💰 Part 2: What would you do with $100K today?

Results from our reader survey on how to allocate $100k of investment capital under todays market conditions.

Last week we ran a reader poll to get a better sense of where our readers would allocate $100K today. Today I wanted to share the results of the survey.

A $100K windfall can be a game-changer in your financial journey. Interestingly enough, our readers preferred a more measured investment approach by allocating their money into Index funds or High Yield Savings. Let's explore these strategies and how you can implement them.

Stock Market Investments

Index funds, particularly VTSAX (Vanguard Total Stock Market Index Fund) and VTI (Vanguard Total Stock Market ETF), were popular choices. Index funds offer broad market exposure, low operating expenses, and low portfolio turnover. They are designed to track the performance of a benchmark index, offering investors a passive and low-cost way to invest in the total stock market.

VTSAX has had really strong performance this year, already up over 18%.

Having a brokerage account at Vanguard is a popular choice since these are Vanguard funds, but you can purchase them from any brokerage. Once your account is set up, you can purchase shares of the fund using your windfall.

One additional consideration when investing a large lump sum is whether to invest it all in one shot in a lump sum trade or to invest your money over a short time period in equal chunks. If you're considering pouring the entire amount into VTSAX in a single trade, one of the primary upsides is the potential for immediate exposure to the market's growth. If the market is on an upward trajectory, you could benefit from the compounding effect of returns on the full amount from day one. However, this approach also comes with the risk of market timing. If the market takes a downturn shortly after your investment, your portfolio could suffer a significant hit.

On the other hand, dollar-cost averaging (DCA) over six months offers a more measured approach. By dividing the $100k into equal portions and investing at regular intervals, you reduce the risk associated with market volatility. If the market dips, you'd be buying more shares at a lower price, and if it rises, you'd still be capturing some of that growth. The downside to DCA is that if the market consistently rises over those six months, you might miss out on some potential gains by not being fully invested from the outset. In essence, a lump-sum investment bets on immediate market growth, while DCA provides a safety net against short-term market fluctuations.

High-Yield Savings Accounts

High-yield savings accounts are a great way to earn more interest on your money than you would with a traditional savings account. If inflation is truly holding steady around 3%, then this is a fairly risk free strategy. Here are some of the top high-yield savings accounts as of 7/24/23 :

• American Express Savings , Rate: 4%

• Marcus by Goldman Sachs, Rate: 4.15%

• Ally Bank, Rate: 4.15

• Discover Bank, Rate: 4.15%

• Capital One 360. Rate 4.15%

Fixed Income Investments

Another user suggested finding the highest rate CD (Certificate of Deposit) and investing the windfall there. CDs offer a fixed interest rate over a specified term and can be a safe way to earn interest on your money.

Certificates of Deposit (CDs) are a reliable investment option, but they come with certain downsides. One of the primary disadvantages is the opportunity cost. When you invest in a CD, your money is tied up for a specific period, potentially missing out on higher returns from other investment opportunities, such as the stock market. Historically, the stock market has offered higher returns than CDs, so by choosing a CD, you might be sacrificing potential gains. Additionally, the threat of inflation poses a risk. If the interest rate of your CD doesn't keep pace with inflation, the real value of your investment can decrease over time, reducing your purchasing power.

Liquidity is another concern with CDs. They have a set term, and if you decide to withdraw your money before the term ends, you'll likely face penalties. This can be problematic if you encounter unexpected financial needs. Furthermore, the returns on CDs, while stable, are typically lower than riskier assets like stocks or real estate. If you're aiming for significant growth, there might be more suitable investment options for your goals.

Lastly, reinvestment risk is a factor to consider. When your CD matures, the prevailing interest rates might be lower than when you first invested. This means you could be faced with reinvesting your money at a less favorable rate, which can affect your long-term returns. In conclusion, while CDs offer safety and predictability, it's essential to be aware of their limitations and evaluate them in the context of your broader financial strategy and objectives.

