If you’ve socked away a significant amount of money, you’re likely already well on your way towards building long-term wealth. Learning how to invest that capital can bring you even closer to reaching your financial goals.
In this guide, we’ll explain how to invest $200,000 smartly and offer ideas for ways to build a diversified portfolio. Keep in mind that these tips apply even if you don’t have hundreds of thousands of dollars at your disposal – they’re applicable for any investors who have a large amount cash set aside and ready to invest.
Ready to learn how to invest 200k? Let’s dive in!
Considerations Before Investing 200k
Before we cover potential investments for your money, it’s important to talk about some portfolio-building principles that every investor should understand. Investing $200k is different than investing $1,000 or even investing $100,000. The stakes are higher and there are a few important considerations.
Determine Your Risk Tolerance
Your tolerance for financial risk will play a big role in determining what types of assets you should invest 200k in. High-risk investments typically offer greater potential rewards, but you also stand to lose more of your investment if things go wrong. Low-risk investments have lower returns, but it’s less likely that you’ll lose a lot of money even if things don’t go your way.
To figure out your risk tolerance, carefully consider how much of your $200,000 portfolio you’re prepared to lose.
Choose Your Time Horizon
It’s also important to consider how long you plan to stay invested for. Investing for retirement in 20 or 30 years is very different from investing to buy a home in just a few years. The longer your investment time horizon, the more you can ignore short-term ups and downs in the market and focus on investments that may take a long time to pay off.
Focus on Diversification
Diversification is key to investing 200k. With such a large amount of money at stake, you don’t want to put all your eggs in one basket. Investing in a diversified selection of assets ensures that even if one investment goes poorly, your other investments can keep your overall portfolio afloat.
Practice Dollar-Cost Averaging
It can be tempting to sit down one day and invest all of your $200,000 at once. However, making a large upfront investment can be ill-advised. If the day you decide to invest happens to be the day before a market crash, you could lose money very quickly.
Instead, it’s a good idea to scale into the market – that is, make a number of smaller investments over time until your entire 200k is invested. Over the course of making repeated investments, it’s likely you’ll capture some highs and some lows. The average price you pay will be somewhere in between these extremes. This is known as dollar-cost averaging.
How to Invest 200k
There are many different ways to invest 200k, and diversified portfolios will take advantage of several of them.
Pay Off Debt
If you have debt, paying it off is a smart way to put your cash to work. The interest rate you pay on many types of debt is higher than what you could earn by investing your money in the market. Earning a 10% annual return in the stock market is considered very good, but you could earn an effective return of 15% or more by paying off high-interest credit card debt.
Max Out Retirement Accounts
Putting your money in a retirement account isn’t technically an investment. However, it’s a good idea to consider before you invest in the market. Any investment gains you make in a retirement account are tax-free, which could be worth a lot of money if your investments are successful.
Maxing out your retirement is especially worthwhile if your employer will match a portion of your contributions. These matching programs essentially offer free cash just for putting money into your retirement account.
Auto-invest with Robo-advisors
If you don’t enjoy the process of picking out investments or don’t feel comfortable with building your own portfolio, you may want to consider using a robo-advisor. Robo-advisors help you set up a portfolio based on your risk tolerance and financial goals, then keep your portfolio on track automatically. It only takes a few minutes to get started and you can largely forget about your portfolio once it’s set up.
Robo-advisors do charge a fee for managing your investments, but fees are typically a fraction of what you’d pay for a human financial advisor. Betterment, one of the largest robo-advisors in the US, charges a 0.25% annual management fee. For an investment of $200,000, that works out to only $500 per year.
Investing in individual stocks is a moderately risky strategy, but one that can pay off if you invest in companies that outperform the broader market. When investing in individual stocks, it’s important to keep diversification in mind – choose a wide range of stocks across several different industries so your investments aren’t overly dependent on any single company or market sector.
There are several different types of stocks you can invest in. Growth stocks are shares of companies that are poised for rapid financial expansion. They are often priced at a premium relative to their current financial situation since investors expect them to be much more profitable in the future.
