What is the best route to invest $50,000?
I'm a recent college graduate with no outstanding loans or debts. I live at home where food is provided and my car is fully paid off, so my monthly expenses are minimal. I have $50,000 in a checking/savings account earning just $1 a month. What's the best way to invest this money in order to get the most bang for my buck?
The first step is to identify what the funds will be for. An example of this would be grad school, down payment on a home, starting a small business, retirement, etc.
The next step would be to identify the time horizon. Will the funds be needed in 5, 10, or 20 years? If you’re going to be investing funds for the short term like 1 to 3 years, you should steer clear of the stock market and stick with CDs despite the low rates. If you are investing with a longer-term time horizon, it would be completely prudent to allocate a portion of your investments to stocks.
Lastly, you need to identify your risk tolerance. Consider how comfortable (or uncomfortable) you would be experiencing a 10% to 15% drop in the value of your investments. If you couldn’t sleep at night, it might be the wrong investment for you.
I wrote an article called Diversification Is Not Enough that goes into greater detail on this subject. I hope you find it helpful.
Please note that this should not be considered investment advice and is only educational in nature.
Best of luck!
David N. Waldrop, CFP®
Good question. Most importantly, do not start the process of what to do with this money by looking for a "good investment," and certainly do not make this decision on your own. Carefully consider your short, medium, and long term financial goals, and seek counsel from someone you trust with a good financial head on their shoulders. I cannot stress enough how important it is for you to define a purpose for this money before you invest it. For example, maybe some is saved for a future down payment on a home, or put aside for future unknown expenses, and other portions are used to start a retirement savings.
Once you decide the purpose of the money, seek out a qualified advisor who can help you with the investment choices. You may have a bit of a hard time finding a fee-based advisor due to the size of your investment, but go that route if you can. Many are starting to lower their minimum account size through the use of technology.
Also, if you are working, take a look at what options are available there. You may find that you are eligible to contribute to a retirement plan at work.
You are off to a good start.
All the best,
Wyatt A. Moerdyk, AIF®
Great question. The key factors when deciding how to construct an investment portfolio are time horizon, investment experience, and risk tolerance. You have a time horizon that's probably at least five decades. You may not have much investment experience, but that's not a problem. And it's too early to learn your tolerance for risk. For example, what if you invested the $50,000 and the market dropped the value by more than a third? I can't imagine that you'd be pleased with that, but it does happen. Look back at 2008-2009. Yet, since then the market averages have fully recovered . . . and then some. Given your time horizon, risk should not be a concern. Your investments should be equities only since equities are always the top performing asset class over 20 years or more. That's well within your time horizon.
Even if we don't have a big drop, it's more common than not to have a 10% pullback sometime during most years. That's quite normal, but it passes.
So as exciting as the world of investing may be, there's exciting and there's smart. Exciting is investing in a few hot stocks and hoping for the best. The problem with hot stocks is that you'll often end up getting burned.
The smart way is simple enough. Make equal commitments in two no-load mutual funds: total U.S. equity index and total international equity index. Once a year, rebalance so that the funds are equally divided. Then watch it grow over time.