Why invest in stocks?
Stocks offer some of the best diversification for your portfolio. Not only can you get exposure to nearly every industry in the world, but stocks have historically been proven to provide one of the best returns on investment.
The average annualized return on the S&P 500 since the early 70s has been close to 12 percent per year.
- 2015 – 1.38 percent (another down year)
- 2016 – 11.77 percent
- 2017 – 21.64 percent...
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You can find the rest of the annual returns since 1928 on this sheet that a student from NYU so graciously put together.
You can find the rest of the annual returns since 1928 on this sheet that a student from NYU so graciously put together.
How to invest in stocks
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The idea of investing in stocks can get really complex, so I am going to give you three quick methods by which you can invest $100,000 while providing you with some further reading.
The idea of investing in stocks can get really complex, so I am going to give you three quick methods by which you can invest $100,000 while providing you with some further reading.
1. Buy individual stocks
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This is the riskiest but can potentially provide the biggest reward. When you pick an individual stock, you really have to know what you’re doing. Unless you’re investing in thousands of individual stocks, which most people don’t, your level of diversification will be low.
For example, you might choose to invest in ten different stocks—which can provide you with diversity, but not like an ETF or mutual fund would (see more on that below).
If you’re going to invest in individual stocks, I would start by reading my guide on value investing. It’s my favorite approach to picking individual stocks and can significantly reduce your risk while also providing you some recurring revenue (since you’re going after dividend-paying stocks).
You’ll also want to spend some time understanding how to read a stock chart, so you can better analyze the performance of each stock.
This is the riskiest but can potentially provide the biggest reward. When you pick an individual stock, you really have to know what you’re doing. Unless you’re investing in thousands of individual stocks, which most people don’t, your level of diversification will be low.
For example, you might choose to invest in ten different stocks—which can provide you with diversity, but not like an ETF or mutual fund would (see more on that below).
If you’re going to invest in individual stocks, I would start by reading my guide on value investing. It’s my favorite approach to picking individual stocks and can significantly reduce your risk while also providing you some recurring revenue (since you’re going after dividend-paying stocks).
You’ll also want to spend some time understanding how to read a stock chart, so you can better analyze the performance of each stock.
2. Buy ETFs and mutual funds
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Mutual funds and ETFs are basically baskets of stocks, pre-bundled for you, so you can make a single investment and get instant diversification. The difference is how they’re put together, managed, and sold.
- An ETF acts exactly like a stock and is usually not actively managed. It typically follows an index, for example—the S&P 500 or stocks that invest in gold. You can go as broadly or narrow as you want with ETFs, and you can place a focus on things that are important to you. For instance, if you want to invest in socially responsible companies, you can buy an ETF that does that for you.
- Mutual funds, on the other hand, are actively-managed by a person or group of people. There are some exceptions where they may not be (like with Vanguard, who has index funds) but in most cases, mutual funds have someone picking the stocks that are in the fund.
Mutual funds still act like an ETF in that you can get instant diversification, but it’s more meticulously monitored, and the strategy for picking stocks might be based on the fund manager’s personal investment preferences and biases. The cost is also higher, due to this. You’ll pay a premium for investing in a mutual fund—and the argument is that it’s because someone is managing the fund for you.
Historically, though, mutual funds don’t necessarily perform better than ETFs or index funds. You can choose a strategy with mutual funds, as well, but your options might be more limited. Know that mutual funds aren’t a worse choice than ETFs, they definitely have their benefits, but they will cost more and I’d rather keep fees as low as possible when I’m investing $100,000.
Mutual funds and ETFs are basically baskets of stocks, pre-bundled for you, so you can make a single investment and get instant diversification. The difference is how they’re put together, managed, and sold.
- An ETF acts exactly like a stock and is usually not actively managed. It typically follows an index, for example—the S&P 500 or stocks that invest in gold. You can go as broadly or narrow as you want with ETFs, and you can place a focus on things that are important to you. For instance, if you want to invest in socially responsible companies, you can buy an ETF that does that for you.
- Mutual funds, on the other hand, are actively-managed by a person or group of people. There are some exceptions where they may not be (like with Vanguard, who has index funds) but in most cases, mutual funds have someone picking the stocks that are in the fund.