Momentum stocks are shares that are experiencing a strong, lasting upward price trend. These stocks are more suitable for short-term investment – the goal is to ride the wave of momentum upward and sell before that momentum fades.
Dividend stocks are shares of companies that pay dividends to investors. Dividends are typically paid in cash on a quarterly basis, so they offer recurring income that you can either reinvest in your portfolio or use to pay for everyday expenses.
If you’re not sure how to start choosing individual stocks, consider using a stock picking service like The Motley Fool’s Stock Advisor. Stock Advisor focuses on growth stocks and the service has consistently outperformed the market since it launched in 2002, returning 338% compared to 119% for the S&P 500.
ETFs and Index Funds
Exchange-traded funds (ETFs) are baskets of assets. When you invest in an ETF, you’re investing in all the assets in that basket. You can buy a single ETF that includes hundreds of different stocks, top stocks from a specific market sector, or even commodities like gold and silver.
One of the most common types of ETFs is what’s known as an index fund. Index funds include the same stocks as market indices like the S&P 500 or the NASDAQ 100. When you invest in an index fund, your investment will achieve the same performance as the index that the fund tracks.
ETFs and index funds are popular among investors because they offer built-in diversification. Instead of picking individual stocks, you can invest in the whole stock market with an index fund or in a whole market sector using a sector-specific ETF. You can invest in ETFs and index funds with any brokerage platform.
Series I Savings Bonds, also known as I bonds, are a type of bond issued by the US government that’s designed to protect against inflation. The interest rate these bonds pay out varies every 6 months and is calculated to match the current inflation rate, plus offer a small amount of additional interest. So, I bonds can offer very attractive interest rates when inflation is soaring.
Investors can only purchase $10,000 worth of I bonds per year, so they won’t make a huge dent in a $200,000 portfolio. In addition, you must hold I bonds for at least one year. If you cash them out within five years, you’ll forfeit the last three months of interest. You can only purchase I bonds through the US Treasury Department’s website.
Real estate is relatively uncorrelated with the stock and bond markets, making it a great option if you want to diversify a stock-heavy portfolio. The most direct way to invest in real estate is to buy property, although this has some drawbacks. It requires a lot of research to find the right property, and there are high costs to buying and selling real estate.
Alternatively, you can invest in real estate investment trusts (REITs). REITs are companies that own and manage real estate, including residential or commercial properties. You can buy REITs through any major broker. Another option is to invest with a platform like Fundrise, DiversyFund, or CrowdStreet, which offer portfolios of real estate that you can invest in.
High-Yield Savings Accounts
High-yield savings accounts are a low-risk, low-return investment. They allow you to earn a little interest on your cash, so they can be useful for holding cash while you’re waiting for other investment opportunities to develop. M1 Finance offers a high-yield savings account with 1% APY interest for a $125 annual fee.
Crypto Interest Accounts
Crypto interest accounts are a relatively new type of investment that offer interest on your cryptocurrency holdings. These accounts are considered risky because they are not insured like traditional savings accounts. However, they offer fixed interest rates that can be quite high depending on what cryptocurrencies you hold in your account. BlockFi offers crypto interest accounts with rates up to 7% APY, while Celsius offers rates up to 18.63% APY.
Buy an Online Business
With 200k available to invest, you’re not limited to traditional investment options. One alternative investment is to buy an online business and run it to generate consistent profits.
Buying an online business is something you should consider only if you have experience vetting and managing businesses. You can explore businesses for sale on marketplaces like Flippa and Microaquire.
Cryptocurrency is highly risky and only suitable for investors who have a strong stomach for risk. That said, it can be very rewarding if you choose the right cryptocurrency at the right time. For many long-term investors, it’s best to commit only a small portion of your portfolio to cryptocurrency as a way of diversifying your holdings. You can purchase cryptocurrency through a crypto exchange like Coinbase.
Gold tends to rise in value when stocks and other assets fall, making it a good option for diversifying your portfolio. You can buy gold through ETFs or by purchasing physical gold.
Conclusion: Investing 200k
If you have 200k to invest, you have a lot of investment options available to you. Remember to keep your risk tolerance and financial goals in mind, and consider investing in a wide variety of different assets to diversify your portfolio.