To invest in a CD, you can start by comparing rates from different banks. Here are some of the best CD rates from top banks as of today:

Bread Savings
Term: 1-5 Years
Rate: 4.25% - 5.25%
Minimum: $1,500

Marcus by Goldman Sachs
Term: Varies
Rate: 3.70% - 4.85%
Minimum: $500

Capital One
Term: 6 Mo - 5 Years
Rate: 3.90% - 4.75%
Minimum: $0

Synchrony Bank
Term: 6 Mo - 5 Years
Rate: 2.25% - 5.05%
Minimum: $0

Citizens Access
Term: 1 - 5 Years
Rate: 3.30% - 5.00%
Minimum: $5,000

Brokered CD’s

Brokered CDs are certificates of deposit that differ from the traditional ones you might obtain directly from a bank. Instead, they are offered through brokerage firms. These firms acquire CDs from various banks and then present them to their customers. This method of distribution provides investors with a broader selection, allowing them to tap into offerings from banks nationwide, not just those in their immediate vicinity. The primary advantage here is the potential for better interest rates and terms. Additionally, unlike traditional CDs, which have a fixed term, brokered CDs can sometimes be sold on the secondary market before their maturity date. This feature offers an added layer of flexibility, especially for investors who might need to liquidate their assets earlier than anticipated.

When it comes to trading brokered CDs, the process is akin to how one might trade stocks or bonds. Through your brokerage account, you can peruse a list of available CDs, each with its terms, interest rates, and issuing banks. Once you've made a selection that aligns with your investment goals, you can purchase it directly via the brokerage platform. If circumstances change and you wish to access your funds before the CD's maturity, there's the option to sell it on the secondary market. However, the selling price is influenced by current interest rates and market demand. For instance, if interest rates have surged since your initial purchase, you might find the CD's value has diminished, which could result in a loss.

There are a few critical considerations to bear in mind with brokered CDs. First, be aware of any fees your brokerage might impose for the purchase. These costs can impact the overall return on your investment. Secondly, while brokered CDs are FDIC insured, just like their traditional counterparts, it's vital to ensure that if you're buying multiple CDs, they come from different banks. This strategy ensures you maximize your FDIC coverage. Lastly, the interest payment structure of brokered CDs often differs from traditional ones. Instead of compounding the interest, brokered CDs typically deposit interest payments directly into your brokerage account, either monthly, semi-annually, or annually. As with all investments, understanding the nuances, potential returns, and risks is paramount before diving in.

Real Estate and Unique Investments

Real estate investment was another more unique strategy. While more time consuming than a brokerage or bank transaction, real estate can provide a steady income stream and potential appreciation over time. To invest in real estate, you can start by researching potential markets, looking at factors like population growth, employment rates, and housing prices. Specifically, there seem to be opportunities investing into apartments or multi-family units in growing midwestern towns like Kansas City, Omaha, Des Moines, or Bentonville.

Once you've chosen a market, you can work with a real estate agent to find properties within your budget. For a young investor with $100k at their disposal, diving into the real estate market can be both exciting and profitable, especially when approached with a strategic mindset. There are a few different ways to act on this strategy.

Start with Research and Education: Before making any moves, it's crucial to educate oneself about the real estate market. This doesn't necessarily mean enrolling in formal courses (though that's an option). There are numerous online resources, podcasts, and books dedicated to real estate investing. Familiarize yourself with terms, understand market trends, and learn about property valuation. Platforms like BiggerPockets offer a wealth of knowledge and can connect you with experienced investors who've been in your shoes.

Consider Real Estate Crowdfunding: If you're looking for a mostly passive investment, real estate crowdfunding platforms might be the answer. Websites like Fundrise or RealtyMogul allow investors to pool their money together to invest in larger real estate projects, be it rental properties, commercial spaces, or multi-family units. With as little as $1,000, you can own a share of a property or a portfolio of properties. Your $100k can be diversified across multiple projects, spreading risk and maximizing potential returns. The best part? These platforms manage the properties, ensuring a hands-off experience for you.

