know what your AGI is. Look at the IRS website and be aware of where you might be phased out. If you get phased out, you can always consider an IRA.
Now on to your question: Based on not being married and not having a primary residence you want to consider what your time horizon is for those items and prioritize them against investing the assets for the longer term. If you are planning to get married and/or purchase a primary residence in the next few years, you may want to consider lower risk investments to ensure your down payment or honeymoon assets are protected. In CA you could do a muni-bond ladder or CD ladder to yield a bit better than cash.
If your income vs cost of living variance is large enough that you know can replenish the current savings, within the time frame in which you are planning to purchase a primary residence and/or get married, then I would suggest you build a diversified portfolio geared towards a long-term time horizon, but designed around your risk tolerance. Within your diversified portfolio you could potentially carve out a small allocation for some sort of real estate investment, such as a publicly traded REIT, so that you can get the best of both worlds; investing along with some diversified real estate exposure. You may want to search out a CFP® professional in your area that is product agnostic and will act as a fiduciary when working with you. Make sure you do your homework and research anyone you plan to work with. I would especially recommend working with a professional if you chose to invest in concentrated positions, such as a REIT so that someone can explain all the potential risks of investing.
Know that the information I provided above are some examples of items I would suggest for a client. But since all I know about you are the seven sentences you provided, this is not nearly enough information to provide you with a recommendation or advice. The above information should be confirmed with a professional that has had a chance to explore your personal situations to ensure it is aligned with your goals, objectives and risk tolerance.
Please do not hesitate to contact me with any questions.
Robert J Leiphart, CPF®
What is your investment risk tolerance? It sounds like you have the ability to assume a good deal of investment risk, but the first step in advising you on the right type of investments starts with a better understanding of your willingness to risk losing money in search of higher returns than you can earn in the bank.
Real estate investing is not limited to owning your own residence or renting one out. You also could consider investing in real estate investment trusts (REITs) through a brokerage account. REITs invest in all different types of property, not just residential real estate, and tend to provide a high level of current income. Such an investment might be appropriate for your IRA.
I'd say stay liquid. You're right that at the moment it looks crazy to invest in Bay Area real estate; you might never earn a decent return. But at your age you are the classic long term investor. Investments you make today should be sold in 40 years, or never.
Values in the stock market are a bit crazy too, but that shouldn't stop you from buying shares in a handful of good-quality, well managed, financially sound and growing companies. You can possibly earn a dividend yield of more than 1.75% to boot. Keep in mind that this will take some disciplne, since markets tend to behave perversely from time to time. Train yourself to buy -- never sell -- if the market drops. You are obviously in a position to put away money consistently -- "paying yourself" with a deposit to your investment account at the same time you pay other bills -- so don't worry too much about current markets. No one ever gets in at exactly the bottom. (And please, never try to time the market.)
If you have a long-term horizon, which it seems you do then invest it in a portfolio of stocks and bonds. I would recommend a majority in stocks since you are young and if you are able to ignore/tolerate the volatility of stocks then you will do well over time. In addition, if you plan to add money to the account periodically, then over time, you will also be dollar cost averaging. In general, invest as you would in real estate- for the long term, without looking at the account balance often and adding more money over time (As you would if you had a mortgage)
You will also have to decide how you invest in stocks - i.e. what vehicles, market capitalization, geography, value, growth etc. Some areas of the market are quite expensive while others are cheap, and your portfolio will have to take that into account.
This exercise needs a lot of initial and ongoing work and if you are not able to do it or devote the time, you should hire a financial advisor.
Great job saving and looking to put your money to work! A great option is to move that savings into an appropriately balanced ETF portfolio in an Individual Taxable Account. This allows withdrawal flexibility while historically generating a better return than a checking or savings account.