Mutual funds still act like an ETF in that you can get instant diversification, but it’s more meticulously monitored, and the strategy for picking stocks might be based on the fund manager’s personal investment preferences and biases. The cost is also higher, due to this. You’ll pay a premium for investing in a mutual fund—and the argument is that it’s because someone is managing the fund for you.
Historically, though, mutual funds don’t necessarily perform better than ETFs or index funds. You can choose a strategy with mutual funds, as well, but your options might be more limited. Know that mutual funds aren’t a worse choice than ETFs, they definitely have their benefits, but they will cost more and I’d rather keep fees as low as possible when I’m investing $100,000.
3. Go with a roboadvisor
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Speaking of low cost and ease, a third way you can invest in stocks with your $100k is with a roboadvisor. This is the method I would choose if I were a first-time investor (and actually, I’ve been investing for over a decade and still choose to use a roboadvisor).
A roboadvisor is a broker, like Betterment, that uses a computer algorithm to compose, monitor, and rebalance your stock portfolio. You merely invest the money and tell the algorithm what your goals and risk levels are, and they’ll do the rest.
Speaking of low cost and ease, a third way you can invest in stocks with your $100k is with a roboadvisor. This is the method I would choose if I were a first-time investor (and actually, I’ve been investing for over a decade and still choose to use a roboadvisor).
A roboadvisor is a broker, like Betterment, that uses a computer algorithm to compose, monitor, and rebalance your stock portfolio. You merely invest the money and tell the algorithm what your goals and risk levels are, and they’ll do the rest.
Managing your stock investments
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Regardless of which method you choose, investing in stocks can get complicated and confusing over time. If you are going to put $100,000 (or any part of it) into stocks, you need a tool that can help you analyze where your investments are at and how you’re performing.
The tool I recommend is Personal Capital. You can read about it in our full review here, but one of the coolest features is the allocation visualization chart.
After you link your investment accounts, you can see exactly how much of your portfolio falls into a variety of categories and determine where you need to invest more or less, based on your investment patterns. You can also monitor your overall portfolio performance, as well as take advantage of plenty of other features.
- Decide what type of investor you are
Regardless of which method you choose, investing in stocks can get complicated and confusing over time. If you are going to put $100,000 (or any part of it) into stocks, you need a tool that can help you analyze where your investments are at and how you’re performing.
The tool I recommend is Personal Capital. You can read about it in our full review here, but one of the coolest features is the allocation visualization chart.
After you link your investment accounts, you can see exactly how much of your portfolio falls into a variety of categories and determine where you need to invest more or less, based on your investment patterns. You can also monitor your overall portfolio performance, as well as take advantage of plenty of other features.
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There are no two ways about it, $100,000 is a lot of money and deciding how to invest it can be equal parts exciting and overwhelming. Luckily, you needn’t navigate this journey alone. Finding the right help depends on the type of advice you want, how much guidance you want, and how hands-on or hands-off you want to be:
- I’m a DIY investor. If you’re the hands-on type, it’s cheaper — and easier — than ever to create, research and manage your own portfolio. Before you begin, decide which forex trading style is best for you — active trading, day trading or passive investing. Once you’ve opened an account with one of the many online brokerages, you’ll be able to take pick and choose among a variety of assets (think: stocks, bonds, mutual funds, ETFs and options). Consult our picks of the best stock brokers.
- I’d like to automate this process. Looking for a low-cost/low-hassle solution? Robo-advisors are a good option. These companies offer automated portfolio management for less than you’d pay a human to do the same thing. But many providers offer a human touch, where you’ll have access to financial advisors who can answer investing questions or customize your portfolio. We’ve rounded up the best robo-advisors, depending on your needs.
- I’m seeking full-service guidance. Hiring a financial advisor (we recommend fee-only) is the costliest option. But you get someone to make investment recommendations, manage your windfall and address other financial planning tasks on your list. If this is more your speed, learn how to find a financial advisor.
There are no two ways about it, $100,000 is a lot of money and deciding how to invest it can be equal parts exciting and overwhelming. Luckily, you needn’t navigate this journey alone. Finding the right help depends on the type of advice you want, how much guidance you want, and how hands-on or hands-off you want to be:
- I’m a DIY investor. If you’re the hands-on type, it’s cheaper — and easier — than ever to create, research and manage your own portfolio. Before you begin, decide which forex trading style is best for you — active trading, day trading or passive investing. Once you’ve opened an account with one of the many online brokerages, you’ll be able to take pick and choose among a variety of assets (think: stocks, bonds, mutual funds, ETFs and options). Consult our picks of the best stock brokers.