Explore Turnkey Rental Properties: Turnkey properties are homes that are move-in ready and often already have tenants. Numerous companies specialize in sourcing, renovating, and renting out these properties to investors. With $100k, you can potentially buy a turnkey property outright or use it as a substantial down payment. The turnkey provider typically handles property management, making it a passive investment. However, it's essential to vet the provider thoroughly and understand the rental market in the property's location.

Partner Up: If multi-family units appeal to you, but the price point seems out of reach, consider pooling resources with like-minded investors. Your $100k can be combined with funds from other investors to purchase a multi-family property. By forming a limited liability company (LLC) or a similar legal structure, you can outline the terms of the partnership and the distribution of rental income. Partnering not only allows you to invest in larger properties but also spreads the risk and management responsibilities.

Leverage Property Management Companies: Whether you opt for a single rental property or a multi-family unit, consider hiring a property management company if you desire a passive investment experience. These companies handle tenant acquisition, rent collection, maintenance, and any issues that arise, ensuring your involvement is minimal. While they do charge a fee (often a percentage of the monthly rent), the convenience they offer can be well worth the cost, especially if you're not keen on the day-to-day responsibilities of being a landlord.

Real estate offers a myriad of opportunities for young investors. With $100k and a strategic approach, one can tap into the potential of rental properties or multi-family units without being bogged down by active management. The key lies in research, leveraging modern investment platforms, and seeking professional assistance when needed.

Angel Investing in Startups

Some users mentioned being interesting in investing into startups. Angel investing involves providing capital to startups in exchange for ownership equity or convertible debt. For those looking to venture into this realm, it's essential first to network extensively within the startup ecosystem.

Joining angel investor groups or platforms like AngelList can offer access to curated investment opportunities and allow you to collaborate with experienced investors. It's also crucial to conduct thorough due diligence on any potential investment. This means understanding the startup's business model, assessing the competence of the founding team, evaluating the market potential, and reviewing financial projections. Remember, while angel investing can offer substantial returns, it's also high-risk. Diversifying your investments across multiple startups can help mitigate this risk. It may also take you 5-10 years to see your returns, and your capital will locked up during this time period unless you find a high growth startup with active 2nd market trading.

Crypto Investment

The allure of cryptocurrency remains strong for some investors, with Bitcoin and Ethereum being the frontrunners in terms of popularity and market capitalization. For those considering a 70% Bitcoin and 30% Ethereum portfolio mix, it's essential to approach this with a well-thought-out strategy. Given the volatile nature of cryptocurrencies, it's advisable to employ a long-term holding strategy, resisting the urge to make impulsive decisions based on short-term market fluctuations. Additionally, always ensure your investments are secure. Using hardware wallets or trusted wallet providers can safeguard your assets from potential cyber threats. Remember, while the crypto market offers significant potential for returns, it's also marked by its unpredictability, so invest only what you're willing to lose.

The Results Surprised Me

The survey results certainly provided some unexpected insights. While I had braced myself for a tilt towards riskier investment avenues, the reality painted a different picture. There was a very strong inclination towards index funds, with VTSAX being a notable mention. This choice strikes a balance between the high-risk, high-reward paradigm and the ultra-conservative approach. Investing in index funds like VTSAX offers a diversified exposure to the stock market, mitigating some risks while still providing the potential for appreciable returns. A significant number of respondents showcased a preference for conservative options like high-yield savings accounts and CDs.

The collective leanings towards these investment choices might hint at a broader sentiment. Perhaps there's a prevailing wariness about the economy's current state or skepticism about the stock market's future after a significant bull run, especially in the Nasdaq. It could also suggest a more measured approach to wealth accumulation, where capital security and steady growth are valued over rapid gains. Whatever the motivations, it's clear that the investment landscape is as much about psychology and perception as it is about numbers and charts.

Investing a windfall can be a significant step towards achieving your financial goals. Whether you choose to invest in the stock market, real estate, pay off debts, put your money in a CD, or a high-yield savings account, the most important thing is to choose a strategy that aligns with your personal circumstances and goals.

What would you do with a $100k windfall? Share your thoughts and join the conversation in the comments section below.