- I’d like to automate this process. Looking for a low-cost/low-hassle solution? Robo-advisors are a good option. These companies offer automated portfolio management for less than you’d pay a human to do the same thing. But many providers offer a human touch, where you’ll have access to financial advisors who can answer investing questions or customize your portfolio. We’ve rounded up the best robo-advisors, depending on your needs.
- I’m seeking full-service guidance. Hiring a financial advisor (we recommend fee-only) is the costliest option. But you get someone to make investment recommendations, manage your windfall and address other financial planning tasks on your list. If this is more your speed, learn how to find a financial advisor.
Pad your nest egg
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Once you’ve determined what type of investor you are, time is of the essence to start putting that money to work in the market. A $100,000 windfall offers a unique opportunity to pad your savings — and beyond, maxing out your retirement account (more on that later).
Perhaps you’re thinking, “With this kind of money we can pay cash for the kids’ educations so they can graduate without any student loan debt!” Instead, consider this: In Maslow’s hierarchy of needs for finances, “pay yourself first” forms the foundation of the triangle. Therefore, your needs come before saving for your child’s college tuition. The kids can get scholarships or loans, or work their way through school; similar opportunities aren’t available to retirees. (Learn more about how to prioritize your financial goals.)
Investing, say, $70,000 of that windfall and earning a 6% average annual return will mean an extra $300,000 in 25 years — the kind of padding that makes it less likely you’ll run out of money and have to move in with the kids. Use a retirement calculator to see how extra dollars affect when you can retire and how much monthly income you’ll have in the future.
» Read up on the basics: How to invest in stocks
Once you’ve determined what type of investor you are, time is of the essence to start putting that money to work in the market. A $100,000 windfall offers a unique opportunity to pad your savings — and beyond, maxing out your retirement account (more on that later).
Perhaps you’re thinking, “With this kind of money we can pay cash for the kids’ educations so they can graduate without any student loan debt!” Instead, consider this: In Maslow’s hierarchy of needs for finances, “pay yourself first” forms the foundation of the triangle. Therefore, your needs come before saving for your child’s college tuition. The kids can get scholarships or loans, or work their way through school; similar opportunities aren’t available to retirees. (Learn more about how to prioritize your financial goals.)
Investing, say, $70,000 of that windfall and earning a 6% average annual return will mean an extra $300,000 in 25 years — the kind of padding that makes it less likely you’ll run out of money and have to move in with the kids. Use a retirement calculator to see how extra dollars affect when you can retire and how much monthly income you’ll have in the future.
» Read up on the basics: How to invest in stocks
Max out retirement (and avoid the IRS, while you’re at it)
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Don’t even think about the Cayman Islands. There are legal ways to dodge the IRS, at least for a while, and one of the best is to stuff as much of that $100,000 as possible into tax-favored retirement savings accounts.
Employer-sponsored retirement plans, like a 401(k) or 403(b), and individual retirement accounts, like Roth or traditional IRAs, can help shield tens of thousands of your dollars from taxes. (Learn more about the differences between IRAs and 401(k)s.)
With $100,000 at your disposal, you can afford to max out both a 401(k) and an IRA if you’re eligible. If you’re under age 50, that comes to $25,000 in 2019 ($19,000 for the 401(k) and up to $6000 for an IRA). It’s $32,000 for those age 50 and older when you add in the catch-up contributions (an extra $6,000 in a 401(k) and $1,000 for an IRA).
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Don’t even think about the Cayman Islands. There are legal ways to dodge the IRS, at least for a while, and one of the best is to stuff as much of that $100,000 as possible into tax-favored retirement savings accounts.
Employer-sponsored retirement plans, like a 401(k) or 403(b), and individual retirement accounts, like Roth or traditional IRAs, can help shield tens of thousands of your dollars from taxes. (Learn more about the differences between IRAs and 401(k)s.)
With $100,000 at your disposal, you can afford to max out both a 401(k) and an IRA if you’re eligible. If you’re under age 50, that comes to $25,000 in 2019 ($19,000 for the 401(k) and up to $6000 for an IRA). It’s $32,000 for those age 50 and older when you add in the catch-up contributions (an extra $6,000 in a 401(k) and $1,000 for an IRA).
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